Inventory management under joint product recovery and cap-and-trade constraints
Abstract
The influence of environmental legislation in inventory control policies is explored. Previous work on product recovery is extended using the introduction of a cap-and-trade mechanism in an infinite-horizon inventory system in which demand and returns are uncertain. Demand is met through two different sources namely manufacturing and remanufacturing, which differ in cost and greenhouse gas emissions. The main contributions of this paper are 1) comparison of system operation in terms of cost and environmental performance under conventional and green inventory policies, and 2) managerial insights into the structure of green inventory policies. To illustrate the impact of a cap-and-trade scheme, a numerical example is used. We solved the problem as a Markov decision process, and characterized the inventory policies based on the optimal replenishment strategy. We also conducted a sensitivity analysis to examine the effect of underlying environmental parameters such as the emission cap and the allowance price in the policy structures. The results indicate that decisions are sensitive to carbon prices. The inventory policy could play an important role in compliance with environmental legislation, although there is threshold carbon price beyond which the company must focus on strategic decisions rather than tactical decisions.