Channel coordination in green supply chain management

AbstractEnvironmental consciousness has become increasingly important in everyday life and business practice. The effort to reduce the impact of business activities on the environment has been labelled as green supply chain management. Any major greening project would require efforts on the part of the entire supply chain. However, very few studies have addressed the issue of coordinating the green supply chain. We consider the problem of coordination of a manufacturer and a retailer in a vertical supply chain, who put in efforts for 'greening' their operations. We address some pertinent questions in this regard such as extent of effort in greening of operations by manufacturer or retailer, level of cooperation between the two parties, and how to coordinate their operations in a supply chain. The greening efforts by the manufacturer and retailer result in demand expansion at the retail end. The decision variables of the manufacturer are wholesale price and greening effort, while those of the retailer are retail price and its greening effort. We find that the ratio of the optimal greening efforts put in by the manufacturer and retailer is equal to the ratio of their green sensitivity ratios and greening cost ratios. Further, profits and efforts are higher in the integrated channel as compared to the case of the decentralized channel. Finally, a two-part tariff contract is found to produce channel coordination in this problem. A numerical example illustrates the results.Keywords: distributionchannel integrationgreen supply chain managementsupply chain coordinationenvironment AcknowledgementsThe authors are grateful to P.D. Jose, IIM Bangalore, India, Eunkyu Lee, Syracuse University, USA, and Charles Weinberg, UBC, Canada, for useful comments and discussion. The first author acknowledges the support provided by Supply Chain Management Center (SCMC), IIM Bangalore during his stays as visiting faculty in 2009–2011.Notes1 Another effect, the price premium effect, is representative of the behaviour of a consumer who is willing to pay extra for a green product. However, we do not include this aspect in the current paper.2 Notice that the greening efforts can expand the demand beyond the market potential θ. This is the reason why θ is referred to as 'base' market potential here.3 The parameter assessment of αs can be done through an empirical analysis by collecting data that relate greening costs with demand for the product. A regression analysis with demand as the dependent variable and greening investments as the independent variable could be carried out. Data for this purpose may be obtained from the similar projects handled by the organization (manufacturer or retailer) in the past.4 The modelling structures similar to the one used in this paper have been used by earlier authors like CitationBerger et al (2006), CitationGurnani et al (2007), and CitationGurnani and Erkoc (2008).5 For analytical convenience, no specific parameter has been chosen for price sensitivity factor in the demand function. It may be considered as 1 throughout the paper.6 As far as the performance under the integrated chain is concerned, the values of individual parameters do not matter as long as the total effectiveness parameter (manufacturer greening effectiveness coefficient+retailer greening effectiveness coefficient) is maintained at the same level. In the decentralized setup, although the results change with dissimilar values of greening effectiveness coefficients, the changes are not substantial. Therefore, we restrict ourselves to reporting results with identical values of greening effectiveness coefficients across the players in the supply chain.