Indo-US Workshop on Designing Sustainable Products, Services and Manufacturing Systems
August 18 - 20, 2009, Indian Institute of Science, Bangalore
LOW CARBON LOGISTICS PROVIDER
N VISWANADHAM and S KAMESHWARAN
Centre for Global Logistics and Manufacturing Strategies
Indian School of Business, Hyderabad, INDIA
N_Viswanadham@isb.edu, Kameshwaran_S@isb.edu
Green initiatives by businesses mitigate ill effects of carbon emissions in the supply chain by using
environment friendly inputs, processes, and re-cycling. Regulators, on the other hand, reduce carbon
emissions in the supply chain using carbon pricing: either through trading in carbon markets or by carbon
tax. We argue that, the end-to-end holistic view of carbon emissions at various stages of the supply chain
can help companies leverage the above mechanisms by making informed decisions in design,
manufacturing, sourcing, and distribution. In this view, we introduce the notion of low carbon logistics
provider, a company that creates value through an alliance of supply chain competencies, by exploiting
information flows and goods flows in the supply chain to simultaneously optimize costs and carbon
emissions. The low carbon logistics provider essentially acts as an orchestrator in coordinating the supply
chain stake holders, along with the carbon regulators and key players from the ecosystem. The design of
green supply chain is modeled as a mixed integer linear program that considers emissions and carbon
pricing in addition to the traditional supply chain cost parameters. The proposed model can be generalized
to include the entire supply chain from procurement through retailing and is applicable to various sectors
like manufacturing, food, and service.
Keywords: Green supply chain, low carbon logistics provider, orchestrator, carbon awareness, carbon
trading, mixed integer linear program.
1. Introduction
Design, modeling, and analysis of the traditional supply chain has primarily focused on
optimizing the procurement of raw materials from suppliers, manufacturing of the
products, and the distribution of finished products to customers. A supply chain design
problem comprises the decisions regarding the number and location of production
facilities, the amount of capacity at each facility, the assignment of each market region to
one or more locations, supplier selection for sub-assemblies, components and materials,
number of echelons, and distribution network (Chopra and Meindl, 2004). The primary
performance criteria are cost and customer satisfaction (measured in terms of quality,
lead time, service, etc). In the last two decades, supply chains expanded globally,
especially in automobile, computer, consumer electronics, food, and apparel industries. In
a global supply chain, suppliers, production facilities, distribution centers, and markets
are dispersed globally. The connecting infrastructure for globalization consisting of
1
trains, trucks, ships, aircrafts, and warehouses are major sources of green house gas
emissions. In addition, sourcing from low cost countries with poor technology and nonstringent regulations contribute to the increasing green house gas emissions.
The Intergovernmental Panel on Climate Change has identified six primary
greenhouse gases that impacts climate change in the atmosphere: Carbon dioxide,
methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride.
The common sources of the above gases are fossil fuel combustion, production of cement
and aluminum, semiconductor industry, refrigeration gases, and electrical transmissions.
With increasing pressure from governments, environmentalists, and customers, green
initiatives are no more a corporate social responsibility for companies. The supply chain
should be green in order to claim its product as green. There is no unique definition of
green supply chain. A popular notion is the extended or closed loop supply chain that
includes waste disposal and collection at end-of-life, which are then re-manufactured and
re-used (B. M. Beamon, 1999). Our approach to green supply chain is based on a
commonly and widely accepted notion of greenness called as carbon footprint. A carbon
footprint is the total set of greenhouse gas emissions caused directly and indirectly by an
individual, organization, event or product, expressed as carbon dioxide equivalent a.
Equivalent carbon dioxide (CO2e) is the concentration of carbon dioxide that would cause
the same level of radiative forcing as a given type and concentration of greenhouse gas.
The full footprint of an organization encompasses a wide range of emissions sources,
from direct use of fuels to indirect impacts such as employee travel or emissions from
other organizations within the supply chain.
For example, consider the carbon footprint of a tomato ketchup from Sweden, studied
by Andersson et al (1998). The supply chain of the ketchup is globally dispersed. Tomato
is cultivated and processed into tomato paste in Italy, packaged and transported to
Sweden with other ingredients to make tomato ketchup. The aseptic bags used to package
the tomato paste were produced in the Netherlands and transported to Italy; the bagged
tomato paste was placed in steel barrels, and moved to Sweden. The five-layered red
bottles were either made in the UK or Sweden with materials from Japan, Italy, Belgium,
the USA and Denmark. The polypropylene screw cap of the bottle and plug were
produced in Denmark and transported to Sweden. Additional low-density polyethylene
shrink-film and corrugated cardboard were used to distribute the final product. Other
ingredients such as sugar, vinegar, spices and salt were also imported. The bottled
product was then shipped through the wholesale retail chain to shops, and bought by
households, where it is stored refrigerated from one month to a year. The carbon footprint
for 1 kg tomato ketchup, measured as CO2e in kg was estimated to be 2290.
Our approach to green supply chain considers the CO2 equivalent emissions as a
performance measure for the supply chain. With the growing concern over the
environmental degradations due to carbon emissions, a fundamental paradigm shift is
required in designing and analyzing supply chains, spanning across the strategic, tactical,
a
http://www.carbontrust.co.uk/solutions/CarbonFootprinting/ (accessed October 2009)
Indo-US Workshop on Designing Sustainable Products, Services and Manufacturing Systems
August 18 - 20, 2009, Indian Institute of Science, Bangalore
2
and operational decisions. This work proposes one such shift in reducing carbon
emissions using the notion of low carbon logistics provider (LCLP). LCLP can be
defined as a company that creates value through an alliance of supply chain
competencies, by exploiting information flows and goods flows in the supply chain to
optimize costs and carbon emissions.
The rest of the chapter is organized as follows. We categorize various approaches for
mitigating carbon emissions and affirmative action in the following three sections:
Emissions reduction (Section 3), carbon awareness (Section 4), and carbon pricing
(Section 4). Synthesizing the mechanisms of these approaches, we develop our proposed
notion of low carbon logistics provider in Section 5. Finally we conclude the chapter in
Section 6.
2. Emissions Reduction
In this section we outline some of the green supply chain initiatives that directly reduce
the green house gas emissions.
2.1 Substitution in the Supply Chain
The obvious way of reducing emissions is to substitute carbon-intensive input factors
with low-carbon alternatives. For example in the electricity sector, using natural gas
instead of coal for power generation can reduce carbon emissions by about 50% per unit
of electricity produced (Neuhoff, 2008). Renewable energy sources can provide near-zero
emissions during operation of the plants. Similarly for logistics, one can substitute with
low-emission vehicles and transportation modes.
Walkers crisps from PepsiCo in UK used following substitutionsb:
(i) Using only British potatoes and cutting down food miles;
(ii) Improving production efficiency by moving to more efficient production line;
(iii) Reducing the weight of packaging;
(iv) Running delivery lorries on biodiesel and using fuel efficient driving
With additional initiatives like recycling of waste, Walkers has reduced 4800 tonnes
of CO2 in two years since 2007 (7% reduction).
Another approach is to examine the entire supply chain and identify the substitution
opportunities. For example, Walkers learned that storing potatoes in humid conditions to
soften the skin increases their water content. Further, water content is the main weight
contributor to potato, thus favoring farmers to humidify the potatoes. However, prior to
frying to make crisps, potatoes had to be dried to remove the excess water content, which
consumes lot of energy. A gain in money for one agent in the supply chain affects
adversely on the emissions in a different segment of the chain. The solution here is to
provide farmers incentives for dry content of the potato (rather than its weight), thereby
creating a win-win scenario.
b
http://www.walkerscarbonfootprint.co.uk/walkers_carbon_trust.html (accessed October 2009)
Indo-US Workshop on Designing Sustainable Products, Services and Manufacturing Systems
August 18 - 20, 2009, Indian Institute of Science, Bangalore
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Similar observations were also made for clinker, a main component in cement.
Clinker is produced by heating lime stone, which undergoes a chemical transformation
releasing carbon. Although carbon emissions can be reduced by using renewable energy
sources for heating, the majority of the emissions is due to the chemical transformation
that cannot be avoided. After milling, clinker is mixed with other substances to make
cement. Walker and Richardson (2006) observed that the main scope for reducing
emissions is via the substitution of some of the clinker with other materials suitable for
cement production.
2.2 Supply Chain Coordination
The above approach of substituting a function with a low-carbon alternative at times can
lead to wrong conclusions. For example, consider buying a rose in UK with two
alternatives: One grown in Netherlands and the other from Kenya. At the outset, flower
from Netherlands will be more eco-friendly as it would have travelled less food-miles
than from Kenya. However, research by Williams (2007) reveals that 12,000 cut stems of
roses from Kenya emitted 2,200 Kg CO2, whereas that of a Dutch operation emits 35,000
Kg CO2. Roses from the Netherlands required artificial light, heat and cooling over the
eight to 12-week growing cycle, whereas the natural weather of Kenya favored the roses
without any temperature regulators. Thus a holistic analysis of end-to-end supply chain
can lead to better reduction in emissions.
Supply chain encompasses different functional entities, possibly owned by different
companies. Even with a single ownership, the various functions within the supply chain
like procurement, manufacturing, and distribution, tend to work with their own
objectives, constraints, and payoffs. Coordination among the entities in the supply chain
can result in pursuit of achieving system wide objectives. Low carbon emission is one
such objective. With a target of carbon emission cap on the entire supply chain (with
other traditional objectives), various entities in the supply chain will collaborate and
coordinate in the pursuit of the above objectives.
Another possibility of coordination is that of among the competitors in a particular
stage of the supply chain. For example, consider the automobile supply chain of India.
The Indian auto logistics, largely made up of finished vehicle distribution, is estimated at
INR34.71 billion in 2006–07 and has been growing at a rate of 18.31% during 2001–02
and 2006–07 (Cygnus, 2007). The auto industry in India is clustered in and around the
cities of Chennai (south), Mumbai (west), Jamshedpur (east), and Gurgaon (north). The
demand is distributed across the entire nation. The finished vehicle logistics of moving
the finished vehicles from the factories to the retailers is usually done by the companies
in isolation without any coordination with the competitors. A truck carrying finished
vehicles from a factory in the south to a retailer in the north of India, usually returns
empty or less than truckload carrying some other cargo. The emissions and cost could be
optimized if the truck carries in the return journey vehicles from a factory in the north to
a retailer in the south. India has a vast and well established railway network, which can
Indo-US Workshop on Designing Sustainable Products, Services and Manufacturing Systems
August 18 - 20, 2009, Indian Institute of Science, Bangalore
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be leveraged for the nationwide vehicle distribution with reduced emissions. However,
this demands a central player who can coordinate the competitors and execute the
distribution at less cost and low emissions.
3. Carbon Awareness
Businesses and individuals are generally aware of the negative impacts of emissions on
climate change. However, contribution of green house gas emissions in their own
production and consumption activities is largely overlooked. From the supply chain
perspective, we can categorize carbon awareness as producer awareness and consumer
awareness.
The producer awareness is about the knowledge of the carbon footprint of a product
along the entire supply chain, right from raw materials to final packing and delivery. In
the tomato ketchup case study from Sweden (Andersson et al, 1998), the 2290 CO2e for 1
kg of ketchup was contributed by the following activities in the supply chain:
 Agriculture (190);
 Processing (500);
 Packaging (1275);
 Transport (130);
 Shopping (195);
Once the producer or manufacturer is aware of this aggregate carbon footprint and the
constituent break-ups, the possibilities for innovation arise. In particular, emissions
become a performance metric or criterion in evaluating or re-designing the supply chain.
Aankhen, Inc. creates supply chain visibility providing new source of information and
data on carbon footprint using RFID and GPS technologies (Aankhen Inc., 2008). The
emissions visibility identifies the opportunities for continuous carbon footprint reduction
and cost improvement by exposing existing supply chain inefficiencies. It creates a
surprising “I didn’t know we did that!” awareness followed by “What is the impact of
changing that?” resulting in action with “Let’s change that.”
The consumer awareness is about the knowledge of the carbon footprint of the
product consumed. For example, if the consumer is aware of the carbon footprints of the
alternate ketchups, then it becomes an additional attribute in the selection decision along
with the traditional attributes like price, taste, brand, etc. Carbon labeling or declaring the
carbon footprint of product provides the necessary information for the consumer.
Labeling has proved to be successful in other business ill practices like child labor and
animal torture. In India, when the awareness of child labor was wide spreading among the
public, businesses started labeling apparels and fire crackers as No Child Labor (used in
the production of the product). This acted as an incentive for the child labor aware
consumers to buy such products, which in-turn provided incentive for other producers to
follow the practice. In the near future, one can expect such scenario in carbon labeling.
In a survey among UK consumers (L.E.K. Consulting, 2007), a majority of 56%
stated that they would value the information regarding carbon footprint of the products.
Indo-US Workshop on Designing Sustainable Products, Services and Manufacturing Systems
August 18 - 20, 2009, Indian Institute of Science, Bangalore
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Also, 44% of consumers would switch to a product or service with a lower carbon
footprint, even if it was not their first preference. This is further demonstrated by the fact
that 20% were willing to travel to a less convenient retailer in order to obtain a low
carbon product and 15% were willing to pay more for a less carbon product. The research
reveals the growing carbon awareness among consumers and thereby emphasizing
businesses the need for including the carbon footprint in their supply chain design.
However, the dichotomy of child labor and no child labor does not exist for carbon
labeling. Rather it is a continuous metric, which also provides scope for progressive
improvements in order to outperform the competitors. Further, as the demand for the
product is also a function of the carbon footprint, it naturally provides a benchmark or
baseline target of the emissions for the businesses.
4. Carbon Pricing
Pricing carbon has become widely acknowledged as a significant catalyst in international
efforts to reduce greenhouse gas emissions. It is essentially based on the theory of
internalizing the externalities. The green house gas emissions are negative externalities
caused in production and transportation of products through the supply chain. In order to
internalize the negative externalities, the environmental costs are factored in to the supply
chain costs in the form of carbon pricing.
The rationale for using carbon pricing is as follows (Neuhoff, 2008): It creates
incentives for the use and innovation of more carbon efficient technologies, and induces
substitution towards lower carbon fuels, products and services by industry and final
consumers. The price signal feeds into individual decisions that would be difficult to
target with regulation. It also makes it profitable to comply with carbon-efficiency
regulations, thus facilitating their implementation. There are two mechanisms for
delivering carbon prices: carbon tax and cap and trade schemes. In the following, we
briefly discuss the above two mechanisms. For more detailed discussions, see Neuhoff
(2008).
4.1 Carbon Tax
Carbon tax levies a fee on the production, distribution or use of fossil fuels based on how
much carbon their combustion emits. The government sets a price per ton on carbon,
which is translated into a tax on electricity, natural gas or oil. Taxing basically
discourages the usage of high carbon emitting fuels thereby encouraging businesses and
individuals to reduce consumption and increase energy efficiency. It is an indirect tax that
is based on transactions, rather than direct taxes that are based on incomes. Carbon tax
schemes were introduced in Sweden in 1991 and subsequently in Denmark, Finland,
Netherlands, and Norway.
Carbon tax can be levied at different points of the supply chain. Some taxes target the
transaction between producers (coal mines and oil wells) and suppliers (coal shippers and
oil refiners). Some taxes affect only distributors like the oil companies and utilities. There
Indo-US Workshop on Designing Sustainable Products, Services and Manufacturing Systems
August 18 - 20, 2009, Indian Institute of Science, Bangalore
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are also taxes that charge consumers directly through electric bills. Thus, it is a price
based mechanism – the carbon price is fixed, but the quantity of emissions is not.
4.2 Cap and Trade Scheme
The cap and trade scheme is a dual to carbon tax where the quantity of emissions is
fixed, but the carbon price is determined by the market. Cap and trade schemes have four
basic components (Neuhoff, 2008):
(i) Governments set a cap on the total volume emissions of a pollutant and create the
corresponding volume of allowances.
(ii) These allowances are distributed for free or sold to firms and individuals.
(iii) The allowances can then be traded in the carbon market. This creates in principle
economic efficiency. Firms that would face high costs to reduce their emissions will
buy allowances from firms with lower costs, thus reducing the total costs of
emissions reductions.
(iv) Emissions are monitored and reported, and at the end of the accounting year, firms
either have to surrender allowances proportional to the volume of their emissions to
government or can bank them to the following year.
In contrast to carbon tax, cap and trade scheme fixes the quantity of emissions and allows
the market to determine the price. The largest carbon market is the European Union
Emissions Trading Scheme valued at US$50 billion with a volume of 2061 MtCO2e,
followed by New South Wales (US$224 million with a volume of 25 MtCO2e) and
Chicago Climate Exchange (US$72 million with a volume of 23 MtCO2e) in 2007
(Capoor and Ambrosi, 2008). Developing countries have not capped their emissions, and
therefore do not have cap and trade schemes. They participate in emissions trading via
the clean development mechanism (CDM). Under CDM, certified projects in developing
countries can sell credits from emissions reductions to developed countries that accept
these credits within their cap and trade schemes. Thus linkages created by emissions
trading can put a price on carbon even in countries that have not capped their emissions.
The producers in developing countries do not pay for carbon-intensive production but
they are paid for investments to reduce emissions. Thus their production costs and
competitive product prices do not increase to reflect the carbon price (Neuhoff, 2008). To
the contrary, where the allowance price exceeds the costs of implementing measures to
reduce carbon emissions, this provides a subsidy to carbon intensive activities.
For supply chain design, the carbon pricing offers three alternatives for locating a
manufacturing facility or an emissions intensive process:
(i) Locate in a region that offers cap and trade scheme with a allowance on the quantity
of emissions; Additional emission requirements can be bought from the market or
the excess allowance can be traded or saved for future use.
(ii) Locate in a carbon taxable region, paying tax as per the usage with no upper limits
on emissions;
Indo-US Workshop on Designing Sustainable Products, Services and Manufacturing Systems
August 18 - 20, 2009, Indian Institute of Science, Bangalore
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(iii) Locate in a developing country with neither tax nor cap on the emissions;
For a global supply chain with many facilities, one can judiciously choose the facilities in
different regions such that the emissions can be traded among subsidiaries by balancing
carbon reductions with economic justifications.
5. Low Carbon Logistics Provider
From the above discussions, one can infer the following requirements for mitigating
carbon emissions:
(i) Emissions can be reduced by choice of right partners like suppliers and logistics
providers in isolation. Further, a win-win scenario with both cost and emission
reduction can be achieved by optimally selecting the partners across the entire supply
chain.
(ii) Carbon awareness is increasing among the consumers. Even if regulators can be
bypassed by producing in developing countries with no emissions cap and tax,
companies need to be accountable for the consumers.
(iii) Carbon offsets among the different subsidiaries of the supply chain can be done cost
effectively with the use of carbon markets and taxes.
(iv) A supply chain channel master or leader is required to coordinate the entire supply
chain;
(v) The leader should possess deep knowledge of supply chain entities and also the
ecosystem consisting of regulators, carbon markets, emission standards, etc.
In view of the above observations, we propose here the notion of a low carbon
logistics provider (LCLP). LCLP can be defined as a company that creates value through
an alliance of supply chain competencies, by exploiting information flows and goods
flows in the supply chain to optimize costs and carbon emissions. LCLP essentially acts
as an orchestrator. The orchestrator is a management literature metaphor to describe the
role of a player who organizes and manages a set of activities in a network, by ensuring
value-creation opportunities in the system and value appropriation mechanisms for each
player (Dhanraj and Pharke, 2006). Orchestration brings about and manages whole set of
tangible and intangible elements starting from design to distribution. Unlike outsourcing,
orchestrators manage a network of contributors who have a stake in the outcome. In the
domain of logistics, there are related notions of orchestrators: IBM global trade
orchestrator (Wedan, 2006) and integrated knowledge-based logistics providers
(Viswanadham and Gaonkar, 2009). For example, in the case of finished vehicle
distribution of Indian auto logistics, Indian Railways is a potential orchestrator.
Indo-US Workshop on Designing Sustainable Products, Services and Manufacturing Systems
August 18 - 20, 2009, Indian Institute of Science, Bangalore
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5.1 LCLP as Orchestrator
Two popular orchestrators in the domain of computers and apparels are Medion AG
and Li & Fung, respectively. Medion AG (Germany) orchestrates the entire value chain
from the initial product to after-sales services of computers and peripherals for its retail
customers (Ordanni et al, 2006). Li & Fung (Hong Kong) is a trading company that
provides its clients with a virtual company for manufacturing apparels and toys
(O’Connell, 2006; Fung & Wind, 2007).
In order to understand the requirements and capabilities of orchestrators, let us
consider the case of Li & Fung in detail. The clients, usually from US and Europe,
approach Li & Fung with demand for certain items. Li & Fung primarily operates as an
agent, finding suppliers to manufacture items according to customers’ specifications. The
items include garments, toys, household items, sporting goods, handicrafts, and fashion
accessories. The company is divided into several dozen independent divisions, each of
which concentrates on orchestrating for one category of products and serves one or few
customers. The company has an international sourcing network with thousands of
suppliers in over dozens of countries. Different countries offer different combinations of
manufacturing capabilities, quality standards, and cost. The international sourcing
network is not a formally constituted entity but consists of two intangible assets:
relationships with the service providers and knowledge of the manufacturing capabilities,
special skills, business practices, and regulations pertaining to each country and each
supplier. The knowledge also includes the hidden costs like tariffs, duties, taxes, quotas,
customs declaration processes, security requirements, and interfacing with government
authorities. Further, all these are frequently subject to change. Li & Fung’s business
depends on these assets which leverage the international differences in labor costs and
manufacturing capabilities to provide products that closely match the customers’
requirements with respect to price, quality, and delivery time. Li & Fung owns no
factories or hard capacities and all the activities in the value creation, except for
coordination, are performed by other service providers.
LCLPs can similarly be viewed as an orchestrator. They are the next stage in the
evolution of 2PLs and 3PLs. Similar to Li & Fung, the primary strengths of the LCLP are
the knowledge and the relationships. The knowledge comprises of:
 the end-to-end supply chain emission requirements;
 requirements of stake holders;
 capabilities of service providers;
 innovation possibilities;
 emission regulations;
 carbon market information;
 customers’ carbon awareness;
The second asset is the relationships with the key players and potential partners from
the eco-system:
 service providers (suppliers, contract manufacturers, 3PLs);
Indo-US Workshop on Designing Sustainable Products, Services and Manufacturing Systems
August 18 - 20, 2009, Indian Institute of Science, Bangalore
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



regulators;
carbon markets;
low carbon enablers (like Carbon Trust of UKc);
project based activities like clean development mechanism (CDM) and joint
implementation (JI);
Using the above two intangible assets, LCLP can optimize carbon emissions without
compromising on cost. LCLP acts as an orchestrator in design, planning, and
coordination of the entire supply chain. With the knowledge of the differential
capabilities of the various service providers in terms of cost and emissions, the LCLP can
optimally choose a set of service providers, who can achieve the emission target of the
entire supply chain. Further with the use of carbon markets, LCLP can configure the
supply chain with optimal plant locations and right choice of service providers such that
carbon offsets can be exchanged among the stakeholders at minimal cost. The LCLP as
orchestrator is shown in figure 1.
2PLs/3PLs
Suppliers
Contract
Manufacturers
Plants/
Facilities
Customers
Low Carbon Logistics Provider
Supply Chain
Design
Regulators
Supply Chain
Coordination
Carbon
Markets
Emissions
Reduction
CDM & JI
Carbon
Trading
Low Carbon
Enablers
Fig. 1. Low carbon logistics provider as orchestrator
5.2 Design of Green Supply Chain
In the following, we illustrate the functionality of LCLP using a green supply chain
design example. For brevity, we assume a single product being manufactured. The
demand zones or customer locations and the required demand for the product at each of
c
http://www.carbontrust.co.uk/ (accessed October 2009)
Indo-US Workshop on Designing Sustainable Products, Services and Manufacturing Systems
August 18 - 20, 2009, Indian Institute of Science, Bangalore
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the demand zone are known. After initial analysis and collection of data, LCLP shortlists
a potential set of suppliers, plant locations, warehouse locations, transportation modes are
identified. This information is represented as a graph 𝐺 = (𝑁, 𝐴) with nodes and arcs.
The nodes 𝑁 = 𝑆 ∪ 𝑀 ∪ 𝑊 ∪ 𝐶 consists of suppliers (𝑆), manufacturing facilities (𝑀),
warehouses (𝑊), and customers (𝐶). The arcs denote the possible paths for flow of
goods. There are 𝐾 alternate modes of transportation or fuels with different costs and
emissions between a pair of nodes. The graph depicts the potential locations, facilities,
and feasible paths, from which a supply chain has to be designed. Only the set 𝐶 that
denotes demand zones or end-customers are fixed. The design problem is to choose a
subset of nodes from 𝑆 ∪ 𝑀 ∪ 𝑊 and feasible paths, such that the demands at 𝐶 are
satisfied subject to various constraints. The design problem is mathematically modeled as
the mixed integer linear programming problem.
Notation
𝑆
𝑀
𝑊
𝐶
𝐾
𝐺 = (𝑁, 𝐴)
Set of suppliers/sub-contractors
Set of manufacturing facilities
Set of warehouses/distribution centers
Set of customers/retailers
Set of transportation modes/alternate fuel types
Supply chain network; 𝑁 = 𝑆 ∪ 𝑀 ∪ 𝑊 ∪ 𝐶;
Data
The data required are capabilities, requirements, costs, and emissions of the various
service providers. In addition to the traditional cost parameters like fixed costs, variable
costs, and transportation costs, the LCLP estimates the greenhouse gas emissions factor
per unit of the product at all possible nodes and transportation modes. The LCLP handles
the carbon emissions at two levels:
(i) An upper bound 𝐺𝐻𝐺 on the total emissions for the entire demand is targeted.
(ii) Carbon taxes or trading for the subsidiaries 𝑀 ∪ 𝑊.
The target 𝐺𝐻𝐺 is for the carbon labeling to declare the per product carbon footprint.
It includes carbon emissions from suppliers and shipping. If costs of operation and
production favor the choice of developing companies (that have no carbon tax or
emissions cap), the 𝐺𝐻𝐺 will factor in the emissions thus balancing both cost and
emissions. The carbon pricing also allows internal carbon offsetting between the different
facilities of the supply chain in terms of both emissions and costs. The data required for
the design are summarized as follows:
𝐹𝐶𝑖 , 𝑖 ∈ 𝑆 ∪ 𝑀 ∪ 𝑊
𝑉𝐶𝑖 , 𝑖 ∈ 𝑆 ∪ 𝑀 ∪ 𝑊
Fixed cost of opening facility 𝑖 ∈ 𝑀 ∪ 𝑊 or supplier
development cost of 𝑖 ∈ 𝑆
Per unit purchasing cost from supplier 𝑖 ∈ 𝑆 or production/
Indo-US Workshop on Designing Sustainable Products, Services and Manufacturing Systems
August 18 - 20, 2009, Indian Institute of Science, Bangalore
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𝑆𝑈𝑃𝑖 , 𝑖 ∈ 𝑆
𝐶𝑇𝑌𝑖 , 𝑖 ∈ 𝑀 ∪ 𝑊
𝐷𝐸𝑀𝑖 , 𝑖 ∈ 𝐶
𝑆𝐻𝑃𝑖𝑗𝑘 , (𝑖, 𝑗) ∈ 𝐴, 𝑘 ∈ 𝐾
𝐶𝐴𝑃𝑖 , 𝑖 ∈ 𝑀 ∪ 𝑊
𝜆𝑖 , 𝑖 ∈ 𝑀 ∪ 𝑊
𝛼𝑖 , 𝑖 ∈ 𝑆 ∪ 𝑀 ∪ 𝑊
𝛽𝑖𝑗𝑘 , (𝑖, 𝑗) ∈ 𝐴, 𝑘 ∈ 𝐾
𝐺𝐻𝐺
processing cost at facility 𝑖 ∈ 𝑀 ∪ 𝑊
Supply capacity
Facility capacity
Demand
Shipping cost for transport alternative 𝑘 from node 𝑖 to
node 𝑗
Cap on allowable emissions under cap and trade scheme
for facility 𝑖 (= 0, for carbon tax)
Carbon price under cap and trade scheme for trading from
facility 𝑖 or carbon tax
Greenhouse gases emissions factor per product (raw
material/sub-assembly/semi-finished/finished/storage) at 𝑖
Greenhouse gases emissions factor per product for
shipping using transport alternative 𝑘 from node 𝑖 to 𝑗
Upper bound on greenhouse gases emissions factor per
product across the entire supply chain
For brevity, we denote all the quantity processed at all nodes (𝑆𝑈𝑃𝑖 , 𝐶𝑇𝑌𝑖 , 𝑆𝐻𝑃𝑖𝑗𝑘 ) in the
equivalent units of the demand (𝐷𝐸𝑀𝑖 ). For example, if two units of a component are
required in the final product then the two components are counted as one unit. This can
be obtained using the bill of materials. The 𝜆𝑖 is the deterministic value for carbon tax,
but for cap and trade scheme, it is a deterministic estimate (like expectation) of the
volatile carbon price.
Decision Variables
The decision variables in the design problem are selection of suppliers, the procurement
quantity from the selected suppliers, selection of facilities, production quantity at the
facilities, and shipping volume between the selected suppliers and facilities.
𝑦𝑖 ∈ {0,1}, 𝑖 ∈ 𝑆 ∪ 𝑀 ∪ 𝑊
𝑥𝑖 ∈ ℝ+ , 𝑖 ∈ 𝑆 ∪ 𝑀 ∪ 𝑊
𝑧𝑖𝑗𝑘 ∈ ℝ+ , (𝑖, 𝑗) ∈ 𝐴, 𝑘 ∈ 𝐾
𝑦𝑖 = 1, if facility 𝑖 ∈ 𝑀 ∪ 𝑊 is open or supplier 𝑖 ∈ 𝑆 is
chosen;
𝑦𝑖 = 0, otherwise.
Number of units of the product equivalent procured from
supplier 𝑖 ∈ 𝑆 or processed at facility 𝑖 ∈ 𝑀 ∪ 𝑊
Number of units of product equivalent shipped from node 𝑖
to node 𝑖 using the transportation alternative 𝑘
Optimization Model
We present below the mixed integer linear programming formulation for the optimization
problem. The objective of the optimization problem is to minimize the total cost of
procurement, production, transportation, and carbon costs.
Indo-US Workshop on Designing Sustainable Products, Services and Manufacturing Systems
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min ∑𝑖∈𝑁\𝐶 𝐹𝐶𝑖 𝑦𝑖 + ∑𝑖∈𝑁\𝐶 𝑉𝐶𝑖 𝑥𝑖 + ∑(𝑖,𝑗)∈𝐴 ∑𝑘∈𝐾 𝑆𝐻𝑃𝑖𝑗𝑘 𝑧𝑖𝑗𝑘
+ ∑𝑖∈𝑀∪𝑊(𝛼𝑖 𝑥𝑖 − 𝐶𝐴𝑃𝑖 ) 𝜆𝑖
(1)
subject to
∑(𝑖,𝑗)∈𝐴 ∑𝑘∈𝐾 𝑧𝑖𝑗𝑘 ≥ 𝐷𝐸𝑀𝑗
∀𝑗 ∈ 𝐶
(2)
∀𝑖 ∈ 𝑆
(3)
∑(𝑖,𝑗)∈𝐴 ∑𝑘∈𝐾 𝑧𝑖𝑗𝑘 = 𝑥𝑖
∀𝑖 ∈ 𝑁\𝐶
(4)
∑(𝑖,𝑗)∈𝐴 ∑𝑘∈𝐾 𝑧𝑖𝑗𝑘 = 𝑥𝑗
∀𝑗 ∈ 𝑁\𝐶
(5)
∀𝑖 ∈ 𝑀 ∪ 𝑊
(6)
𝑥𝑖 ≤ 𝑆𝑈𝑃𝑖 𝑦𝑖
𝑥𝑖 ≤ 𝐶𝑇𝑌𝑖 𝑦𝑖
∑(𝑖,𝑗)∈𝐴 ∑𝑘∈𝐾 𝛽𝑖𝑗𝑘 𝑧𝑖𝑗𝑘
+ ∑𝑖∈𝑁\𝐶 𝛼𝑖 𝑥𝑖 ≤ 𝐺𝐻𝐺
(7)
𝑦𝑖 ∈ {0,1}
∀𝑖 ∈ 𝑆 ∪ 𝑀 ∪ 𝑊
(8)
𝑥𝑖 ∈ ℝ+
∀𝑖 ∈ 𝑆 ∪ 𝑀 ∪ 𝑊
(9)
𝑧𝑖𝑗𝑘 ∈ ℝ+
∀(𝑖, 𝑗) ∈ 𝐴, 𝑘 ∈ 𝐾
(10)
The objective function (1) includes the fixed cost, variables cost, shipping cost and also
the carbon costs. Note that the term for carbon costs allows negative values (decrease in
cost) for cap and trade schemes when the facility does not utilize all the allowances. This
excess quantity can essentially be traded in the market. The demand (for 𝐶) and supply
(for 𝑆) constraints are given in (2) and (3), respectively. Constraints (4) and (5) impose
the flow constraints at each node and also determine the production quantity. The
traditional constraint of imposing zero production for closed facility and capacity
constraint for open facility is given by (6). The supply chain wide upper bound on
emissions, including the emissions from suppliers and due to transportation, is given by
(7). The problem can be solved using commercial optimization solvers like CPLEX. One
can also create scenarios and perform if-then analysis by considering different values for
𝐺𝐻𝐺 and its effect on the overall cost.
6. Conclusions
In this work, we introduced the notion of low carbon logistics provider (LCLP), who can
synthesize the various emissions mitigation approaches and mechanisms in the design of
low carbon supply chains. LCLP essentially acts as an orchestrator that creates value
through an alliance of supply chain competencies, by exploiting information flows and
goods flows in the supply chain to optimize costs and carbon emissions. We also
illustrated the capability of the LCLP in designing green supply chains with a mixed
Indo-US Workshop on Designing Sustainable Products, Services and Manufacturing Systems
August 18 - 20, 2009, Indian Institute of Science, Bangalore
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integer linear programming model. The model used the various emissions reduction
mechanisms:
 Supply chain coordination;
 Substitution of inputs;
 Carbon awareness (by using carbon footprint as a constraint);
 Carbon pricing (carbon tax and carbon markets);
The proposed LCLP concept can be extended to other sectors like food supply chains
and service industry. There are several perspectives along which this research could be
furthered. For a given vertical, identifying the functionalities (in terms of knowledge and
relationships) of an LCLP is the first and a challenging work. Also, is the design of
infrastructural and information backbone to support an LCLP. Proceeding further, one
can identify and evaluate the potential players in the ecosystem for evolving into an
LCLP. In this work, we illustrated the functionality of LCLP with a design of green
supply chain. There are other decision and coordination problems that LCLP faces at
strategic, tactical, and operational levels:
 Carbon trading decisions: Whether to sell the extra allowance in market or bank
them for future? Should the additional carbon be bought or offset by investing in
a project based activity in a developing country?
 Carbon footprint tradeoffs: The effect of carbon footprint on brand, price, and
ultimately the demand of the product.
 Network updating and restructuring: The primary assets of LCLP as
orchestrator are knowledge and relationships, which needs continual updating
and restructuring. The network of service providers needs to be – expanded,
pruned, and repositioned – according to the market conditions and emissions
standards. Analytics are required to assist the LCLP in determining which
service provider to upgrade, which emission technology to invest in, the exit and
entry options in terms of geography, etc.
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