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Green supply chain management

Nowadays, human activity have changed the functioning of planetary system(Arias-Maldonado, 2015). In order to reduce the ecological deterioration, a sustainable development strategy should be implemented(Kuhlman and Farrington, 2010). The impact on environment and efficient resource utilization need to consider at the supply chain management (SCM) rather than within company boundary(Tippayawong et al., 2016). As a result, the concept of green supply chain (GSC) has gained rapid attention from both academia and industries(Sarkis et al., 2011).

Even though the tradition SCM typically focus on economic performance, green supply chain (GSCM) aims to integrate economic and environmental sustainability(Fahimnia et al., 2015). However, there is a different viewpoints on whether such integrated goals could be achieved(Kim and Kim, 2017).Some researches claim that environmental improvement does not always lead to profitability and it may conflict with economic goal(Corbett and DeCroix, 2001). While some researchers argue that GSCM practices may improve company’s economic performance(Esfahbodi et al., 2016). Thus advancing the green level of GSCM has both positive and negative impacts on the economic performance(Zhu and He, 2017). However, a blind eye to environmental issues is no longer an option and GSCM is an indispensable requirement(Lin et al., 2017).

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Moreover customer purchasing behavior has become one of important factor in GSCM implementation with tremendous increase of global consumption(Jamali and Rasti-Barzoki, 2018). Many studies indicate that more customers shown their environmental concerns and desire to purchase green products(Joshi and Rahman, 2015). However, there is a gap between consumers’ awareness and actual actions, green consciousness does not always lead to green purchasing behavior(Syaekhoni et al., 2017).

Motivated by mentioned above, we explore the coordination mechanism alignment between green technology investment cost and economic performance of GSC in market segmentation. Previous researches mainly focus on empirical methods. In this paper, we adopt game theoretical approach methods to answer the following questions:

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What is the impact of customer heterogeneity on greenness level and profitability of supply chain?

What is effect of greenness cost and green sensitive consumer on environmental and profitability of supply chain?

How does bargaining on investment cost sharing in green supply chain affect their decision?

In order to solve the problem, we developed two scenarios namely, (1) without market segmentation and (2) with market segmentation. Under scenario (1) there are sub-scenario namely (i) individual decision scenario where the supplier and manufacturer makes decisions based on their own interest; (ii) jointly decision scenario where supplier and manufacturer is treated as a system and both make collective decisions to maximize the overall profit of the supply chain.

The main contribution of the paper is threefold. First, a game theoretic approach is adopted and equilibrium solutions are calculated in two different scenarios. Second, the paper explores the influences of investment decisions on members pricing and green strategies on GSC. Third, factors that affect green investment and profitability of GSCM are taken into account.

Literature review

This paper is closely related to the following two research streams: one is GSC and GSC coordination.

Regarding to the first stream, Madani and Houe(Madani and Rasti-Barzoki, 2017; Houe and Grabot, 2009) studies GSCM improve the environment and economic organizations performance. Hoek(Van Hoek, 1999) revels GSCM is an important organizational philosophy to achieve corporate profit and market share. Li.(Li et al., 2016) showed that the impact of green product in deployment of GSCM in the decision making process.

Analyzing the GSC coordination mechanism, Amacher et al.(Amacher et al., 2004) studied how a technology investment for greening strategies used in order to gain a competitive advantage. Lu and Cruz(Liu and Cruz, 2012) studied green product price strategy and their impact on green products on market demand from the manufacturer’s perspective. Zhang et al.(Zhang et al., 2017) studied greenness price and their innovation strategy from manufacturers perspective Basiri and Heydi(Basiri and Heydari, 2017) established a GSC model between a manufacturer and a retailer to study their coordination. The developed model result, products green quality was determined by the manufacturer.

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To enhance GSC development further, increasing number of studies are inclined to design a reasonable coordination and incentive mechanism to realize GSC coordination and benefits of members(Barari et al., 2012). Barari et al.(Barari et al., 2012) studied a coordination mechanism concerning the environment benefits and commercial interests between supplier and retailer to promote GSC. Zhang et al.(Zhang et al., 2015) extended the GSC and designed a two-part tariff in between two-stage SC channel in order to achieve coordination. Swami and Shah(Swami and Shah, 2013) studied GSC coordination problem in central and dis-central channel. Hamdan and Cheaitou (Hamdan and Cheaitou, 2017) designed cost shared contract to motivate green input in manufacturing, but, unfortunately, the proposed cost sharing contract was not applied in the centralized decision.

As it can seen from the above literature review that designing an incentive mechanism to realize GSC coordination is always a heated issue. Thus, this work explores the alignment between greening investment cost and economic performance for GSC coordination.

Problem Statement and Formulation

Problem Description

In this work, we investigate the impact of green investment cost on the greenness level and economic performance of GSC. We take into account a two-level supply chain GSC composed of a supplier, a manufacturer and customers. The supplier produces components which are an input for the manufacturer and the manufacturer wholesales to the customer.

Notation

Model parameter

K Potential customer

D_S Demand function when supplier bear green investment cost

D_M Demand function when manufacturer bear green investment cost

β_i Green sensitivity coefficient, i=M”,S, 0<β<1

α Price sensitivity coefficient, α≥1

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γ Fraction of price oriented consumers in the market

1-γ Fraction of environmental oriented consumers in the market

π_i Profit, i=M”,S

π_SC Supply chain total profit

I_i Investment sensitivity coefficient, i=M”,S

c Unit cost

Decision parameter

G_i Greenness degree of green product, i=M”,S

p Selling price

w Wholesale price

Assumptions

Both engaged in green technology innovation development. The market demand (D) is sensitive to the selling price (p) and green technology innovation effort (G) provided by supplier and manufacturer.

D(P”,G_i”,)=KP^(-α) 〖G_i〗^(β_i ) (1)

P > w > c. In order to ensure profits for the supplier and the manufacturer, the unit selling price must be higher than the unit wholesale price, and the unit wholesale price is not less than the unit production cost.

To advance green product in R&D, suppler and manufacturer need to invest a funds. Green investment cost of supplier, f(G_S )=〖I_S G_S〗^2 where I_S denotes the investment sensitivity for supplier. Whereas, f(G_M )=〖I_M G_M〗^2 where I_M denotes the investment sensitivity for manufacturer. This type of cost function is considered in many studies, for instance literature(Chen et al., 2017).

The demand functions of supplier and manufacturer are as follows, respectively.

When supplier only invest in green technology innovation, D_S (P”,G_S”,)=KP^(-α) G^(β_S )

When manufacturer only invest in green technology innovation, D_M (P”,G_M )=KP^(-α) G^(β_M )

Based on the above assumptions profit function of suppler and manufacturer are given as follows, the supplier’s profit function is: π_s=(w-c-f(G_S)) D_S while the manufacturer’s profits functions is: π_m=(p-w-f(G_M)) D_M and The total profit function for the supply chain is: π_sc=(w-c-f(G_S)) D_S+(p-w-〖f(G〗_M)) D_M

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