An Economic Order Quantity inventory model for a product with a circular economy indicator

Abstract

Circular economy approach is receiving an increasing attention as an alternative to the current linear economic model with the ambition of positive impact on the environment while contributing to economic growth. In this paper, an Economic Order Quantity inventory model in a circular economy is presented. We assume that the product can be manufactured with a variable level of circularity measured by an index. The information provided by a given circularity indicator allows the consumers to make responsible decisions about what they buy. Governments can influence the transition to a circular economy through regulations, taxes and subsidies, while companies seek to maximize their profits by taking these considerations into account in decision-making. Hence, we argue that the circularity level has impact on the demand, cost and selling price of the product and propose various linear and nonlinear relationships. Therefore, additionally to the order quantity, the circularity level is also a decision variable in our model. The optimal parameters are determined analytically and numerical Examples are provided. From the company’s perspective, the obtained results demonstrate that making circular products can be justified financially.