Environmental monetization and risk assessment in supply chain design and planning

Abstract

Sustainable development is imperative for companies as society pressures for wealth environment are increasing. For this reason, all the decisions related with the design and planning of companies must include societal and environmental worries to achieve the desired sustainable development. Additionally, as market uncertainties are present, companies have to deal with financial risk associated with management decisions. This paper explores these challenges and proposes a mixed integer linear programming (MILP) model for the design and planning of supply chain that accounts for economic and environmental performances under risk assessment. An objective function incorporating environmental costs discounted from the economic revenues is developed where monetization of the environmental impacts is explored by applying the EPS method. Simultaneously, risk is considered by calculating the conditional value-at-risk (CVaR) measure. It is considered the maximization of the difference between the expected net present value and the environmental impact as well as the minimization of its risk associated. To solve the proposed model, it is applied the augmented ε-constraint method generating a pareto-optimal curve that provides the trade-offs between both objectives. As main contribution, this work provides a new model where monetization of environmental impacts is considered, and expands the traditional models based purely on economic risk to a new approach where financial risk contemplates both supply chain economic and environmental performances. A supply chain case-study is solved and based on the results managerial insights are derived.