Insourcing versus outsourcing decision under environmental considerations and different contract arrangements

Abstract

We investigate the insourcing versus outsourcing decision for a manufacturer, facing a price- and carbon emission-sensitive demand and an environmental regulation in the form of a carbon tax. We consider the carbon emissions generated during the production phase. In case of outsourcing, the transportation emissions are also considered, and we investigate the outcomes of revenue sharing and cost sharing contracts between the manufacturer and the supplier. We study the impacts of customers’ environmental awareness, carbon tax, price sensitivity, market potential, and supplier’s location on the insourcing vs. outsourcing decision, the environmental performance and the selling price. Our results show that a higher customers’ environmental awareness, a larger market potential and a longer distance between the supplier and the manufacturer favor insourcing over outsourcing, whereas a higher carbon tax and a higher price sensitivity favor outsourcing.