Modelling a one retailer–one manufacturer supply chain system considering environmental sustainability and disruption

Abstract

In this paper, mathematical models are developed for a decentralised supply chain system consisting of a manufacturer and a retailer. The manufacturer facing the quality disruption of a random product executes production as per multiple-period orders of the retailer in a finite horizon. Both the retailer and the manufacturer have a restriction on CO2 emission. The objectives are for the manufacturer to make decisions to identify an optimal production and green investment, and for the retailer to determine optimal sourcing such that their respective profits are maximised in a horizon. First, a simple stochastic model is developed for the manufacturer, considering the defective production quantity as a stochastic variable. The retailer supply chain inventory system is then formulated as a Markov decision process model by taking consumer demand as a stochastic variable. The developed models are jointly considered and solved using MATLAB. The results indicate that the product’s defect probability affects the green investment and production decision of the manufacturer and the sourcing decision of the retailer. The emission limit only influences the green investment decision. In addition, although the high defect probability helps to increase the retailer’s profit, there is low profit for the manufacturer in a finite horizon.