The impact of co-location in emissions regulation clusters on traditional and vendor managed supply chain inventory decisions

Most of the works studying the response of supply chains to environmental regulations assume all parties are subjected to the same regulations. However, quite rarely the buyers and vendors are co-located and under the same environmental regulations. In this paper, we study the inventory and production decisions of a buyer and a vendor in a multiple buyers-single vendor supply chain with multiple products under various environmental regulations. Our analysis shows that the multiple buyers-multiple products case simplifies to the single buyer-single product case in certain conditions. We find that while a cap-and-trade regulation on the buyer may increase or decrease the economic order quantity of the buyer in traditional supply chains, it always decreases the economic order quantity of the buyer in vendor managed inventories (VMI). We show that while cap-and-trade regulation induces a reduction in carbon emissions of the buyer in both VMI and traditional supply chains, it may increase the carbon emissions of the vendor. Furthermore, we find that although not as widely used as cap-and-trade regulation, carbon cap regulation may decrease the carbon emissions of the buyer and vendor beyond that of a green buyer or a green vendor. In addition, we prescribe actions that the buyer or vendor may take to offset the effects any changes in parameters have on the economic order/production quantities.