Three-echelon circular economic production–inventory model for deteriorating items with imperfect quality and carbon emissions considerations under various emissions policies

Abstract

Traditional production systems have a sole focus of maximising economic outcomes but due to the world’s ever-growing awareness about environmental issues, circular production systems, with a dual focus of maximising economic output and minimising environmental impact, have become prevalent in recent years. These types of production systems incorporate circular economy initiatives in their operational processes with the aim of reducing their carbon footprints. However, this is a voluntary measure to reduce carbon footprints and for this reason, various governments have introduced regulatory measures to involuntarily reduce carbon footprints of production systems. These regulatory measures include carbon tax, cap, cap-and-trade and cap-and-offset policies that are designed to reduce carbon emissions from production processes. With this in mind, this paper proposes an integrated sustainable production–inventory model for a three-echelon supply chain for imperfect quality deteriorating items with a circular economy indicator under various carbon emissions regulations. Using four different combinations of functions for both the demand rate and unit gross profit and four different carbon emissions regulations, 16 variants of the model are solved and analysed using heuristic algorithms. The model variants are not only aimed at optimising inventory replenishment decisions but also the circularity economy indicator of the deteriorating inventory. Of the 16 variants, the highest profit is achieved for the logistic demand and linear profit functions combination under cap-and-offset, despite a circularity indicator of 81.75%. The results also show that carbon emissions policies are effective at reducing the supply chain’s carbon footprint, albeit with a slight impact on the profit.