Supply chain coordination under nonlinear cap and trade carbon emission function and demand uncertainty

Abstract

Purpose This paper investigates to find whether it is possible to align the interests of a small and medium manufacturing enterprise (SMME) with its raw material supplier in a manufacturing supply chain (MSC) to achieve a sustainable solution. To this end, current study examines the coordination of an MSC under cap and trade consisting of a raw material supplier and a carbon-emitting SMME confronting a stochastic demand. Design/methodology/approach The model is developed under both the decentralized and centralized decision-making scenarios. Under the investigated model, the SMME decides on both production quantity and sustainability level simultaneously. To achieve coordination and align the interests of both MSC members toward sustainable economic development goals, a customized revenue-sharing contract is developed. Findings Although the centralized model is profitable for the MSC, it makes a loss for the SMME compared to the decentralized scenario. The revenue-sharing agreement is able to create coordination among the MSC members and optimize profitability and sustainability. The established revenue-sharing guarantees a Pareto-improving situation for both members. Applying the established contract not only reduces shortage occasions but also results in more sustainability levels, which in turn means movement toward attaining sustainable economic development goals. Originality/value Unlike previous studies, carbon emission is assumed as a nonlinear decreasing function of the sustainability level which is a more realistic case. In accordance with SMMEs business environments, the market demand is also assumed uncertain. In addition, instead of assuming an investment cost for sustainability, the authors assumed unit production/purchasing costs as functions of product sustainability level.