Channel coordination in green supply chain management The case of package size and shelf-space allocation:

Abstract

Environmental consciousness has become increasingly important in present times, as evident by the examples from both everyday life and business practices. In the manufacturing sector, the efforts to reduce the impact of environmentally harmful activities have collectively been labeled as green supply chain management. Any major greening project would require efforts on the part of the entire supply chain. However, relatively few studies have addressed the issue of coordinating the green supply chain. We address the issue of vertical coordination in a green supply chain between the players at the upstream (say, a manufacturer) and downstream (say, a retailer) levels of the chain. In this paper, we focus on an interesting problem faced by manufacturer-retailer pairs (e.g., P&G, and Walmart) in the consumer products supply chains. The manufacturer has to decide on the wholesale price and the package size of its product. The manufacturer is labeled as a green manufacturer, since reducing the pack size of its product would help him save on environmentally costly transportation cost. Reduction in pack size helps the manufacturer also save on product packaging cost. Moreover, the reduce package size also results in cost savings for the retailer in terms of handling and storage. The retailer decides on the retail price and the shelf space to be allocated to the "green" manufacturer. The increase in allocation of shelf space has a demand expansion effect on the retail demand for the green manufacturer's products. However, the decrease in pack size has a demand reduction effect on its demand, because larger pack sizes attract more consumer attention, and therefore, act as an advertising vehicle. Further, the retailer has limited shelf-space and has to balance the space allocation for the green manufacturer against the potential profitability of allocating that space to "other" manufacturers.. In view of the above elements of complexity, it is interesting to examine the optimal prices charged, optimal reduction in size and optimal shelf-space allocation in this problem. We examine the problem for the cases of both integrated and decentralized channels. Our results show that the total profit is greater, pack sizes are smaller, and shelf-space allocation is greater in the integrated channel as compared to the decentralized channel. Retail prices can be greater or smaller in the decentralized channel as compared to the integrated channel, depending on certain values of the problem parameters. These results show that clearly there is scope for channel coordination in this problem setting for better profitability and environmental benefits. We propose a two-part tariff scheme which effectively coordinates the green supply chain in this problem setting