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Environmental implications of transport contract choice - capacity investment and pricing under volume and capacity contracts

Berling, Peter LU and Eng-Larsson, Fredrik LU (2017) In European Journal of Operational Research
Abstract

Inspired by the observation that capacity contracts are used by some retailers to increase their transport provider's investments in green transport solutions, we investigate and compare a service provider's optimal investment, and its environmental implications under a volume and a capacity contract respectively. We solve the service provider's investment problem under the assumption that the retailer uses the service to replenish a warehouse with storable goods. We then show that a capacity contract leads to more green transports, but not necessarily a larger investment in green transport solutions. At the same time, the optimal solution involves heavy investment in inventory at the retailer. The investment in inventory is... (More)

Inspired by the observation that capacity contracts are used by some retailers to increase their transport provider's investments in green transport solutions, we investigate and compare a service provider's optimal investment, and its environmental implications under a volume and a capacity contract respectively. We solve the service provider's investment problem under the assumption that the retailer uses the service to replenish a warehouse with storable goods. We then show that a capacity contract leads to more green transports, but not necessarily a larger investment in green transport solutions. At the same time, the optimal solution involves heavy investment in inventory at the retailer. The investment in inventory is non-decreasing in the cost benefit of the green transports, which may have a significant negative environmental impact. The implication is that a capacity contract will lead to better environmental performance than a volume contract only when the green transports' cost benefit is within a given interval. Whether the capacity contract is the more profitable option for the service provider within this interval depends on inventory related costs and the relative environmental costs from transportation and inventory. Interestingly, owing to this, regulation that target the price of the conventional vehicles, such as a carbon tax, may lead to both an increase or a decrease in environmental performance.

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Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
epub
subject
keywords
Capacity contracts, Contracting, Green transports, Inventory, OM and the environment
in
European Journal of Operational Research
publisher
Elsevier
external identifiers
  • scopus:85015308634
  • wos:000400221000011
ISSN
0377-2217
DOI
10.1016/j.ejor.2017.01.056
language
English
LU publication?
yes
id
7e332777-b6d7-43eb-bab2-015c566dbed6
date added to LUP
2017-03-30 14:16:21
date last changed
2017-09-18 11:34:34
@article{7e332777-b6d7-43eb-bab2-015c566dbed6,
  abstract     = {<p>Inspired by the observation that capacity contracts are used by some retailers to increase their transport provider's investments in green transport solutions, we investigate and compare a service provider's optimal investment, and its environmental implications under a volume and a capacity contract respectively. We solve the service provider's investment problem under the assumption that the retailer uses the service to replenish a warehouse with storable goods. We then show that a capacity contract leads to more green transports, but not necessarily a larger investment in green transport solutions. At the same time, the optimal solution involves heavy investment in inventory at the retailer. The investment in inventory is non-decreasing in the cost benefit of the green transports, which may have a significant negative environmental impact. The implication is that a capacity contract will lead to better environmental performance than a volume contract only when the green transports' cost benefit is within a given interval. Whether the capacity contract is the more profitable option for the service provider within this interval depends on inventory related costs and the relative environmental costs from transportation and inventory. Interestingly, owing to this, regulation that target the price of the conventional vehicles, such as a carbon tax, may lead to both an increase or a decrease in environmental performance.</p>},
  author       = {Berling, Peter and Eng-Larsson, Fredrik},
  issn         = {0377-2217},
  keyword      = {Capacity contracts,Contracting,Green transports,Inventory,OM and the environment},
  language     = {eng},
  month        = {02},
  publisher    = {Elsevier},
  series       = {European Journal of Operational Research},
  title        = {Environmental implications of transport contract choice - capacity investment and pricing under volume and capacity contracts},
  url          = {http://dx.doi.org/10.1016/j.ejor.2017.01.056},
  year         = {2017},
}