Optimal inventory control policy and supply chain coordination problem with carbon footprint constraints

Carbon footprint constraints exert pressure on supply chains to reexamine decisions. In this paper, we consider carbon transfer cost and carbon holding cost in a supply chain. A multiperiod dynamic programming model with carbon footprint constraints is presented to investigate the impact of carbon transfer cost and carbon holding cost on inventory control policy as well as the supply chain coordination problem. A two‐control limit inventory control policy is proved to be optimal and a contract with wholesale price, subsidy, and fixed setup cost is verified analytically to coordinate the supply chain. Finally, a numerical study is conducted to reveal managerial insights. We find that when the supply chain is coordinated, the chain's profit is more sensitive to carbon transfer cost while inventory level is more sensitive to carbon holding cost. Additionally, because of the complexity of the coordinated contract, when it is not easy to coordinate the supply chain, it is better to keep the values of wholesale price, subsidy, and fixed setup cost below the corresponding values for the coordinated supply chain.