A sustainable inventory management model for closed loop supply chain involving waste reduction and treatment

Abstract

With the environmental concerns emerged in the last decade, the transition towards circular economy production models has become a top priority for industrialized countries. Retail supply chains however are still mostly referred to the linear “take-make-consume-dispose” model, which is recognized to be a largely unsustainable approach due to the implied unbalanced consumption of energy and resources and uncontrolled generation of waste. The development of new and more suitable decision models for supply chain management in compliance with the principles of circularity is thus an industrial need and an emergent research field. Based on a detailed analysis of the systemic criticalities in linear supply chain management models and on their inherent exposure towards decision biases leading to overproduction, this research proposes an original closed loop supply chain management model coherent with the product lifecycle approach and compliant with the 4Rs model adopted in EU regulations. Specifically, the model shifts towards reducing waste, by considering non-constant salvage value for the products at the end of the selling season, depending on their actual conditions. The proposed model is validated through a numerical application which demonstrates how the unscrupulous use of traditional stochastic inventory management models substantially hinders the sustainability of the supply chain, unless a reverse logistic channel and appropriate waste management policies are enforced. Comparing the linear and the closed loop models, by means of a numerical application, with the closed loop model the expected leftover inventory decreased of the 65%, while the expected lost sales increased of the 83.4%. The results obtained demonstrate the effectiveness of the approach proposed in analyzing the dynamics of supply chain management models, and performing scenario analyses on different configurations, thus obtaining useful insights for sustainable supply chain design.

The main contribution of the research is to incorporate the 4R into the newsvendor model, determining new optimality conditions that imply the overall reduction of waste because of a smaller quantity of products managed along the supply chain respect to the linear supply chain model, assuming that supply chain’s actors are willing to accept a higher stockout risk in view of less inventory stocks. The results also show that the overall profits of the closed loop supply chain reduce of the 26.2% respect to the linear supply chain profit, which can be considered the ‘cost’ of circularity.