The economic and environmental performance of dual sourcing: A newsvendor approach

We extend the dual sourcing model based on the newsvendor framework by considering the environmental impact of transport. In our context, dual sourcing means that a company, e.g. a retailer, uses an offshore and an onshore supplier. We include environmental regulations for transport in the model. Firstly, emission taxes for the transport from the offshore source are considered. It can be shown that with increasing emissions taxes the company sources less from offshore. This improves the environmental performance but the economic performance (expected profit) is severely harmed. Secondly, we propose that an emission trading scheme is valid for transport activities. In this case, the optimal policy turns out to be a two-sided control-limit policy. If the emission limit (expressed in product units) is set to the minimal offshore order quantity the environmental impact of transport can be reduced while the economic performance is nearly not affected. Thus, from managerial perspective emission trading is preferred to an emission tax on transport. Also from the perspective of policy-making emission trading is reasonable as it helps to limit the negative environmental impact of transport but does not strongly reduce the competitiveness of individual companies.