INCORPORATING ENVIRONMENTAL CONCERNS IN SUPPLY CHAIN OPTIMIZATION - Environmentally Conscious Materials Handling - page 120

through manufacturers and logistics providers, to customers. Thus, firms operat-
ing in supply chains must factor new elements (decision variables, constraints,
and parameters) into SCO models. We provide three examples below.
1. Decision variables of at-source and end-of-pipe compliance levers, num-
ber of permits to buy, sell, or bank from year to year.
2. Constraint on emissions; emissions cannot exceed the number of permits
on hand. The shadow price corresponding to this constraint would be the
value that the firm places on an incremental permit.
3. Stochastic net present value (NPV) of a banked permit, since future market
value is influenced by a host of factors including compliance activity in
the industry and uncertainty in future regulation.

2.3 Uncertainty in the Evolution of Environmental Legislation

In the authors' experience working with managers charged with environmen-
tal decision making in the automotive and electronics industries, uncertainty in
future legislation wreaks havoc on current decision making. No longer can man-
agers rely on static or myopic optimization approaches that are incapable of
accommodating uncertainties in the optimization problem parameters (such as
emissions limits, costs of compliance, and penalties for noncompliance). The
supply chain optimization problem is affected by legislative uncertainty in two
ways:
1. Although it is generally believed that costs of compliance (through
at-source or end-of-pipe efforts) are convex increasing in the pollution
outcome, future costs of compliance are difficult to predict and can
materially influence current decisions. Robust or stochastic methods of
optimization are therefore required.
2. Likewise, the constraints likely to be faced in the future are unknown
in identity (i.e., which pollutants) and magnitude (i.e., what limits). For
example, the regulatory requirement of lead-free solder in the EU (through
the RoHS directive) resulted in a sudden change in supply chain decisions
for most businesses dealing with electronic and electrical equipment.

3 ECONOMIC FACTORS

Economic factors such as resource scarcity, competition from low-cost produc-
ers, and the evolution of so-called green customer segments have recently come
to the forefront and have prompted significant changes to the way SCO is to
be approached. In certain instances, economically viable approaches such as
remanufacturing have had positive environmental effects, such as reduced energy
consumption and reduced waste. However, environmentally friendly endeavors
can often be expensive relative to their economic benefits. The relationship