Sustainability strategies in an EPQ model with price- and quality-sensitive demand

This paper studies a manufacturer producing a single product which is sold on a market where demand is sensitive to price and quality. The production process of the manufacturer is assumed to impact the environment, for example by producing emissions or scrap or by consuming non-renewable resources. The environmental impact of the production process is treated as a quality attribute in this paper, and it is assumed that environmentally conscious customers are willing to pay a higher price for the product in case the environmental impact of the production process is reduced (or, likewise, a higher degree of sustainability is achieved). The model developed in this paper studies the trade-off between sustainability, costs and demand and proposes strategies to maximise the manufacturer’s profit. INTRODUCTION There is a growing recognition that corporations play a critical role in achieving global sustainability (Shrivastava, 1995). Over the last two decades, individual corporations and industry associations in virtually all economic sectors have developed policies, plans, and programs to address sustainability issues. These initiatives typically focus on addressing the “triple bottom line” of corporate economic, environmental, and social performance (Elkington, 1997). One industry that has been particularly active in implementing sustainability initiatives is the manufacturing sector. There are ongoing debates on what sustainability means in a manufacturing context. There is no universally accepted definition of sustainable manufacturing or sustainable production. However, one widely-used definition of sustainable production defines it as “creating goods by using processes and systems that are non-polluting, that conserve energy and natural resources in economically viable, safe and healthy ways for employees, communities, and consumers which are socially and creatively rewarding for all stakeholders in the shortand long-term future” (Glavic and Lukman, 2007). Although each corporation will define sustainability according to its own needs, this definition provides insight into the goals, objectives, and targets typically associated with sustainability initiatives in the manufacturing sector. To help measure the success or failure of their sustainability initiatives, many corporations in the manufacturing sector have developed sustainability indicators. The development of sets of sustainable production indicators has also been the subject of several academic publications, including Veleva and Ellenbecker (2001), Krajnc and Glavic (2003), and Fan et al. (2010). Many other papers have explored the development of sustainability indicators for specific companies within the manufacturing sector. An extensive review of the state-of-the-art of industrial sustainability indicators was provided by Arena et al. (2009). However, while the literature shows that many meaningful contributions have been made, work remains. In particular, none of the indicators in the publications noted above have explicitly explored the link between a corporation’s sustainability performance and demand for its products. A recent systematic review of 91 articles showed that the research on consumer willingness to pay for ethically produced goods – encompassing issues such as environmental and labour practices – has yielded mixed results (Cotte and Trudel, 2009). However, the overall findings of the systematic review suggested that consumers were