The Carbon Cost Influences Research on Supply Chain Network Design

Abstract

With rising global climate change concerns, governments are enacting stricter regulations to curb carbon dioxide emissions from human activities. These policies are pressuring companies to reduce their supply chain carbon footprints to meet sustainability targets and avoid penalties. Integrating carbon pricing into supply chain network design optimization is a powerful lever for driving emission reductions while maintaining economic viability. This project examines incorporating carbon costs into a parcel delivery network design model for logistics provider DHL in Germany. The aim is minimizing total distribution costs across the supply chain by optimizing flows between plants and customer demand markets under carbon pricing. The methodology entails developing a linear optimization model with transportation cost and carbon emission charges as factors, then solving it using the simplex algorithm. Comparative analysis of optimized solutions with and without carbon pricing reveals trade-offs between profitability and sustainability. In addition, the case study focuses on DHL's domestic ground transportation routes connecting seven major cities in Germany. Supply comes from six distribution hubs spread geographically across the country. Demand at each city is forecasted based on historical shipment volumes. The optimization model decides the volume of parcels to transport between each plant-city pair to meet demand at minimum cost. The base scenario only accounts for direct transportation expenses. Then a 12% surcharge is added representing carbon costs from fuel consumption based on current CO2 market pricing. Furthermore, the model is solved first without carbon costs, then with the pricing incorporated. The optimized shipment planning under carbon pricing achieves a 45% reduction in total system costs over 10 iterations, from €3007 initially to €1832. In contrast, the cost-only solution reduces costs by just 39% to €1635. Thus carbon pricing drives greater efficiency and emissions reductions despite higher expenses. Significant network flow reallocations occur, shifting more volume to closer plant-market pairings. This comparative analysis quantitatively demonstrates the cost versus sustainability trade-offs organizations face when optimizing supply chain design under carbon pricing. The research highlights how embedding environmental externalities into logistics models can enhance eco-friendliness without sacrificing economic viability.