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.