Who should invest in CleanTech in the supply chain?

In modern supply chain management, sustainable supply chains are often seen as profitable supply chains. More use of clean technologies in supply chains significantly reduce carbon- and other greenhouse gas emissions. However the cost of investment in clean technology is substantial. According to Apple’s Green Bond Report, Apple invested USD 1.657 billion (2016-2017) in clean technologies (CleanTech).
Manufacturing companies in the supply chain are often the largest contributors to environmental pollution including carbon- and greenhouse gas emissions. Manufactures are therefore often seen as the logical investor in CleanTech in the supply chain.
Interestingly, retailers such as Walmart and Marks & Spencer also invest directly in manufacturers’ clean production projects. Retailers can obtain higher profits by investing in CleanTech in the supply chain. Specifically, if the benefit from the clean technology investment is more significant in increasing market demand than reducing environmental tax, the retailers have an incentive to invest; otherwise, they prefer to wait for the manufacturer’s investment.

CleanTech investments can be made by different members in the supply chain. This raises the question: who should invest? CleanTech investment made by a firm affects not only its upstream/downstream supply chain partner but also its competitor and/or substitutes.

Shi et al. (2019) investigated the oppportunity to invest in CleanTech in a supply chain where each supply chain member have the incentive and the option to invest in the adoption of clean technology to reduce emissions. The manufacturer produces a single type of environmentally friendly products, which are sold to consumers through two different retailers. Either the manufacturer or retailers have an option to invest in clean technology. The amount of clean technology investment affects the pollutants emitted and thus the environmental tax, as well as the purchase willingness of the customers with environmental awareness
Three scenarios were examined:

  1. the manufacturer makes the investment
  2. both retailers make the investment
  3. only one retailer makes the investment

Manufacturer’s performance
The manufacturer prefers to have both retailers invest in CleanTech. This is because the manufacturer can take advantage of the investment from both the retailers. The scenario in which only one retailer makes the investment, the manufacturer prefers to invest in clean technology by himself. This is because the manufacturer can charge both the retailers a higher wholesale price, though he should undertake the investment costs.
Retailers’ performance
It may be expected that the retailers prefer to wait for the manufacturer to make investment. However, this is not true. The retailers are able to obtain higher profits by investing in the manufacturer’s clean technology. This is because the manufacturer charges a lower wholesale price to the retailer who invests in clean technology.
In the scenario where only one retailer makes the CleanTech investment, it appears that the other retailer who does not invest becomes can become a free rider and can obtain a higher profit. However the profit improvement is not significant especially when the investment costs are high.

A sustainable supply chain is a profitable supply chain
Smart CleanTech investments in a supply chain can simultaneously achieve economic and environmental profit. Shi et al. (2019) show that the scenario in which both retailers make the CleanTech investment, all supply chain members’ profit and the emission reduction are higher than those in other scenarios.

Norbert Bol

Literature

Shi, X., Dong, C., Zhang, C., & Zhang, X. (2019). Who should invest in clean technologies in a supply chain with competition?. Journal of Cleaner Production.

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