Dekker-Design and Planning For Green Global Supply Chains

Transportation Research Part E 72 (2014) 210–235
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Transportation Research Part E

journal homepage: www.elsevier.com/locate/tre
Design and planning for green global supply chains

under periodic review replenishment policies
Ioannis Mallidis a,⇑, Dimitrios Vlachos a, Eleftherios Iakovou a, Rommert Dekker b
a
Department of Mechanical Engineering, Aristotle University of Thessaloniki, P.O. Box 461, 54124 Thessaloniki, Greece
b
Econometric Institute, Erasmus University Rotterdam, Burg. Oudlaan 50, 3062 PA Rotterdam, The Netherlands
a r t i c l e i n f o a b s t r a c t
Article history: We quantify the impact of jointly optimizing strategic network design and tactical inven-
Received 17 February 2014 tory planning on the cost and CO2 emissions of multi-echelon logistics networks. The
Received in revised form 13 September 2014 obtained insights indicate that longer optimized replenishment cycles reduce a node’s
Accepted 15 October 2014
transportation cost and CO2 emissions but increase its inventory costs. Moreover, under
a fixed replenishment cycle, a node’s service level increases when supplied by a satellite
warehouse. Finally: (i) the costs of implementing optimal green network design decisions
Keywords:
could be misleading if inventory planning is neglected, (ii) greening of supply chains could
Green supply chain management
Supply chain network design
become expensive, (iii) current legislative CO2 ton prices hardly influence logistics
CO2 emissions networks.
Environment Ó 2014 Elsevier Ltd. All rights reserved.
Periodic review inventory planning system
1. Introduction
After the creation of a common European market in 1994, multinational companies changed their distribution structures
in Europe to large centralized European Distribution Centers employed for the supply of demand points within the continent.
This practice has been proven quite successful mainly due to the significant cost savings achieved by centralizing facilities
and stocks and from further employing fast and reliable truck transportation for both inbound and outbound to the DC
transportation.
Today, as the impacts of global warming are becoming increasingly visible, governments, international organizations, and
companies have recognized the necessity of global CO2 emissions reduction. As a result, emissions reduction policies such as
emissions trading schemes, green taxes, and environmental management systems have been proposed and are gradually
being implemented. Additionally, corporate social responsibility (CSR) issues have also arisen, designating the significance
of a ‘‘green image’’ as a corporate attribute that can lead to improved profitability. Today, leading companies clearly realize
the importance of ensuring a long-term competitive advantage based on ‘‘green’’ policies.
In this context, an important question is how these policies will affect the distribution structure. Policy-makers are advo-
cating the use of intermodal transport, which allows transporting large quantities, resulting however, in lengthy delivery
times and thus reduced responsiveness. To overcome the latter, it appears that more regional or satellite distribution centers
are necessary.
On this basis, several researchers have developed strategic green network design models. These are usually capacitated or
un-capacitated facility location models, the objective of which is to determine supply chain designs that minimize
⇑ Corresponding author. Tel.: +30 2310 995896; fax: +30 2310 996018.
E-mail address: imallidi@auth.gr (I. Mallidis).
http://dx.doi.org/10.1016/j.tre.2014.10.008
1366-5545/Ó 2014 Elsevier Ltd. All rights reserved.
I. Mallidis et al. / Transportation Research Part E 72 (2014) 210–235 211
transportation costs and CO2 emissions. However, these research efforts do not take into account the potential impact of tac-
tical inventory planning decisions, such as determining transportation frequencies and service levels at the nodes of their
examined networks.
The objective of this paper is to remedy (to a degree) this gap by evaluating the impact of jointly optimizing strategic
supply chain network design and tactical inventory planning decisions in the cost and CO2 emissions performance of
multi-echelon logistics networks. The impact of strategic network design decisions is evaluated by comparing the cost
and CO2 emissions performance of alternative realistic network design options, in terms of the number and type of operating
distribution centers and transportation modes employed, while the impact of tactical inventory planning decisions is
captured by jointly considering periodic review inventory planning policies at their nodes.
The paper’s contribution can be summarized as follows. Firstly, we evaluate the impact of jointly optimizing strategic
supply chain network design decisions, related to the selection of the number and type of operating distribution centers
and transportation modes employed, and tactical inventory planning decisions related to the determination of optimal order
delivery frequencies and stock levels, on the cost and CO2 emissions performance of real-world multi -echelon logistics net-
work design options. Secondly, we develop two multi -echelon periodic review inventory planning models, where the review
period is a decision variable, in order to quantify these cost and CO2 emissions impacts.
The rest of the paper is organized as follows. In Section 2, we present an extensive literature review along with a critical
taxonomy of papers that deal with green supply chain network design decisions, tactical green inventory planning decisions,
and the combination of both. Section 3 describes the problem under study, while Section 4 presents the development of a
multi-echelon periodic review decision-making model. Section 5 illustrates the applicability of the proposed model through
an extensive case study of a white goods retailer in the market of Greece, using real-world cost and emissions data. More-
over, the paper’s results are presented, along with managerial insights and a graphical decision-support tool for evaluating
the economic viability of adopting a ‘‘green’’ policy, while a sensitivity analysis on various cost parameters is also conducted
for validating the robustness of the cost optimal solutions. Section 6 discusses extensively the obtained managerial insights
and the contribution of this work, while Section 7 sums-up the findings of the research while indicating the paper’s key con-
tribution points to the literature, its limitations, and future research perspectives.
2. Literature review
In this Section, we provide a critical taxonomy of papers that examine strategic network design, tactical inventory
planning, and an integration of both types of decisions, while identifying the research gaps in the existing literature along
with our paper’s main contribution to the literature. (A more detailed analysis of the paper’s contribution to the literature
is provided in the following Section 6.)
2.1. Strategic network design decisions
As inbound flows to distribution centers (DCs) tend to be transported in full truckloads, while outbound flows in smaller
delivery trucks, the number of DCs has a large effect on a network’s transport efficiency as its increase can significantly
reduce outbound transportation distances. Consequently, the environmental impact of strategic network design and specif-
ically facility location decisions has received significant attention by researchers (Dekker et al., 2012). A first attempt to eval-
uate the environmental impact of facility location decisions was made by Li et al. (2008). The authors propose a profit
maximization and emissions minimization mixed integer linear programming model (MILP), in order to determine optimal
DC location and transportation mode selection decisions. The optimization criteria are the transportation costs and transpor-
tation as also production CO2 emissions. On the same basis, Ramudhin et al. (2010) propose a MILP model that decides on the
optimal DC location and transportation mode selection maximizing supply chain sustainability. All three dimensions of sus-
tainability are evaluated (economic, environmental, and social). The economic dimension is evaluated through the minimi-
zation of total logistics costs from various supply chain activities (purchasing, production, warehousing, distribution, and
recycling). The environmental dimension is evaluated through the consideration of greenhouse gas emissions regulations,
and finally, the social dimension is evaluated through the improvement of the life standards and quality of life of the com-
munities around the supply chain. Their work is further extended by Chaabane et al. (2012) as they additionally: (i) decide on
the optimal amount of quantities produced, and (ii) minimize inventory costs of materials and products.
Wang et al. (2011) propose another MILP model for determining optimal DC locations, their capacities and environmental
protection levels. The optimization criteria incorporate: (i) the on-hand, transportation, handling and investment costs on
green equipment, and (ii) the production and distribution centers’ CO2 emissions. The authors conduct a comprehensive
set of numerical studies and identify the Pareto optimal solutions along with their sensitivity to various parameters. An
interesting outcome of their analysis is that higher facility capacities in the network result in an increase in total logistics
costs and in the associated environmental impact.
Mallidis et al. (2012) propose a MILP model that decides on: (i) the number and location of DCs and entry Ports (EPs), (ii)
the capacity of the operating DCs, (iii) the type of transportation modes employed between the nodes of the examined net-
work, and (iv) the dedicated or shared use of transportation modes and distribution facilities. The optimization criteria incor-
porate transportation, DC operating and pipeline inventory holding costs and transportation CO2 and PM (particulate matter)
212 I. Mallidis et al. / Transportation Research Part E 72 (2014) 210–235
Table 1
Decisions, modeling methodologies and optimization criteria of the strategic green network design models.
Authors Decisions Model Optimization criteria

Li et al. (2008) Facility location MILP Transportation costs
Transportation mode selection. Transportation and Production CO2 emissions
Ramudhin et al. (2010) Facility location MILP Purchasing, Production, Warehousing, Recycling and Dis-
Transportation mode selection. tribution costs.
Transportation and Production Greenhouse gasses.
Life standards.
Quality of life.
Chaabane et al. (2012) Facility location. MILP Purchasing, Production, Warehousing, Recycling and Dis-
Transportation mode selection. tribution costs.
Production quantities. Transportation and Production Greenhouse gasses.
Life standards.
Quality of life.
Inventory costs
Wang et al. (2011) Facility location. MILP On-hand, Transportation, handling, and investment costs
Facility capacity. on green equipment.
Environmental protection levels at Production and DCs’ CO2 emissions
facilities.
Mallidis et al. (2012) Facility location. MILP Transportation and DC costs.
Transportation mode selection. Transportation CO2 and PM emissions.
Facility capacity.
Shared or Dedicated use of DCs and
transportation modes.
Pishvaee et al. (2014) Flows between facilities. Benders Opening costs of facilities, variable transportation, pro-
Facility processing technologies, Decomposition cessing costs, and cost savings from integrating facilities.
capacities, and locations. Algorithm Damage to human health, ecosystem and resources.
Creation of job opportunities, consumer risk minimiza-
tion, damage to workers health and value of local
development.
Harris et al. (2014) Number of operating facilities. MOEA Transportation and facility costs.
Allocation of customers to facilities. Transportation and facility CO2 emissions.
emissions. The applicability of the proposed methodology and the cost-environmental trade-offs generated are demon-
strated through the optimization of a real-world supply chain for the distribution of white goods produced in the Far East
to the emerging region of Southeastern Europe.
Pishvaee et al. (2014) propose a Benders Decomposition Algorithm for determining the optimal material flows between
facilities, their processing technology, capacities and locations, which minimize logistics costs, and environmental as well as
social impacts. The costs include the fixed facility opening costs, the variable transportation, processing costs, and the sav-
ings from integrating facilities. The environmental impacts incorporate the damage to human health, the ecosystem and the
resources, and finally the social impacts incorporate the creation of new jobs, the reduction of risk for consumers, the reduc-
tion of damages to workers’ health, and the value of local development to communities.
Finally, Harris et al. (2014) propose a novel methodological framework, based on the multi-objective evolutionary algo-
rithm (MOEA) with a Lagrangian Relaxation approach, for determining the optimal number of operating facilities and the
optimal allocation of customers to these facilities, while jointly minimizing transportation and facility costs as well as trans-
portation and facility CO2 emissions.
Table 1 displays the decisions, modeling methodologies and optimization criteria of the strategic green network design
research efforts.
2.2. Tactical inventory planning decisions
Regarding the environmental impact of tactical inventory planning decisions and with respect to waste minimization
objectives, Chen and Monahan (2010) investigate the impact of a company’s production and inventory planning decisions
on the environment. The authors propose a single-echelon newsboy-type model in order to determine the optimal produc-
tion quantity which minimizes the per unit shortage, production and holding costs, under the constraint of a specific amount
of wastewater generated.
With respect to CO2 emissions, Benjaafar et al. (2010) propose a single-echelon MILP inventory planning model that deci-
des on the optimal order cycle, order and inventory quantity and amount of backorders, while minimizing the fixed and var-
iable ordering, holding and backordering costs during a planning horizon subject to a constraint on the cap of CO2 emissions
produced during the planning horizon. The demand in their model is assumed deterministic.
On the same basis, Hua et al. (2011) propose a single-echelon inventory planning methodology for managing a company’s
CO2 emissions under a carbon emissions trading scheme. Their proposed model is based on the classical Economic Order
Quantity (EOQ) modeling methodology and determines the optimal order quantity, under a cap-and-trade system, which
Table 2
Decisions, modeling methodologies, and optimization criteria of the tactical green inventory planning models.
Authors Decisions Model Optimization criteria Echelons

Chen and Monahan (2010) Optimal production Newsboy Shortage, production, and holding costs. Single-Echelon
quantity Amount of wastewater.
Benjaafar et al. (2010) Order cycle MILP Ordering, holding, backorder and CO2 emissions Single-Echelon
Order quantity costs.
Inventory quantity
Backorder quantity
Hua et al. (2011) Optimal order quantity EOQ Ordering, holding and CO2 emissions costs Single-Echelon
Bouchery et al. (2012) Optimal order quantity EOQ Holding and ordering costs Single and Multi-
Order processing and transportation costs Echelon
Injury rates
Sazvar et al. (2014) Inventory and shortage MILP Ordering, holding, recycling and transportation Multi-Echelon
levels costs
Order quantity Transportation, production and recycling GHG
Number of vehicles emissions
Konur (2014) Optimal order quantity EOQ Holding, ordering, transportation costs Single-Echelon
Truckload Transportation and inventory holding CO2
Truck type emissions
Sazvar et al. (2014) Optimal order quantity EOQ Holding, ordering, transportation costs Single-Echelon
FTL or LTL Transportation and inventory holding CO2
emissions
Arıkan and Jammernegg Optimal order quantity Newsboy Selling price per unit Single-Echelon
(2014) Purchasing cost per unit
Salvage value per unit
Transportation and manufacturing emissions.
Emissions from product leftovers.
minimizes ordering, holding and carbon emissions costs. Bouchery et al. (2012) develop a multi-objective (cost, environmen-
tal performance, and social impact) extension of the EOQ model, referring to it as the sustainable order quantity (SOQ)
model, for determining the optimal order quantity that minimizes inventory holding and ordering costs, order processing
and transportation CO2 emissions, as well as injury rates from logistics operations. The authors initially applied the model
on a single-echelon supply chain network and then moved onto a multi-echelon extension. For both models, a set of efficient
solutions were analytically identified. These solutions were obtained using a multi-objective optimization methodology that
quickly identifies the economic, environmental, and social tradeoffs while providing a satisfactory solution. Sazvar et al.
(2014) propose a multi-echelon bi-objective MILP model in order to determine the inventory and shortage levels, the order
quantity, the total sales and the number of different types of vehicles for transporting a specific deteriorating product, while
minimizing the ordering, holding, recycling and transportation costs as well as the transportation, production and recycling
greenhouse gasses (GHG) emissions. Konur (2014) proposes a single-echelon EOQ modeling methodology with truckload
transportation and carbon emissions constraints. The model determines the optimal order quantity, truckload and truck type
that minimizes purchase, setup costs, inventory holding and transportation costs, under a constraint on the inventory hold-
ing and transportation CO2 emissions.
Konur and Schaefer (2014) further propose a single-echelon EOQ modeling methodology, which determines the optimal
order quantity that minimizes holding, ordering and transportation costs, considering less-than-truckload (LTL) and full-
truckload (FTL) transportation under a carbon cap, cap and trade, cap and offset, and taxing policies for the emission gener-
ated by transportation and the inventories reserved at the facilities.
Finally, Arikan and Jammernegg (2014) consider a single period inventory-planning model. They initially employ the
model for determining the optimal order quantity which maximizes profit subject to a constraint on the transportation,
warehousing and additional emissions of the products not sold. The authors further extend their model to allow for a second
emergency supply channel. In the extended version, the vendor’s optimal order quantity is also determined; In this case, the
order quantity consists of the sum of the order quantities from both supply channels. Moreover, the emissions constraint
additionally considers the transportation and manufacturing emissions of the order quantity from the second supply
channel.
Table 2 depicts the decisions, modeling methodologies, and optimization criteria of the green tactical inventory planning
papers examined.
2.3. Integrated approach
Finally, the only academic research effort that evaluates both the environmental impact of strategic network design and
tactical inventory planning decisions appears to be that of Harris et al. (2011). The authors propose: (i) a gravity location and
simulation-based modeling methodology for determining optimal facility location and transportation mode selection deci-
sions, and (ii) a square root law for determining optimal inventory levels. The optimization criteria involve the transporta-
tion and inventory holding costs and the transportation CO2 emissions. Moreover, the authors conduct a sensitivity
analysis for evaluating how different transportation mode utilization levels may affect the optimal number of operating
facilities.
A critical taxonomy of the literature review reveals that:
The cost and environmental impacts of strategic network design decisions are mainly evaluated through the employment
of MILP models. This observation is further supported by the work of Brandenburg et al. (2014) who identify MILP models
as one of the most commonly used sustainable supply chain management modeling methodologies.
The cost and environmental impacts of tactical inventory planning decisions are mainly evaluated through the employ-
ment of EOQ and newsboy-type models applied in single-echelon logistics networks.
There is a clear gap in academic research efforts for assessing the impact of jointly optimizing strategic network design
and tactical inventory planning decisions in the cost and CO2 emissions performance of multi-echelon logistics networks.
According to Ivanov (2010) these supply chain decisions are highly interlinked.
To remedy this shortcoming, this manuscript evaluates the impact of jointly optimizing strategic network design and tac-
tical inventory planning decisions in the cost and CO2 emissions performance of multi-echelon supply chain networks. The
impact of strategic network design decisions is evaluated by comparing the cost and CO2 emissions performance of alterna-
tive realistic multi-echelon network design options, while the impact of tactical inventory planning decisions by jointly con-
sidering periodic review inventory planning policies at their nodes.
3. Problem under study
Based on our extensive experience working jointly with multinational companies that serve the EU market, these com-
panies while using as entry ports either the Port of Rotterdam or major Mediterranean ports, face a common set of dilemmas
while designing their respective logistics networks. The three most prevalent logistics network design options that these
companies consider are discussed below.
In the first option, the company considers the market as a single region and serves it through a number of retail stores.
The retail stores in turn, receive their orders from one large central DC through truck transportation. To this end, the central
DC places its orders to a fara-way distant manufacturing site (a loading point). These orders are transported in containers to
an entry port through deep-sea shipping and then by heavy-duty trucks to the central DC.
In the second option, the market is partitioned into a number of regions and the retail stores of each region are served
exclusively through a peripheral DC. The peripheral DC is in turn replenished by the central DC through intermodal connec-
tions, thus acting as a ‘‘satellite’’.
In the third option, there is no central DC. The market is split into the same number of regions as in the second option
with one regional DC allocated to each region. Each regional DC is replenished independently from the distant manufacturing
site via deep-sea shipping and through its respective entry port. These three options are illustrated in Fig. 1 for a simplified
problem realization with two markets and five retail stores.
Specifically for the problem under study, we consider a multinational company that aims to serve a specific geographical
area (Market), trading various products with similar characteristics (e.g. white goods or consumer electronics), through a
number of retail stores located in the market’s area. The nomenclature for each examined option is provided in Table 3.
In all options, we assume that transportation from the DCs (central, regional and satellite) to the retail stores, occurs by
truck. More specifically, delivery trucks are employed for short transportation distances within city limits and heavy-duty
trucks for long-haul regional transportation distances. Additionally, the company is fully accountable for its DC facilities
and truck emissions, as trucks and DC facilities are assumed to be leased through long-term contracts. Specifically, with
the respect to truck transportation this implies that the company will be also accountable for the return truck trip’s CO2
emissions and costs. This is not the case however, for the barge, rail, or short sea shipping transportation modes employed
in the intermodal connections of Option DC/SDCs and for the deep-sea ships employed in all options.
Moreover, the lengthy lead times from the distant manufacturing site to the DC(s) in all options lead to increased and
variable waiting times for an end-customer in the case of a stockout at the DC. Thus, the inventory levels at the DCs (exclud-
ing the satellite ones) must be large enough to satisfy practically all orders from the retail stores they serve. This necessitates
the operation of quite large DCs that can provide high service levels (with a negligible probability of a stockout).
On the other hand, the satellite DCs act as intermediate echelons as they are replenished by the central DC. This further
implies that: (i) their capacity could be smaller and thus the probability of a respective stockout occurrence could be signif-
icant; (ii) a simultaneous stockout occurrence at the satellite DC and at the retail store would increase the necessary time for
a backorder to be fulfilled at the retail store.
The critical decisions for managing the above logistics network design options involve the determination of: (i) the stock
levels reserved at the retail stores and the satellite DCs, (ii) the order delivery frequencies to the retail stores, and (iii) the
optimal logistics network design option in terms of cost and CO2 emissions. The optimization criteria are: (a) the total logis-
tics costs that include, the holding costs of a product per time unit at the retail stores and the DCs (central, satellite and regio-
nal), the backorder cost of a product per time unit at the retail stores, the backorder cost of a product at the satellite DC, the
EP: Entry Port
DC: Distribution Center (central and regional)

Option DC
RS: Retail Store
RS2 Market
SDC: Satelite DC EP DC
//
RS1 RS3 RS4

Distant
Loading
Point
RS5
Option DC/SDCs Region 1

Market
RS2
EP DC
//
SDC1
RS3
RS1
RS4
Distant SDC2
Loading
Point
on 2
RS5 Regi
Option M-DCs Region 1

Market
DC1 RS2
EP1
//
RS1 RS3
RS4
Distant
DC2
Loading
Point
// 2
gion
RS5 Re
EP2
Fig. 1. Logistics network design options.
Table 3
Network design options under study.
Option Distribution operations

DC One central DC that serves the market as a single region
DC/SDCs One central and a number of satellite DCs, one for each region
M-DCs Multiple (M)-DCs, one for each region
transportation costs per trip or round trip (depending on the transportation mode employed) between the nodes of the net-
works’ under study, the (central, regional and satellite) DCs’ operating costs, and (b) the total logistics CO2 emissions that
include, the transportation CO2 emissions per trip or roundtrip between the nodes of the network under study, and the
DCs’ operating CO2 emissions.
Each retail store faces stochastic demand. Our analysis focuses on fast moving items/products, for which the retail stores
employ a base stock periodic review ordering policy (R,S) for the replenishment of their stock from the DC (central or satellite
depending on the option).
We argue that the length of the review period has a significant impact on both the cost and the CO2 emissions of the retail
stores as it affects their order delivery frequencies (1/R), thus their relevant transportation costs and CO2 emissions, and their
reserved stocks, thus their associated inventory-related costs. Moreover, as the trucks serving the retail stores are leased, the
order delivery frequencies to the retail stores can be quite flexible allowing for different review periods. Based on the above,
we treat the review periods of the stores as independent decision variables.
The review periods of the DCs (central, regional and satellite) are considered fixed as they are determined by the delivery
frequency of the transportation mode employed for their replenishment. Specifically, the review period of the central DC of
Option DC and the regional DCs of Option M-DCs are determined by the liner deep sea shipping schedule between the distant
manufacturing site and their entry port, while the review period of each satellite DC (of Option DC/SDCs) is dictated by the
transportation schedules of the intermodal connections between the central and satellite DCs.
To this end, since DCs receive orders from their serving retail stores at their review period epochs, the development of
analytical mathematical expressions for modeling these operations requires that the orders are coordinated. This further
implies that the review periods of the retail stores cannot be higher than the review period of their associated DC. Addition-
ally, as it has been clearly documented that power-of-two inventory planning policies further enhance coordination
(Muckstadt and Sapra, 2010), we limit the review periods of the retail stores and the DCs to be power-of-two multiples
of a base planning period.
4. Model development
We examine the three described realistic logistics network design options for serving a market. In the first option (Option
DC) we examine the market as a single region (r = 1), served through a number of retail stores meM. The retail stores are in
turn served by a central DC through truck transportation. Finally, the central DC orders from a distant manufacturing site and
its orders are delivered by ship to an entry port and then by a heavy-duty truck.
In the second option (Option DC/SDCs), the market is split into a number of regions reRE. The retail stores of each region
meMr receive their orders from their satellite DC, denoted by SDCr. Each SDCr in turn, receives its orders from the central DC,
through intermodal connections. As in Option DC, the central DC orders from a distant manufacturing site and its orders are
delivered by ship to an entry port and then by heavy-duty truck.
Finally, in the third option (Option M-DCs), the market is partitioned into the same number of regions as in Option DC/
SDCs, where each region also encapsulates the same number of retail stores meMr. The difference from Option DC/SDCs is
that there is no central DC, and instead of satellite DCs, regional DCs (DCr) are employed (in the same locations though to
allow for comparisons), which are replenished independently from the distant manufacturing site again via deep ship ship-
ping and through their respective entry ports.
For each option, the periodic review inventory planning decisions of their nodes are determined and given these deci-
sions, their total logistics costs and CO2 emissions are expressed.
Each retail store m in all options faces stochastic demand per time unit for product p (peP) with a probability density
function upm ðÞ and a cumulative distribution function Upm ðÞ. We assume that the demand of product p per time unit t at
the retail store m denoted by X pm is an independent and normally distributed random variable with a mean lPm and a standard
deviation rpm . Each retail store employs a periodic review inventory planning policy with a review period of Rm time units.
This review period determines the order delivery frequencies at the retail store (1/Rm).
At the review epochs, the order size is set so that it raises the inventory position of product p to Spm . The order arrives after
a deterministic lead time Lm which is common for all products of a retail store. We further assume that the lead times for the
replenishment of the DCs are deterministic.
Following the standard analysis like the one provided by Silver et al. (1998), the base stock quantity Spm of product p at
retail store m can be expressed as the sum of the mean demand during the protection period, thus lPm ðLm þ Rm Þ and the safety
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
stock, zPm rPm Rm þ Lm , where zpm represents the safety stock factor for product p at the retail store m (further determining
its cycle service level). Thus, the base stock quantity is given by:
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
SPm ¼ lPm ðRm þ Lm Þ þ zPm rPm Rm þ Lm 8m; p: ð1Þ
The standard expected cost formulas for (R, S) policies found in the literature, charge backorder quantities once at the end of
the review cycle. However, if these formulas are implemented in the problem under study, where the review period is a deci-
sion variable, the expected backorders of a specific retail store will be charged with different frequencies depending on the
review period. Thus, for example, for a planning horizon of one hundred time units and a review period of ten time units, the
backorder cost will be charged ten times during the planning horizon. If we double the review period, the backorder cost will
be charged only five times during the same planning horizon. Therefore, it would not be possible to compare the system’s
performance for different review periods. To this end, Ray et al. (2010) compare two periodic review inventory planning
models where the first charges backorders once at the end of the order cycle, and the second one, every time unit after order
arrival until the end of the order cycle. In this manuscript, we provide a multi-echelon extension of Ray et al.’s model by
additionally incorporating: (i) DCs’ (central, regional and satellite) inventory-related and transportation costs and CO2 emis-
sions parameters, as well as retail stores’ transportation costs and CO2 emissions parameters, (ii) coordination between the
DCs and their serving retail stores, and (iii) the impact of a concurrent stockout occurrence at a satellite DC and its serving
retail stores on their service levels.
The general notation related to the proposed cost and emissions models as well as the methodology for the determination
of: (a) the expected on-hand and backorder quantities at the retail store, (b) the expected on-hand quantities at the central
DC, (c) the container trips from the distant loading point to the DC, and (d) the truck roundtrips from the DC to the retail
stores is presented in subsection 4.1 for the Option DC. The additional nomenclature and the necessary methodological mod-
ifications for the other two options are discussed in subsections 4.2 and 4.3 respectively.
4.1. Option DC
Since each retailer employs an inventory planning policy for the replenishment of each one of its products stocks from the
DC, independently from the other retailers’, it is possible to simplify the mathematical expressions by omitting the indices
related to retail store (m) and product (p) from all model’s variables and parameters. Thus, in the remainder of the Section, all
mathematical equations hold for each product of each retail store.
The expected on-hand and backorder quantity of the examined product at the examined retail store at time t is given by
Eqs. (2) and (3), respectively:
Z S
EðOHðtÞÞ ¼ ðS xt Þ ut ðxt Þdxt ð2Þ
0
Z 1
EðBOðtÞÞ ¼ ðxt SÞ ut ðxt Þdxt ; ð3Þ
S
where ut( ) and Ut( ) are the probability density and the cumulative distribution functions respectively, of the demand of
the examined product at the examined retail store during L + t time units, Xt. Moreover, S can be also expressed as a function
of k(t) instead of z as in Eq. (1):
pffiffiffiffiffiffiffiffiffiffi
S ¼ l ðL þ tÞ þ kðtÞr L þ t; ð4Þ
where k(t) represents the safety stock factor for the examined product at time t. k(t) for the specific product and the specific
retail store is determined through Eq. (1) and (4) as follows:
pffiffiffiffiffiffiffiffiffiffi pffiffiffiffiffiffiffiffiffiffiffi
l ðL þ tÞ þ kðtÞ r L þ t ¼ l ðL þ RÞ þ z r L þ R ()
pffiffiffiffiffiffiffiffiffiffi pffiffiffiffiffiffiffiffiffiffiffi
kðtÞ r L þ t ¼ lðR t Þ þ z r L þ R ()
pffiffiffiffiffiffiffiffiffiffiffi
l ðR tÞ LþR
kðtÞ ¼ pffiffiffiffiffiffiffiffiffiffi þ z pffiffiffiffiffiffiffiffiffiffi : 0 < t < R ð5Þ
r Lþt Lþt
From Eq. (5), it is deducted that the safety factor for the examined product at the end of the order cycle R is k(R) = z.
lðL þ tÞ=r L þ t and following the
Employing the standard normal random variable ut ¼ ½xpt ffiffiffiffiffiffiffiffiffiffi analysis of Silver et al.
(1998) for systems with normal demand and since dxt ¼ r L þ t dut and kðtÞ ¼ ½S lðL þ tÞ=r L þ t; Eq. (3) can be easily
transformed to:
pffiffiffiffiffiffiffiffiffiffi Z 1
EðBOðtÞÞ ¼ r Lþt ðut kðtÞÞ ut ðut Þdut ð6Þ
kðtÞ
Eq. (6) can be further simplified as follows:

" #
pffiffiffiffiffiffiffiffiffiffi Z 1 Z 1
EðBOðtÞÞ ¼ r L þ t ut ut ðut Þdut kðtÞ ut ðut Þdut
kðtÞ kðtÞ
" "Z ##
pffiffiffiffiffiffiffiffiffiffi Z 1 1 Z kðtÞ
¼r Lþt ut ut ðut Þdut kðtÞ ut ðut Þdut ut ðut Þdut
kðtÞ 1 1
R1
and for normal demand, since kðtÞ
ut ut ðut Þdut ¼ ut ðkðtÞÞ
EðBOðtÞÞ ¼ r L þ t½ut ðkðtÞÞ kðtÞ ½1 Ut ðkðtÞÞ: ð7Þ
Moreover, from Eqs. (2) and (3) it can be easily shown that:
Z S Z 1
EðOHðtÞÞ EðBOðtÞÞ ¼ ðS xt Þ ut ðxt Þdxt ðxt SÞ ut ðxt Þdxt
0 S
Z S Z 1
¼ SUt ðSÞ xt ut ðxt Þdxt
xt ut ðxt Þdxt þ S½1 Ut ðSÞ
0 S
Z 1 Z 1 Z 1
¼ SUt ðSÞ xt ut ðxt Þdxt xt ut ðxt Þdxt xt ut ðxt Þdxt þ S½1 Ut ðSÞ
1 S S
Z 1 Z 1
¼ SUt ðSÞ lðL þ tÞ þ xt ut ðxt Þdxt xt ut ðxt Þdxt þ S½1 Ut ðSÞ
S S
¼ SUt ðSÞ lðL þ tÞ þ S SUt ðSÞ ¼ lðL þ tÞ þ l ðL þ tÞ þ kðtÞ r L þ t
¼ kðtÞ r L þ t; ð8Þ
(the previous simplifications are based on the assumption that there is a negligible probability that the demand during L + t
RS RS
time units, xt will take a negative value and thus, 1 xt ut ðxt Þdxt Þ: ’ 0 xt ut ðxt Þdxt
Finally, employing Eqs. (7) and (8), Eq. (2) can be further simplified to:
pffiffiffiffiffiffiffiffiffiffi pffiffiffiffiffiffiffiffiffiffi pffiffiffiffiffiffiffiffiffiffi
EðOHðtÞÞ ¼ r L þ t kðtÞ þ EðBOðtÞÞ ¼ r L þ t kðtÞ þ r L þ t ½ut ðkðtÞÞ kðtÞ ½1 Ut ðkðtÞÞ
pffiffiffiffiffiffiffiffiffiffi pffiffiffiffiffiffiffiffiffiffi pffiffiffiffiffiffiffiffiffiffi pffiffiffiffiffiffiffiffiffiffi
¼ r L þ t kðtÞ þ r L þ t ut ðkðtÞÞ r L þ t kðtÞ þ r L þ t kðtÞ Ut ðkðtÞÞ
¼ r L þ t ½ut ðkðtÞÞ þ kðtÞ Ut ðkðtÞÞ ð9Þ
As the central DC faces the normally distributed demand of its serving retail store, its demand during its replenishment cycle
RD is also normally distributed. Moreover, as its lead time LD is considered deterministic, the expected time-average on-hand
inventory level of the examined product at the DC, assuming that the amount of the expected number of backorders is neg-
ligible, can be estimated by:
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
R l
EðOHD ðRD ÞÞ ’ zD r2 ðRD þ LD Þ þ D ; ð10Þ
2
where zD represents a predefined safety stock factor for the examined product at the DC, which is assumed to take a very
high value (i.e. zD = 4) as discussed earlier. This in turn leads to a negligible probability of a stockout occurrence and thus,
the central DC’s expected number backorders will not be considered for determining the expected total logistics costs of
Option DC.
Finally, in order to determine the DC’s operating costs and CO2 emissions, and as these costs and emissions depend on the
DC’s size,pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
its capacityffi needs to be determined. To that effect, the capacity of the central DC is estimated as:
K D ¼ zD r2 ðRD þ LD Þ þ RD p lffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
, consisting ffiof: (i) a quantity reserved for a safety stock that results in a negligible probability
of a stockout occurrence, zD r2 ðRD þ LD Þ, where zD takes a very high value as mentioned earlier, and (ii) a capacity large
enough to handle the peak demand of the product from its serving retail store during a long planning horizon RD l.
The model assumptions of Option DC are summarized as follows:
The market is served as a single region through a number of retail stores that in turn receive the orders for their products
from a central DC.
Demand per time unit of each product at each retail store is assumed to be normally distributed.
Each retail store receives orders from one large central DC through delivery truck transportation for short transportation
distances within city limits and heavy-duty trucks for long-haul regional transportation distances.
The lead time from the DC to the retail stores, L, is considered deterministic.
As we consider coordination between the retail store and the DC: (i) the store’s review period cannot be higher than the
review period of the DC, and (ii) the allowable values of the review periods of the store and the DC are expressed as
power-of-two multiples of a base planning period.
The central DC also employees a periodic review inventory planning policy for the replenishment of its orders from a dis-
tant manufacturing site, but with a predefined order delivery frequency (1/RD) which is determined by the liner deep sea
shipping schedule between the distant manufacturing site and its entry port.
The central DC receives orders from the distant manufacturing site through deep-sea shipping until its entry port and
heavy-duty truck transportation from the entry port.
The lead time of the central DC LD is also considered deterministic.
The inventory levels of the DC must be large enough to satisfy practically all orders from the retail store it serves neces-
sitating the operation of a quite large DC that can provide high service levels. Thus zD is predefined to take a very high
value and therefore, the expected numbers of backorders of the central DC are not considered while determining the
expected total costs of Option DC.
pffiffiffiffiffiffi
The capacity of the central DC is estimated as: K D ¼ zD r2 þ RD l, consisting of: (i) a quantity reserved for a safety
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
stock that results in a negligible probability of a stockout occurrence, zD r2 ðRD þ LD Þ, where zD takes a very high value,
and (ii) a capacity large enough to handle the peak demand of its product from its serving retail store during a long plan-
ning horizon, RDl.
The company is fully accountable for its DC facilities and truck emissions, as trucks and DC facilities are assumed to be
leased through long-term contracts. Specifically, with the respect to truck transportation this implies that the company
will be also accountable for the return truck trip CO2 emissions and costs. However, this is not the case for the deep-sea
shipping transportation.
In our analysis, we develop two objective functions. The first one minimizes the store’s inventory-related and transpor-
tation costs and the second one the store’s transportation CO2 emissions. The decision variables of the first objective function
are the store’s review period R and the safety stock factor z for the examined product at the examined store; while the deci-
sion variable of the second one is solely the review period R. These objective functions are optimized independently since the
purpose of our research is to capture the cost of implementing CO2 emissions-related optimal solutions. Thus, through this
approach, a decision-maker is able to determine accurately the additional cost of implementing a green policy before adopt-
ing a sustainability-based redesign of his logistics network. As a reminder, the DC-related costs and emissions of the objec-
tive functions are not included in the optimization process since zD and RD are predefined and are thus used in the model as
input parameters.
Furthermore, the independent optimization of the cost and CO2 emissions objectives for the alternative network design
options, allows for the adoption of the network design option, which better satisfies predetermined cost and CO2 emissions
performance targets.
Tables 4 provides the nomenclature of the model’s cost and CO2 emissions parameters, while Table 5 the nomenclature of
the model’s decision variables.
The holding cost per time unit of the examined product, h, is charged on the expected on-hand inventory level of the
product at the retail store as well as the DC. The backorder cost per time unit of the examined product, b, is charged on
the expected backorder level of the product at the retail store. The transportation cost from the distant loading point to
the DC, cD, is charged per trip, while the transportation cost from the DC to the examined retail store, c, is charged per round-
trip since dedicated leased trucks are employed as discussed earlier. Specifically, for the transportation segment between the
loading point and the DC and since the cargo is transported in containers, cD is charged on the total number of container trips
required for serving the total shipment to the DC. The number of container trips needed to transport the total demand of the
DC during its replenishment cycle RD can be calculated as the ceiling function d(RDl)/FCLe, where FCL represents the full
container loading capacity. For the transportation segment between the DC and the retail store though, and since containers
are deconsolidated at the DC, the product’s demand is transported loose in trucks. Thus, truck roundtrips are considered and
therefore, c is charged on the total number of truck roundtrips required for serving the total demand of a retail store during
its replenishment period. The number of truck roundtrips is provided by the ceiling function d(Rl)/FTLe, where FTL denotes
the full truckload capacity. Finally, the operational cost of the DC per time unit is assumed as a nonlinear function of its
capacity KD, denoted by C(KD).
Additionally, the CO2 emissions parameter, eD, is charged on the total number of container trips required for serving the
total demand of the DC during its replenishment period, while e, on the total number of truck roundtrips required for serving
the total demand of the retail store during its replenishment period from the DC.
Table 4
Cost and CO2 emissions parameters.
h Holding cost per time unit for the examined product

b Backorder cost per time unit for the examined product
cD Transportation cost per container trip from the distant manufacturing site (loading point) to the DC. This cost includes the ship transportation
cost to the entry port, the handling cost per container at the entry port and the hinterland transportation mode cost from the entry port to the
DC.
c Truck transportation cost per roundtrip from the DC to the examined retail store.
C(KD) Operational cost of the DC per time unit.
eD Transportation CO2 emissions per container trip from the loading point to the DC. These emissions include the ship transportation CO2
emissions to the entry port, and the hinterland transportation mode CO2 emissions from the entry port to the DC.
e Truck transportation CO2 emissions per roundtrip from the DC to the retail store.
E(KD) CO2 emissions related to the operation of the DC per time unit.
Table 5
Decision variables.
z Safety Stock factor of the examined product at the examined retail store (only for the cost objective function)
R The retail store’s review period
Finally, the magnitude of CO2 emissions related to the operation of the DC per time unit, E(KD), is also assumed as a non-
linear function of its capacity.
Consequently, the two objective functions, expected total cost, E(TCDC), and CO2 emissions, E(TEDC) of Option DC for one
retail store and product per time unit are provided by Eq. (11) and (12), respectively:
Minimize expected total cost per time unit of Option DC, E(TCDC), for one product and retail store:
Z Z
1 R 1 R 1 1
min EðTC DC Þ ¼ h EðOHðtÞÞdt þ b EðBOðtÞÞdt þ c dðR lÞ=FTLe þ cD dðRD lÞ=FCLe þ h
R 0 R 0 R RD
EðOHD ðRD ÞÞ þ CðK D Þ: ð11Þ
Minimize expected total CO2 emissions per time unit of Option DC, E(TEDC), for one product and retail store:
1 1
min EðTEDC Þ ¼ e dðR lÞ=FTLe þ eD dðRD lÞ=FCLe þ EðK D Þ: ð12Þ
R RD
Eq. (11) and (12) can be easily extended for multiple products peP and retail stores meM.
Regarding the optimization procedure employed, the optimization of the cost objective function 11 (only the first three
out of six segments of the function are optimized, as the DC related costs are constant), leads to Proposition I.
Proposition I. For a given R, the optimal value of z = k(R) for the examined product at the examined retail store is derived
from:
Z R
bR
Ut ðkðtÞÞdt ¼ ð13Þ
0 hþb
Proof. See Appendix.

The solution method for obtaining the store’s cost optimal decision variable values is provided below:
We enumerate power-of-two values of R (1, 2, 4, 8. . ..) and for each one of these values, the optimal value of z = k(R) for
the examined product at the retail store can then be determined from Eq. (13). As a reminder k(t) is a function of z and is
equal to:
l ðR tÞ LþR
kðtÞ ¼ pffiffiffiffiffiffiffiffiffiffi þ z pffiffiffiffiffiffiffiffiffiffi :
r Lþt Lþt
In case of multiple store’s products we would have multiple z values, one for each product, and one review period R common
for all products. These R and z values are then employed in order to determine the expected total retail store’s logistics costs
RR RR
of Eq. (11) which consists of the products holding plus backorder costs per time unit, h 1R 0 EðOHðtÞÞdt þ b 1R 0 EðBOðtÞÞdt
and the transportation costs per time unit of transporting the product’s demand to the retail store from the central DC,
c 1R dðR lÞ=FTLe:
The maximum allowable value for R is RD to ensure coordination between the orders of the store and its serving DC. We
therefore have a number of the store’s total logistics cost values equal to the number of the power-of-two values of R up to
RD. For example, if RD is 16 time units, we have five total logistics costs values corresponding to R = 1, 2, 4, 8, 16, respectively.
The optimal R and z values of the retail store will be those that correspond to the minimum of these five total logistics cost
values.
The solution methodology for obtaining the store’s CO2 emissions optimal decision variable value R is provided below:
We enumerate power-of-two values of R up to RD. For each one of these values we determine the transportation CO2
emissions per time unit of the store’s product from e 1R dðR lÞ=FTLe. The optimal R is the one that corresponds to the min-
imum transportation CO2 emissions per time unit.
However, and as our intent is to capture the cost of implementing the CO2 emissions-related optimal solution, we have to
be able to determine the expected holding, backorder and transportation costs per time unit of the CO2 emissions optimal
solution. The transportation cost per time unit can be easily estimated by c 1R dðR lÞ=FTLe, using the optimal R in terms of
CO2 emissions. Regarding the expected holding and backorder costs per time unit though, we need an optimal z value for the
RR
store’s product. To tackle this, we determine this value from Eq. (13) ð 0 Ut ðkðtÞÞdt ¼ b R=ðh þ bÞÞ using however, the opti-
mal R in terms of CO2 emissions.
4.2. Option DC/SDCs
In this option the market is split into a number of regions reRM where each region is served by a number of retail
stores meMr. As in Option DC, each retail store applies an inventory planning policy for the replenishment of each of
its products peP orders, but now through a SDCr (one for each region) instead of the central DC of Option DC. The SDCr
in turn, replenishes its orders for each one of its products from the central DC. The mathematical formulation of this
option can also be simplified for one specific region (r = 1), its SDC, one retail store (m = 1), and one product (p = 1) and
therefore the r, m, p notations can be omitted from the subsequent calculations. We assume that the SDC also employs a
periodic review inventory planning policy, with a predefined review period RS and a lead time LS. LS will now be lower
than LD of Option DC since the SDC is supplied by the central DC in contrast to the central DC, which is supplied by
the distant manufacturing site. Moreover, and since the SDC is served by the central DC, additional transportation cost
and CO2 emissions parameters per container trip are considered for serving it, denoted by CS and eS, respectively. These
parameters are charged on the total number of container trips per time unit, required for serving the SDC from the central
DC and are provided by the ceiling function, dðRS lÞ=FCLe. Moreover, as the backup replenishment of SDC from the central
DC allows for lower service levels at the SDC (compared to the very high service levels of the central DC) the safety factor
of the examined product at the SDC, zS is now considered a decision variable and is therefore incorporated in the optimi-
zation process (see Tables 6 and 7). Thus, the expected number of backorders and the associated cost should be included
in the expected total cost of Option DC/SDCs. The relevant backorder cost parameter, denoted by bS, is charged on the
expected number of backorders of the examined product at the end of the replenishment cycle of the SDC, RS, which is
in turn given by:
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi h i
EðBOS ðRS ÞÞ ¼ r2 ðRS þ LS Þ uRS ðzS Þ þ zS ð1 URS ðzS ÞÞ ð14Þ
Moreover, the holding cost per time unit of the examined product at the SDC is charged on the expected on-hand inventory
level of the examined product
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
ffi at the SDC, E(OHS(RS)) estimated similarly to that of the central DC as:
EðOHS ðRS ÞÞ ’ zS r2 ðRS þ LS Þ þ RS2l. Finally, the operational costs and CO2 emissions of the SDC are also expressed
pffiffiffiffiffiffi as a
nonlinear function of its capacity KS, which is also estimated similarly to that of the central DC as: K S ¼ zS r2 þ RS l.
The main difference compared to the central DC is that now, the safety stock factor zS is considered a decision variable in
contrast to the zD safety stock factor of Option DC, which is predefined.
The additional assumptions for modeling Option DC/SDCs are the following:
The market is partitioned into a number of regions reRE.

The retail stores of each region meMr receive their orders from their satellite DC, denoted by SDCr.
Each SDCr receives its orders from one large central DC, through intermodal connections.
The satellite DC employees a periodic review replenishment policy for the examined product with a predefined order
delivery frequency (1/RS), determined by the transportation schedules of the intermodal connections between the central
and satellite DCs.
The lead time of the SDC from the central DC, LS is also considered deterministic.
The backup replenishment of SDC from the central DC allows for lower service levels at the SDC (compared to the
very high service levels of the central DC). Thus, the safety factor of the examined product at the SDC, zS is now con-
sidered a decision variable and is therefore incorporated in the optimization process. Therefore, the expected number
of backorders may be significant and should be therefore utilized in calculating the expected total cost of Option DC/
SDCs.
The optimization problems for the expected total cost and CO2 emissions per time unit of the simplified case of Option
DC/SDCs for one region, product, store and SDC are:
Minimize the expected total cost per time unit of Option DC/SDCs, E(TCDC/SDCs) for one region, product, store and SDC:
Z Z
1 R 1 R 1 1
min EðTC DC=SDCs Þ ¼ h EðOHðtÞÞdt þ b EðBOðtÞÞdt þ c dðR lÞ=FTLe þ cD dðRD lÞ=FCLe þ h
R 0 R 0 R RD
1 1
EðOHD ðRD ÞÞ þ CðK D Þ þ cS dðRS lÞ=FCLe þ h EðOHS ðRS ÞÞ þ bS EðBOS ðRS ÞÞdt þ C ðK S Þ: ð15Þ
RS RS
Table 6
Additional cost and CO2 emissions parameters.
bS Backorder cost per product stockout at the SDC

cS Intermodal transportation cost per container trip from the central to the satellite DC
C ðK S Þ Operational cost of the SDC per time unit.
eS Intermodal transportation CO2 emissions per container trip from the central to the satellite DC
EðK S Þ Operational CO2 emissions of the SDC per time unit.
Table 7
Additional model’s decision variable.
zS Safety stock factor of the examined product at the SDC

Minimize the expected total CO2 emissions per time unit of Option DC/SDCs, E(TEDC/SDCs), for one region, product, store and SDC:
1 1 1
minEðTEDC=SDCs Þ ¼ e dðR lÞ=FTLe þ eD dðRD lÞ=FCLe þ EðK D Þ þ eS dðRS lÞ=FCLe þ EðK S Þ: ð16Þ
R RD RS
The cost optimization of the retail store of Option DC/SDCs is different from that of Option DC, as a stockout at a retailer’s SDC
would increase the time required for fulfilling a customer’s order, due to an additional time period which consists of: (i) the
mean time till the next replenishment of the SDC’s order from the central DC which is equal to R2S , (ii) the lead time from the
central DC to the SDC LS, and (iii) the lead time from the SDC to the retail store, L. Thus, the end customer perceives a varying
lead time depending on the availability of his order at the SDC. To address this issue, we employ the effective lead time L0 as:

RS
L0 ¼ URS ðzS Þ L þ ½1 URS ðzS Þ L þ LS þ ; ð17Þ
2
where URS ðzS Þ represents the probability that the product is available at the SDC, and ½1 URs ðzS Þ the probability of a stock-
out occurrence of the examined product at the SDC. After substituting parameter L of Eqs. (7) and (9), with the effective lead
time L0 and considering the first three out of ten terms of Eq. (15), it is observed that the decision variables of the retail store,
R and z, and the decision variable zS of the SDC are interdependent. Therefore, at this option, we have to jointly determine the
optimal values of R, z, and zS. These decision variables appear only in the first three and the last three out of the ten segments
of Eq. (15), and thus the optimization process should focus only on these segments. However, an analytical solution is not
possible due to the complexity of this joint optimization of the three decision variables. Therefore, the optimal values of the
R, z decision variables of the retail store and the zS decision variable at the SDC can only be determined through enumeration.
We therefore enumerate powers of two values of R up to RS. For each one of these R values we enumerate z, and zS values in
the range (4 to 4) with a step of 0.01. Then, for each R, z and zS combination, we estimate the store’s and SDC’s total logistics
costs per time unit which consist of: (i) the product’s expected holding plus backorder costs per time unit at the retail store,
RR RR
h 1R 0 EðOHðtÞÞdt þ b 1R 0 EðBOðtÞÞdt, (ii) the transportation cost per time unit to the retail store, c 1R dðR lÞ=FTLe, (iii) the
product’s expected holding plus backorder costs per time unit at the SDC, h EðOHS ðRS ÞÞ þ bS R1S EðBOS ðRS ÞÞdt, and (iv) the
operating costs per time unit of the SDC,C ðK S Þ. Finally, the optimal R, z, and zS decisions variable values are those that cor-
respond to the minimum of the store’s plus the SDC’s logistics costs.
Moreover, since zD and RD are also predefined in this option, the central DC’s associated costs are constant and have no
impact on the optimization process. This also stands for the SDC’s review period RS and its associated intermodal transpor-
tation cost per time unit from the central DC, cS R1S dðRS lÞ=FCLe.
The CO2 emissions optimization methodology is however the same as the one of Option DC. We therefore enumerate
power-of-two values of R up to RD and for each one of these values we determine the transportation CO2 emissions of the
store’s product from e 1R dðR lÞ=FTLe. The optimal R is the one that corresponds to the minimum transportation CO2 emis-
sions, while the optimal z and zS are those determined from the cost optimization process, given the R that minimizes the
transportation CO2 emissions per time unit. Furthermore, as zS is a decision variable, the optimal value of zS could be esti-
mated as the one that minimizes the SDC’s capacity and thus operating CO2 emissions. This would lead to the value of zS = -
1 minimizing the SDC’s inventory levels and thus, such an approach is not considered in our analysis.
4.3. Option M-DCs
In this option the market is partitioned into the same number of regions reRE as in Option DC/SDCs, which are served by
their respective retail stores meMr. Each retail store in turn receives its product orders from its independent regional DCr
instead of the SDCr of Option DC/SDCs. Hence, this option is a repetition of the analysis of Option DC for each region.
5. Real-world model application
In this Section, we present the application of the developed methodology on a series of real-world supply chain network
realizations of a specific white goods retailer that we have worked with. Specifically, we consider the three examine alter-
native logistics network design options of a retailer who distributes his products throughout Greece.
The first logistics network consists of one entry port (P0) that of Piraeus, one central DC (DC), located in the wider area of
Aspropirgos and served through the Piraeus entry port, and one large region to serve (r = 1). The region includes two pri-
vately owned retail stores in the wider metropolitan Athen’s area (Marousi-RM1, Argiroupoli-RM2), two in the wider Pelo-
ponnese area (Tripoli-RM3, Patra-RM4), and one, in each of the wider Metropolitan areas of Ioannina-RM5, Larissa-RM6,
Thessaloniki-RM7, and Ksanthi-RM8. Delivery from: (i) the port of Piraeus to the central DC occurs by heavy-duty trucks with
a carrying capacity of one 40 ft container, (ii) the DC to retail stores (1–2) through delivery trucks with a carrying capacity of
33 m3, and (iii) the DC to the far away retail stores (3–8), through heavy-duty trucks with a carrying capacity of 66 m3.
In the second option, the market is split up into two regions r = {1, 2}. The first region is served through retail stores (1–4),
while the second one, through retail stores (5–8). Both regions are served through the central DC, but now indirectly through
peripheral SDCs. Specifically, in this problem, and since we examine the case where the central DC is located within the first
region and involves short transportation distances to its serving retail stores (up to 211 km range), the operation of a SDC for
serving the first region’s retail stores’ would not be a realistic option. Thus in this case, we will only consider one SDC which
is employed for serving the second region (that involves a transportation range of 711 kms) by trucks, while the first region’s
retail stores will be served directly by the central DC again by trucks. More specifically, delivery trucks will be employed for
serving retail stores (1, 2, 7), while heavy-duty for the rest. The SDC will be located in Kalochori, within the main logistics
zone of the wider metropolitan area of Thessaloniki and served by the central DC, through rail transportation.
In the third option (M-DCs), there are two independent regional DCs (DC1, DC2) that order directly from the manufactur-
ing site in Shanghai. The first regional DC operates in place of the central DC of Option DC, while the second one in place of
the SDC of Option DC/SDCs. In this option, the additional entry port of Thessaloniki (P2) is employed for serving the second
regional DC (DC2) in Kalochori, through heavy-duty truck transportation, while the first entry port of Piraeus (P1), still serves
the first regional DC (DC1) in Aspropirgos, again through heavy-duty truck transportation. Both entry ports receive container
flows from Shanghai, China. To this end, the retail stores of each region are served by the same transportation modes as those
employed in the second option (DC/SDCs).
The review period of the central DC in the first option (DC) and of the regional DCs (DC1, DC2) in the third option (M-DCs),
is dictated by the deep-sea shipping schedule from Shanghai and is equal to approximately 30 days. As the retail stores
review periods are power-of-two time units, and in order to coordinate orders arriving to the DCs, we consider a review
RM8
SDC/DC 2 RM7
P2
RM6
RM5
RM4 DC/D RM1

C1
RM2
Po/P1
RM3
150 km
Fig. 2. Nodes of the networks under study in the two regions of Greece.
period equal to 32 days. The review period of the SDC though, is determined by the rail transportation schedule between
Aspropirgos and Thessaloniki’s rail terminal and is equal to 7 days. Similarly, we consider a review period for the SDC equal
to 8 days.
We examine the supply of three fast moving ‘‘Type A’’ products (refrigerators, washing machines, and ovens) that result in
approximately 80% of the company’s total sales. Based on historical data for these products we verified that their daily
demand fits the normal distribution with a coefficient of variation (cv) of about 0.3. Fig. 2 illustrates the nodes of the net-
works under study.
5.1. Calculation of the transportation and DC costs and CO2 emissions parameters
In the following paragraphs we describe the methodology employed for calculating the transportation costs and CO2
emissions as well as the DCs (central, regional and satellite) operational costs and CO2 emissions for the logistics network
design options under study.
5.2. Ship transportation costs per 40 foot (ft.) container trip
The ship transportation costs incorporate: (i) the transportation cost per container trip from Shanghai to the entry ports of
Piraeus and Thessaloniki which is equal to 2,442€ and 2,849€ per 40 ft. container respectively, and (ii) the 40 ft. container
handling costs at the entry port of Piraeus and Thessaloniki equal to 250€ and 170€ per 40 ft container, respectively (Source:
Beinoglou, S.A.).
5.3. Truck costs per roundtrip
We had access to heavy-duty and delivery truck transportation costs per trip in the routes of the logistics network design
options under study, from a Third Party Logistics Operator (3PL) in the Greek region. These costs incorporate the truck leas-
ing costs, assuming that the truck is utilized for 90% of the day, the truck driver’s expenses, its maintenance and repair costs,
its fuel costs and the toll costs per trip. To estimate the transportation cost per roundtrip, the cost of the return trip is
assumed as 80% of the cost of the forward trip. This reduction reflects the reduction for fuel consumed by the empty running
truck in the return trip.
5.4. Ship CO2 emissions per 40 ft. container trip
The ship transportation CO2 emissions per container trip are calculated based on an average fixed amount of 11.1 g/t-km
of CO2 emissions for a 6,000 Twenty-foot (ft.) Equivalent Unit (TEU) container ship (Ebert, 2005) and assuming that a 40 ft.
container has an average weight of 8 tons.
5.5. Truck CO2 emissions per roundtrip
Truck emissions depend on the load of the specific truck. Boer et al. (2011) provide the CO2 emissions amounts produced
by Euro III heavy-duty and delivery trucks per kilometer assuming fully loaded trucks. Specifically, 796 grams of CO2 emis-
sions/km are produced for a heavy-duty and 410 grams of CO2 emissions/km for a delivery truck. Thus, by estimating the
kilometric distances of the routes, through any route planner, of the logistics network design options under study, the truck
CO2 emissions per heavy-duty and delivery truck trips can be then easily determined. Moreover, since trucks are assumed to
be leased, the company will be also accountable for the CO2 emissions amounts produced by the empty truck on the return
trip. However, in order to incorporate the environmental impact of lower loading factors we assume that the emissions per
km for the empty trucks will be approximately 30% less (Coyle, 2007).
5.6. Rail costs
The rail costs considered in the analysis, have been retrieved by the Greek Railway Organization and incorporate a rail
freight rate of 536€ per 40 ft. container trip from the rail terminal of Aspropirgos to the rail terminal of Thessaloniki. This
rate further includes cargo-handling costs at the rail depots along with all document preparation costs. As the container
has to be transported from the rail depot of Thessaloniki to the SDC in Kalochori, we additionally consider a transportation
cost of 100€.
5.7. Rail CO2 emissions
The rail transportation emissions are calculated based on an average fixed amount of 27.91 g/t-km of CO2 emissions
(Ebert, 2005) and assuming that a 40 ft. container has an average weight of 8 tons. To these emissions, we also add the
heavy-duty truck emissions from the rail depot of Thessaloniki to the SDC, which involves a distance of 18 kms.
Table 8
Transportation costs, CO2 emissions, lead times and distances in the options under study.
Route Options Tr. type Cost (€) CO2 (tons) Lead time (days) Dist. (Kms)
Shanghai-P0/P1 All Ship 2,692/T 1.28/T 18.6 14,429
Shanghai-P2 M-DCs Ship 3,019/T 1.30/T 19.1 14,685
DC/DC1-RM1-DC/DC1 DC, M-DCs D 252/RT 0.02/RT 0.04 24
DC/DC1-RM2-DC/DC1 DC, M-DCs D 288/RT 0.02/RT 0.05 28
DC/DC1-RM3-DC/DC1 DC, M-DCs HD 546/RT 0.21/RT 0.11 158
DC/DC1-RM4-DC/DC1 DC, M-DCs HD 648/RT 0.29/RT 0.15 211
DC-RM5-DC DC HD 1,049/RT 0.57/RT 0.29 420
DC-RM6-DC DC HD 900/RT 0.49/RT 0.25 359
DC-RM7-DC DC HD 1,100/RT 0.71/RT 0.37 526
DC-RM8-DC DC HD 1,608/RT 0.96/RT 0.50 711
DC2/SDC2-RM5-DC2/SDC2 M-DCs, DC/SDCs HD 732/RT 0.34/RT 0.18 255
DC2/SDC2-RM7-DC2/SDC2 M-DCs, DC/SDCs D 150/RT 0.02/RT 0.02 22
P0 /P1– DC/DC1, P1-DC2 All HD 100/T 0.02/T 0.03 22
DC-SDC2 DC/SDCs RT&HD 636/T 0.131/T 1.03 524
Table 8 summarizes the transportation costs and CO2 emissions along with the distances and the lead times of the routes
in the networks under study. Specifically, with respect to the lead times, we assume that the retail stores order during the
day and at the end of the day are transferred by means of Electronic Data Interchange (EDI) to the DCs which pick the prod-
ucts in the evening and send them the following morning. Thus in our analysis, we only consider the transportation lead
times from the DCs to the retail stores. Regarding the transport modes considered, (D) represents delivery truck, (HD)
heavy-duty truck, and (R) rail transportation. Moreover, (RT) represents a roundtrip, while (T) the 40 ft container trip.
An interesting finding obtained from Table 8 involves the high transportation cost and emissions of Option DC compared
to Option M-DCs and DC/SDCs. More specifically, in Option DC, the total transportation cost per roundtrip for serving the
retail stores of the second region (RMs 5–8), is equal to 4,657€ (1,049€ + 900€ + 1,100€ + 1,608€), while the CO2 emissions
equal to 4.2 tons per roundtrip. In Options M-DCs, and DC/SDCs though, the total transportation cost is 1,892€
(732€ + 365€ + 150€ + 645€), while the transportation CO2 emissions are 0.84 tons CO2 per roundtrip.
5.8. DC operational costs and CO2 emissions
We have retrieved data on the dimensions, operating costs and electricity consumption of various sized DCs operating in
the Greek market. These costs incorporate leasing or depreciation costs, salary and forklift-handling costs, and other oper-
ational expenses such as electricity, telecommunication costs, etc. Regarding the electricity consumption data and since
these were expressed in Kilowatt-hours (KWh), we had to convert them into CO2 emissions. In order to do so, we employed
the grid electricity factor of Greece, which is equal to 761 grams of CO2 emissions per KWh (Greece Energy Efficiency Report,
2011). Table 9 summarizes the capacity (in m3) and the daily operating costs and CO2 emissions of the examined DCs, assum-
ing an 80% utilization of their height and space.
Given the above data, we developed two logarithmic regression equations. The first one is employed for estimating the
DCs operating costs c per day for a given capacity K, while the second one for the DC CO2 emissions e per day for a given
capacity K, leading to:
DC operational cost per day: c(K) = 564.7ln (K) 4112.9(€) R2 = 86%
DC CO2 emissions per day: e(K) = 0.0721ln (K) 0.5026 (tons CO2) R2 = 88%,
for 2000 m3 < K < 100,000 m3.
Table 9
Capacity and cost parameters for various sized DCs.
Capacity (m3) Operating costs €/day CO2 emissions tons/day

100,000 2740 0.36
39,580 2192 0.26
32,400 1579 0.28
14,112 667 0.14
8400 700 0.08
2000 217 0.05
1000 150 0.04
Table 10
Holding and backorder costs (€/item/day) for products at the retail stores.
Products Refrigerators Washing machines Ovens Total

RMs l1m h1 b1 l2m h2 b2 l3m h3 b3 l1þ2þ3
m
RM1 30 0.7 35 30 0.5 25 20 0.4 20 80

RM2 20 0.7 35 25 0.5 25 25 0.4 20 70
RM3 30 0.7 35 15 0.5 25 27 0.4 20 72
RM4 25 0.7 35 35 0.5 25 30 0.4 20 90
RM5 20 0.7 35 22 0.5 25 25 0.4 20 67
RM6 15 0.7 35 30 0.5 25 35 0.4 20 80
RM7 40 0.7 35 35 0.5 25 40 0.4 20 115
RM8 20 0.7 35 26 0.5 25 22 0.4 20 68
Table 11
Optimal cycle service levels (Type I) and order delivery frequencies (1/Rm) under the cost minimization objective for refrigerators.
Options DC DC/SDCs M-DCs

1 1 1
Nodes (m, SDC) retail stores a m 1/ Rm a m 1/ Rm aSDC a1m 1/ Rm
RM1 80% 1/2 80% 1/2 – 80% 1/2
RM2 75% 1/4 75% 1/4 – 75% 1/4
RM3 75% 1/4 75% 1/4 – 75% 1/4
RM4 81% 1/2 81% 1/2 – 81% 1/2
RM5 69% 1/8 70% 1/8 – 69% 1/8
RM6 76% 1/4 82% 1/1 – 75% 1/4
RM7 86% 1/1 84% 1/1 – 79% 1/1
RM8 70% 1/8 87% 1/1 – 76% 1/4
SDC – – – – 83% – –
Table 12
Optimal service levels (Type I) and order delivery frequencies (1/Rm) under the CO2 emissions minimization objective for refrigerators.
Options DC DC/SDCs M-DCs

Nodes (m, SDC) retail stores a1m 1/ Rm a1m 1/ Rm a1SDC a1m 1/ Rm
RM1 61% 1/16 61% 1/16 61% 1/16
RM2 61% 1/16 61% 1/16 61% 1/16
RM3 51% 1/32 51% 1/32 51% 1/32
RM4 51% 1/32 51% 1/32 51% 1/32
RM5 51% 1/32 70% 1/8 51% 1/32
RM6 51% 1/32 76% 1/4 51% 1/32
RM7 52% 1/32 77% 1/4 51% 1/32
RM8 52% 1/32 70% 1/8 51% 1/32
SDC – – – – 82% – –
5.9. Numerical results and managerial insights
Six instances of the model were solved by combining the three logistics network design options of Table 1 with the two
optimization criteria, cost and CO2 emissions. Table 10 depicts the holding and backorder costs of the products under study
along with their mean demand mp l for products p = 1, 2, 3 and markets m = 1. . . 8. Moreover, Tables 11 and 12 exhibit the
1
optimal order delivery frequencies of the retail stores and the cycle service levels (apm ; where apm ¼ m p U Rm ðzpm Þ) of the retail
stores and the SDC, under the cost and CO2 emissions optimization criteria, respectively. The review periods of the DCs (DC/
DC1, DC2) and the SDC are not included in the above Tables, as they are considered predefined and equal to 32 and 8 days,
respectively. Since the products under study are similar, their holding and backorder costs are the same as a percentage of
their unit price. Moreover, and since the examined products of each retail store are ordered jointly (under a common order
cycle Rm), their safety factors and thus, derived service levels will be the same. Therefore, Tables 11 and 12 only display the
optimal service levels of the first product (p = 1: Refrigerators).
From Table 11, it is observed that the retail store of Marousi (RM1) is served more frequently, compared to the retail store
of Argiroupoli (RM2), even though both retail stores are located in the same area close to the central DC. This appears rea-
sonable as RM1 exhibits higher demand (80 m3 of products) compared to RM2 (70 m3 of products) and therefore the trucks
employed for serving RM1 are consolidated faster compared to those employed for serving RM2. This observation further jus-
tifies the higher transportation frequency for serving the retail store of Thessaloniki (RM7) compared to the other retail
stores.
On a tactical planning level, the managerial insights obtained from the numerical analysis are the following:
T1. Lower optimized order delivery frequencies (higher optimized review periods) result in lower truck transportation
costs and CO2 emissions.
Table 13
Holding and backorder cost breakdown (€/day).
Options Opt. crit. Holding cost Backorder cost

RMs DC or DC1/DC2 SDC RMs DC SDC
DC Cost 800 6546 – 99 – –
DC/SDCs Cost 690 6546 1001 93 – 35
M-DCs Cost 713 7021 – 91 – –
DC CO2 4944 6546 – 352 – –
DC/SDCs CO2 2616 6546 998 235 – 38
M-DCs CO2 4944 7021 – 351 – –
Table 14
Transportation and DC operating cost breakdown (€/day).
Options Optim. crit. Transportation costs DC operational cost

RMs DC or DC1/DC2 SDC DC or DC1/DC2 SDC
DC Cost 9247 27,887 – 1507 –
DC/SDCs Cost 5313 27,887 3260 1507 363
M-DCs Cost 5419 29,641 – 2229 –
DC CO2 8579 27,887 – 1507 –
DC/SDCs CO2 5095 27,887 3,260 1507 362
M-DCs CO2 4968 29,641 – 2229 –
Fig. 3. Cost breakdown (€/day) of the cost optimal options.

Fig. 4. Cost breakdown (€/day) of the CO2 emissions optimal options.
T2. Lower optimized order delivery frequencies increase the probability of a stockout occurrence as the order cycle length
increases, thus resulting in higher reserved inventory, therefore holding costs, and higher backorder costs.
T3. Given the same optimal order delivery frequency, a retail store’s service level is higher when it is served by a SDC
instead of a regional independent DC, in order to counterbalance the higher probability of a stockout occurrence at the
SDC compared to that of the independent regional DC.
Tables 13 and 14 and Figs. 3 and 4 present the cost break-down of the Cost and CO2 emissions optimal solutions of the
examined logistics network design options.
On a strategic level, the obtained managerial insight is twofold and is listed below:
Operating additional DCs (either independent regional or SDCs) results into:

S1. lower retail stores holding, backorder and transportation costs as also transportation CO2 emissions, and
S2. higher DC holding and backorder costs as well as higher DC operating costs and CO2 emissions.
The higher DC holding and operating costs are due to the higher stocks reserved by the large independent regional DCs
compared to the single central one, or the central and satellite DCs compared to the central DC solely. The higher DC back-
order costs are due to the additional backorder costs of the SDCs, while the lower stores transportation costs and CO2 emis-
sions are due to reduced outbound transportation distances from the DCs to their retail stores. Finally, the lower stores
holding and backorder costs are due to the reduced lead times from their DCs (regional or satellite) which additionally
reduces their expected on-hand inventory and backorder levels.
Figs. 5 and 6 illustrate the CO2 emissions break-down of the cost and CO2 emissions optimal solutions of the examined
logistics network design options, respectively, while Table 15 the cost and CO2 emissions optimal solutions for the examined
logistics network design options.
The results of Table 15 indicate that:
The transportation cost and CO2 emissions savings achieved through the use of ship transportation for serving the second
independent regional DC2 of Option M-DCs compared to the ship to the central DC, and then rail transportation to the SDC
of Option DC/SDCs, and the reduced outbound transportation distances, and thus transportation costs and CO2 emissions,
Fig. 5. CO2 emissions breakdown (tons CO2/day) of the cost optimal options.
Fig. 6. CO2 emissions breakdown (tons CO2/day) of the CO2 emissions optimal options.
from DC2 to its serving retail stores, compared to the higher transportation distances from the central DC to the retail
stores of region 2 in Option DC, compensate against the higher operating costs and CO2 emissions of the two large inde-
pendent DCs, and thus Option M-DCs is the best in terms of cost and CO2 emissions (see Figs. 3 and 6).
Since Option M-DCs is the best in terms of costs and CO2 emissions, from a strategic network design perspective the cost
of the CO2 emissions optimal solution of Option M-DCs (49,154) should be equal to its cost optimal solution (45,114
depicted in bold in Table 15). The same stands for the CO2 emissions of the cost optimal solution. However, one can
Table 15
Cost and CO2 emissions for the optimal solutions of all problem instances.
Instance Optimization criterion Option Cost (€/day) CO2 (tons/day)

I-1 Cost DC 46,086 17.20
I-2 Cost DC/SDCs 46,695 15.00
I-3 Cost M-DCs 45,114 14.90
I-4 CO2 DC 49.815 16.90
I-5 CO2 DC/SDCs 48.542 14.72
I-6 CO2 M-DCs 49.154 14.71
clearly see that this is not the case, as these objectives do not align under tactical inventory planning decisions. This fur-
ther documents that the cost impact estimation of implementing optimal strategic green network design decisions could
be misleading if optimal tactical green inventory planning decisions are not jointly considered.
6. A graphical decision-making tool
Another interesting outcome of the analysis involves the much higher cost that the company would pay if it decides to go
‘‘green’’, that is by migrating from the best option in terms of costs (problem instance I-3) to the best in terms of CO2 emis-
sions (problem instance I-6 depicted in bold in Table 15). In this case, its emissions would be reduced from 14.9 tons to
14.7 tons/day, while its cost would increase from 45,114€ to 49,154€. This in turn, results in a marginal cost per ton of
CO2 emissions reduced equal to (49,154–45,114)/(14.9–14.7) = 20,200€ (Mallidis, 2013). This marginal cost value indicates
that if a company decides to develop a green image through the employment of green supply chain network design and tac-
tical inventory planning decisions, it will have to pay an extremely higher cost per ton of CO2 compared to the current: (i)
price per ton of CO2 under the EU Emissions Trading Scheme (EU ETS) which is now equal to 5.71€ (Point Carbon, 2014) and
the penalty cost for no compliance to the EU emissions cap which is 100€ per ton of CO2 (European Commission, 2003;
European Commission, 2009), and (ii) CO2 emissions tax under the EU energy taxation directive which is equal to 20€ per
ton of CO2 (European Commission, 2011; Transport and Environment, 2011).
Based on this marginal value, we provide a graphical decision-support tool that can be employed by supply chain exec-
utives in order to quickly and accurately decide whether it would be economically viable to ‘‘go green’’ and thus to undertake
this initiative or not. This decision depends mainly on the additional cost per ton of CO2 emissions imposed through govern-
mental regulatory interventions.
To depict the tool’s practical use, we evaluate two cases. In the first case, we assume that the EU ETS is also applied to
hinterland transportation and logistics operations while in the second case we assume that a fuel tax is charged based on
the fuels used (thus kilometric distances traveled) and not included in the fuel price(Transport and Environment, 2011). Thus
for each case a cost/ton of CO2 emissions is imposed. The imposed cost/ton CO2 emissions slopes for each one of these cases
are depicted in Figs. 7 and 8, respectively and provide a threshold between the area where a green policy becomes too expen-
sive for the company to adopt (above the dashed line) and the area where a green policy is now economically attractive (grey
area below the dashed line).
Fig. 7. Optimal cost and CO2 emissions problem instances with an EU ETS imposed cost.
Fig. 8. Optimal cost and CO2 emissions problem instances with a fuel tax.
Table 16
Performance of the network design options compared to the base case (0) Option DC.
Performance Holding costs Backorder costs Transportation costs DC operating costs

Options
DC 0 0 0 0
DC/SDCs +891€ (+12.1%) +29€ (+29%) 674€ (1.8%) +363€ (+24.1%)
M-DCs +388€ (+5.3%) 8€ (8.1%) 2,074€ (5.6%) +722€ (+47.9%)
The above figures clearly indicate that:
In the Greek Market, the company will prefer to pay the imposed cost per ton CO2 instead of adopting a sustainability shift
in its supply chain structure.
An economically viable green supply chain network design and inventory planning policy in the Greek Market is a cum-
bersome task for supply chain stakeholders (see the grey areas below the dashed line).
6.1. Sensitivity analysis
Finally, a sensitivity analysis on various cost parameters is conducted in order to investigate the robustness of the cost
optimal solutions of the examined logistics network design options (Table 15). Moreover, a cost breakdown of these solu-
tions is depicted in Table 16 along with the absolute and relative differences (in brackets) of the cost components of the opti-
mal solutions of Options DC/SDCs and M-DCs compared to the respective of the base case (0) Option DC.
More specifically, based on the observations of Table 16, the cost optimal solution would change if the DC operating costs
increase while transportation costs are reduced. On this basis, we conducted a grid search on DC operating cost percentage
increases and transportation cost percentage reductions. The results of the sensitivity analysis indicate that:
Option M-DCs would become more expensive than Option DC and Option DC/SDCs, for a 134% and 310% increase of the
DC operating costs, respectively. That is, we increase the cost and emission values in Table 9 with 134% and 310% respec-
tively, estimate the new logarithmic equations and resolve the model.
o Thus, the cost optimality of Option M-DCs is robust for significant changes in warehouse operating costs.
Option M-DCs becomes more expensive than Option DC and Option DC/SDCs, for a 51.5% and 98% reduction of transpor-
tation costs, respectively. However, such reductions in transportation costs are not likely for the foreseeable future due to
the current global economic and environmental landscape that poses pressure on countries to increase taxation in fuel.
o We can therefore imply that the cost optimality of Option M-DCs is also robust in the specific region for significant
changes in transportation costs.
To this end, we must state that the results of the case study are sensitive to the geography of the area. The region which is
served either by the satellite DC or a second regional DC is easily reachable by sea. This makes a second transportation route
and regional DC more attractive compared to the establishment of a SDC. In the case of a more landlocked area though, a
satellite DC could be more feasible.
7. Managerial insights and contribution
In this Section, we position our methodological approach and findings within the existing literature body. This manu-
script addresses the joint design and planning of global multi-echelon logistics networks under cost and CO2 emissions min-
imization objectives. Such networks comprise of a shipping part, a land transportation part, product inventories and
warehouse facilities. Transportation is often the largest contributor to the emissions of such networks. Reducing these emis-
sions can be done by: (i) replacing land transport with sea transport or by employing intermodal transport for the land part,
(ii) reducing transport frequencies, and (iii) replacing the more polluting outbound transportation with inbound transporta-
tion through the establishment of more warehouse facilities. All these changes do however have an impact on inventories. So
our model differs from the ones encountered in the literature as it evaluates: (i) the impact of jointly optimizing strategic
network design and tactical inventory planning decisions in the cost and CO2 emissions performance of multi-echelon logis-
tics networks; (ii) the impact of strategic network design decisions is evaluated by comparing the cost and CO2 emissions
performance of alternative realistic network design options, in terms of the number and type of operating distribution cen-
ters and transportation modes employed, rather than employing the commonly used MILP modeling methodology; and (iii)
the impact of tactical inventory planning decisions is evaluated through the employment of two multi-echelon periodic
review inventory planning models (one for cost and one for CO2 emissions minimization), instead of the classical inventory
planning models (EOQ or single period newsboy), for determining the optimal order delivery frequencies and stock levels at
the examined networks’ nodes. The model’s capability to handle multi-echelon problems is based on the assumption of order
coordination at the supply chain nodes (at the DCs, satellite DCs and retail stores), along with the employment of an effective
lead time concept, which allows us to incorporate the impact that stockout delays have on the outbound part of the supply
chain.
Five general managerial insights are deducted, three on a tactical level (T1, T2, and T3) and two on a strategic (S1, S2), along
with a number of interesting case-dependent observations. The first tactical insight (T1) identifies the impact of higher opti-
mized review periods (lower optimized order delivery frequencies) on transportation costs and CO2 emissions. T1 is docu-
mented by almost all inventory planning literature. The second tactical insight (T2) identifies the impact of higher
optimized review periods on the retail store’s inventory holding and backorder costs. T2 is discussed partially by Benjaafar
et al. (2010) and Hua et al. (2011) as they evaluate the impact of longer order cycles (higher order quantities) on a node’s inven-
tory holding costs; however, the impact on the backorder costs is only addressed in our manuscript. Finally, to the best of our
knowledge, the impact of operating a Satellite DC on the customer’s service level (insight T3) is not examined elsewhere.
On a strategic level, insight S1 identifies the impact of additional DCs on the holding, backorder and transportation costs
and on the transportation CO2 emissions of the retail store. Most of the strategic network design papers discuss the impact of
additional DCs on transportation costs and CO2 emissions; however, holding and backorder costs are not included in their
analyses except of the work of Chaabane et al. (2012), who evaluate the impact of these decisions on the inventory costs
of products and materials. Finally, the last insight S2 indicates the complex impact of the number of DCs on a network’s
DC inventory and operating costs as also operating CO2 emissions. Harris et al. (2011) also identify the impact of the number
of DCs on a network’s DC inventory costs and CO2 emissions. However, there are no research papers that study this impact on
the network’s DC operational costs as presented in our manuscript.
An interesting observation obtained from our numerical analysis indicates different optimal inventory planning decisions
under cost and CO2 emissions optimization objectives (see Table 11 vs. Table 12). This result is supported by Harris et al.
(2011); the authors state that the optimal solution for reducing costs does not necessarily equate to the optimal solution
for reducing CO2 emissions, further indicating that going green could come with a cost increase. Bouchery et al. (2012) state
that these costs will progressively increase, as we get closer to the solution that minimizes emissions. In this case, companies
would invest in carbon-reduction technologies instead of employing green inventory planning decisions. Their observation
further supports the significantly higher costs of our CO2 emissions optimal solution. However in a general case, the cost of
going green strongly depends on the ratio of transportation to holding plus backorder costs. When transportation is the main
cost determinant, the cost and CO2 emissions optimal inventory planning decisions will tend to align, and only then, the
additional cost of going green is reasonable.
Regarding strategic network design decisions, the optimal solutions for both cost and CO2 emissions optimization criteria
align to a decentralized supply chain configuration. This observation contradicts that of Mallidis et al. (2012) and Harris et al.
(2014) who indicate that cost optimization objectives lead to more centralized supply chain networks. These differences may
be attributed to the fact that both works do not incorporate tactical inventory planning policies in their analysis and thus,
they do not consider retail stores’ holding and backorder cost reductions realized through the increase in the number of
operating DCs. However, this conjecture needs further investigation.
Furthermore, due to the employed normal demand assumption, our methodology is appropriate for the joint design and
planning of multi-echelon logistics networks for fast-moving products, such as white goods, consumer electronics, etc.
Finally, the contribution of this paper stems from: (i) the proposed methodology and its advantages compared to the
other alternative methodologies; (ii) the insights obtained and their complementarity to the existing insights of the
literature; (iii) the validation of the observations of other researchers and the identification of statements that could be
debatable; (iv) the application of the developed methodology on multi-echelon supply chain networks for fast-moving items.
8. Summary and conclusions
This paper presents a methodology for assessing the cost and CO2 emissions impacts of implementing strategic design
and tactical planning decisions in key logistics network design options, frequently encountered by multinational companies
serving the existing EU market EU.
Specifically, a multi-echelon logistics network is considered, which serves a geographical region through a number of
retail stores. Three alternative network realizations are assessed, in which the region is served through: (i) one central
DC, (ii) one central DC and several satellite DCs, where each satellite DC exclusively serves a partition of the region, and
(iii) several regional DCs where each regional DC exclusively serves a partition of the region. The central and regional DCs
are replenished independently from the distant manufacturing site via deep sea shipping and then through their respective
entry ports employing truck transportation, while the satellite DCs are replenished independently from the central DC
through intermodal connections. Finally, all transportation from the DCs (central, regional and satellite) to the retail stores
occurs by heavy-duty or delivery trucks. All the nodes of the above supply chain utilize periodic review replenishment pol-
icies. Optimization methodologies are proposed for the minimization of the expected total cost and the emissions of the
alternative network options under study, while closed-form analytical solutions are developed.
The market of Greece was used as a test case for applying the developed methodology through an extensive realistic case
study. The results reveal that on a strategic level, cost and CO2 emissions minimization objectives align and thus, the com-
pany can reduce its costs and CO2 emissions by establishing more DCs. However, these objectives do not align on a tactical
inventory planning level since the CO2 emissions minimization objective results in lower order delivery frequencies (higher
review periods) compared to those prescribed by cost minimization; this further leads into lower retail stores’ transportation
costs and CO2 emissions and into higher holding and backorder costs. Additionally, as lower order delivery frequencies
increase the probability of stockout occurrences at the retail stores, the cycle service levels (Type I) of the products stored
at the retail stores and at the satellite DC are also lower under the CO2 emissions optimization criterion.
The main contribution of the paper to the literature hinges upon the development of a methodology that quantifies the
impact of jointly optimizing strategic supply chain network design decisions, such as the selection of the number and type of
operating DCs and transportation modes, and tactical inventory planning decisions related to the determination of optimal
order delivery frequencies and stock levels, on the cost and CO2 emissions performance of multi-echelon logistics networks.
There are two limitations of this work stemming from: (i) the assumption of normal demand at the retail stores and the
DCs (central and satellite); and (ii) the assumption of coordination between the retail stores and the DCs. Using the first one,
we were able to simplify the expected backorder quantities of the fast moving products at the retail stores and at the SDC,
and the on-hand quantities at the retail stores, the SDC, the central and the regional independent DCs. As this assumption is
valid for the plethora of commonly encountered supply chains of fast-moving items, the proposed methodology could be
implemented for all such commercial supply chains. Employing the second assumption, we were able to provide an analyt-
ical multi-echelon periodic review inventory planning model. If coordination was not considered, the solution to the prob-
lem under study could only be obtained through the development of a simulation-based modeling methodology. Finally,
regarding future research perspectives, an additional extension of this work involve the inclusion of the impact of opera-
tional decisions, such as vehicle routing, while supplying the retail stores.
Acknowledgements
The authors are grateful to the three anonymous referees and the Editor for their contribution in significantly improving
the final manuscript. They are also grateful to the companies Orphee Beinoglou, and Vassilios Kampakis, Shipping Agency
LTD, that provided detailed and comprehensive data for the case study.
This research paper has been funded by the EU (European Social Fund – ESF) and Greek National Funds through the Oper-
ational Program ‘‘Education and Lifelong Learning’’ of the National Strategic Reference Framework (NSRF) - Research Funding
Program: Heraclitus II, investing in knowledge society through the European Social Fund. It has also been conducted in the
context of the GREEN-AgriChains project that is funded from the European Community’s Seventh Framework Programme
(FP7-REGPOT-2012-2013-1) under Grant Agreement No. 316167. All the above reflect only the authors’ views; The European
Union is not liable for any use that may be made of the information contained herein.
Appendix A
A.1. Proof of Proposition I
By differentiating the expected holding and backorder cost per time unit for the examined product at the examined retail
RR RR l ðR tÞ LþR
store, h 1R 0 EðOHðtÞÞdt þ b 1R 0 EðBOðtÞÞdt, with respect to z and using: kðtÞ ¼ pffiffiffiffiffiffiffiffiffiffi þ z pffiffiffiffiffiffiffiffiffiffi , we obtain:
r Lþt Lþt
Z Z
1 R pffiffiffiffiffiffiffiffiffiffi dut ðkðtÞÞ dkðtÞ dkðtÞ dU ðkðtÞÞ dkðtÞ 1 R
h r Lþt þ Ut ðkðtÞÞ þ kðtÞ t dt þ b r
R 0 dkðtÞ dz dz dkðtÞ dz R 0

pffiffiffiffiffiffiffiffiffiffi dut ðkðtÞÞ dkðtÞ dkðtÞ dkðtÞ dU ðkðtÞÞ dkðtÞ
Lþt þ Ut ðkðtÞÞ þ kðtÞ t dt
dkðtÞ dz dz dz dkðtÞ dz
For normal demand and since:
dut ðkðtÞÞ dkðtÞ dUt ðkðtÞÞ dkðtÞ
þ kðtÞ ¼ 0:
dkðtÞ dz dkðtÞ dz
The above equations can be simplified to:
Z pffiffiffiffiffiffiffiffiffiffiffi Z pffiffiffiffiffiffiffiffiffiffiffi pffiffiffiffiffiffiffiffiffiffiffi
1 R pffiffiffiffiffiffiffiffiffiffi LþR 1 R pffiffiffiffiffiffiffiffiffiffi LþR LþR
h r Lþt pffiffiffiffiffiffiffiffiffiffi Ut ðkðtÞÞ dt þ b r L þ t pffiffiffiffiffiffiffiffiffiffi þ pffiffiffiffiffiffiffiffiffiffi Ut ðkðtÞÞ dt
R 0 Lþt R 0 Lþt Lþt
Z Z
1 R pffiffiffiffiffiffiffiffiffiffiffi 1 R pffiffiffiffiffiffiffiffiffiffiffi pffiffiffiffiffiffiffiffiffiffiffi
¼h r L þ R Ut ðkðtÞÞdt þ b r L þ R þ r L þ R Ut ðkðtÞÞ dt
R 0 R 0

1 pffiffiffiffiffiffiffiffiffiffiffi Z R Z R
¼ r LþR h Ut ðkðtÞÞdt þ b ½Ut ðkðtÞÞ 1dt :
R 0 0
Applying the first order conditions further leads to:

1 pffiffiffiffiffiffiffiffiffiffiffi Z R Z R Z R Z R
r L þ R h Ut ðkðtÞÞdt þ b ½Ut ðkðtÞÞ 1dt ¼ 0 () h Ut ðkðtÞÞdt þ b ½Ut ðkðtÞÞ 1dt
R 0 0 0 0
Z R Z R Z R
¼ 0 () h Ut ðkðtÞÞdt þ b Ut ðkðtÞÞdt b 1dt
0 0 0
Z R
¼ 0 () ðh þ bÞ Ut ðkðtÞÞdt b R
0
Z R Z R
¼ 0 () ðh þ bÞ Ut ðkðtÞÞdt ¼ b R () Ut ðkðtÞÞdt
0 0
bR
¼ ðAÞ
hþb
Moreover, and since the second derivative of (A) with respect to z:
Z R Z R
dUt ðkðtÞÞ dkðtÞ dkðtÞ
dt ¼ ut ðkðtÞÞ dt > 0
0 dkðtÞ dz 0 dz
an optimal z value exists that satisfies the first order condition for a specified value of R.
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Transportation Research Part E 72 (2014) 210–235

Contents lists available at ScienceDirect

Transportation Research Part E

Design and planning for green global supply chains

2.1. Strategic network design decisions

Authors Decisions Model Optimization criteria

2.2. Tactical inventory planning decisions

Authors Decisions Model Optimization criteria Echelons

2.3. Integrated approach

3. Problem under study

EP: Entry Port

DC: Distribution Center (central and regional)

RS1 RS3 RS4

Option DC/SDCs Region 1

Option M-DCs Region 1

Fig. 1. Logistics network design options.

Option Distribution operations

Eq. (6) can be further simpliﬁed as follows:

h Holding cost per time unit for the examined product

Proof. See Appendix.

4.2. Option DC/SDCs

The market is partitioned into a number of regions reRE.

bS Backorder cost per product stockout at the SDC

zS Safety stock factor of the examined product at the SDC

4.3. Option M-DCs

5. Real-world model application

RM4 DC/D RM1

5.2. Ship transportation costs per 40 foot (ft.) container trip

5.3. Truck costs per roundtrip

5.4. Ship CO2 emissions per 40 ft. container trip

5.5. Truck CO2 emissions per roundtrip

5.6. Rail costs

5.7. Rail CO2 emissions

5.8. DC operational costs and CO2 emissions

Capacity (m3) Operating costs €/day CO2 emissions tons/day

Products Refrigerators Washing machines Ovens Total

RM1 30 0.7 35 30 0.5 25 20 0.4 20 80

Options DC DC/SDCs M-DCs

Options DC DC/SDCs M-DCs

5.9. Numerical results and managerial insights

Options Opt. crit. Holding cost Backorder cost

Options Optim. crit. Transportation costs DC operational cost

Fig. 3. Cost breakdown (€/day) of the cost optimal options.

Fig. 4. Cost breakdown (€/day) of the CO2 emissions optimal options.

Operating additional DCs (either independent regional or SDCs) results into:

Instance Optimization criterion Option Cost (€/day) CO2 (tons/day)

6. A graphical decision-making tool

Performance Holding costs Backorder costs Transportation costs DC operating costs

The above ﬁgures clearly indicate that:

6.1. Sensitivity analysis

7. Managerial insights and contribution

8. Summary and conclusions

A.1. Proof of Proposition I

Applying the ﬁrst order conditions further leads to:

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