European Journal of Operational Research 223 (2012) 585–594

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European Journal of Operational Research

journal homepage: www.elsevier .com/locate /e jor

Invited Review

Research advances in environmentally and socially sustainable operations

Christopher S. Tang a,⇑,1, Sean Zhou b,c

a UCLA Anderson School, 110 Westwood Plaza, Los Angeles, CA 90095, USAb Department of Decision Sciences and Managerial Economics, CUHK Business School, The Chinese University of Hong Kong, Hong Kongc Department of System Engineering and Engineering Management, The Chinese University of Hong Kong, Hong Kong

a r t i c l e i n f o

Article history:Received 24 October 2011Accepted 25 July 2012Available online 5 August 2012

Keywords:Environmental responsibilitySocial responsibilitySustainabilityOR/MS models

0377-2217/$ - see front matter � 2012 Elsevier B.V. Ahttp://dx.doi.org/10.1016/j.ejor.2012.07.030

⇑ Corresponding author. Tel.: +1 310 825 4203.E-mail addresses: zhoux@se.cuhk.edu.hk (C.S. Ta

cla.edu (S. Zhou).1 http://www.anderson.ucla.edu/x980.xml.

a b s t r a c t

Consumers and governments are pressuring firms to strike a balance between profitability and sustain-ability. However, this balance can only be maintained in the long run if the firm can take a holisticapproach to sustain the financial flow (profit), resource flow (planet) and development flow (people)for the entire ecosystem comprising poor producers in emerging/developing markets, global supply chainpartners, consumers in developed countries, and the planet. By considering the flows associated with dif-ferent entities within the ecosystem, we classify and summarize recent Operations Research/Manage-ment Science (OR/MS) research developments. Also, we identify several gaps for future research in thisimportant area.

� 2012 Elsevier B.V. All rights reserved.

1. Introduction

Since the early 2000s, three major forces are pressuring firms topay attention to the triple bottom line: profit, people and planet(Elkington, 2002). First, with rapid global economic developmentin the past century, the demand for natural resources (clean water,crude oil, woods, metals, etc.) continues to rise (especially in coun-tries such as India and China), whereas the supply of these naturalresources continues to diminish. Meanwhile, the economic activi-ties have generated and will continue generating vast wastes andpollutants to the environment (electronic wastes, waste water,greenhouse gas emissions, etc.). Being aware of the seriousnessof this issue, many countries/organizations have enacted andimplemented regulations and legislations to force companies tobecome more environmentally responsible. For example, to reduceelectronic wastes, the Europe Union (EU) enacted the waste electri-cal and electronic equipment (WEEE) directives in 2003 that setcollection, recycling and recovery targets for all types of electricalgoods. The reader is referred to Atasu and Van Wassenhove (2010)for a comprehensive review on product take-back legislation. Onthe other hand, greenhouse gases have been considered as a majorcause of climate change and global warming. To reduce greenhousegas emissions, the Kyoto protocol was adopted in 1997 underwhich most developed countries agreed to legally binding targetsfor their emissions of the six major greenhouse gases. As such,the EU designed and implemented an emissions trading (or

ll rights reserved.

ng), chris.tang@anderson.u-

cap-and-trade) mechanism to provide incentives for companiesto invest in clean technologies and curb their emissions. A similartrading program for reducing sulfur dioxide emission has also beenimplemented under the acid rain program in the US.2 Due to thechallenges of coordinating the complex trade-offs betweeneconomic, environmental, and societal factors, it is expected thatgovernment regulations and legislations will continue to play a veryimportant role in pushing sustainable businesses activities.

Second, as western companies outsource or off-shore theirmanufacturing operations to developing countries, consumer-advocacy groups have raised concerns about various unethicalpractices. This awareness can certainly impact consumer’s pur-chasing behavior, which exerts pressure for companies to pay moreattention to social responsibility. Companies such as BP and Nikehave learned the hard way that public image related to environ-mental and social responsibility issues can directly affect theirprofitability. Meanwhile, with more consumers willing to pay morefor products they perceive as environmentally friendly, companiescould design and use sustainable attributes of their product to gaincompetitive advantage in the markets, in particular, as more atten-tions are being paid to the programs such as Eco-Label program inthe EU. Moreover, the government is pushing the private sectorcompanies to help by way of ‘‘social innovation’’ (e.g., the ‘Big Soci-ety’ initiatives in the UK, and the ‘Office of Social Innovation’ in theUS). The reader is referred to Sodhi and Tang (2011a) for details.

Third, with growth slowing in developed countries, westerncompanies from the fast-moving consumer goods and other sec-tors are seeking to expand in emerging economies in Africa, Asia

2 http://www.epa.gov/capandtrade/.

Fig. 1. The PPP ecosystem: profit, planet, and people.

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and South America with ‘‘the next billion [consumers]’’ as their ral-lying cry (Prahalad, 2004). However, these companies face not onlyentrenched local competition and local concerns (over environ-mental and social issues) but also supply-chain constraints thathamper growth in these countries. In addition, the consumer activ-ists and the media put pressure on these companies to becomemore socially and environmentally responsible. According to PaulPolman, CEO of Unilever, ‘‘A company’s contribution to society isabsolutely critical in today’s environment. It is very clear that thisworld faces some considerable challenges: poverty, water, globalwarming and climate change. Businesses like Unilever have aresponsibility here and thus a major role to play.’’3 Therefore, in or-der to sustain future growth in revenue, companies need to developthe emerging market so that the poor producers can become theirconsumers in the future. To do so, companies need to help the poorto break the poverty cycle.

To achieve the planet and people goals quickly, many firms of-ten use piecemeal solutions that can cause unintended conse-quences. As articulated in Lee (2010), without thinking abouttheir suppliers’ survival, some companies simply ask their suppli-ers to use eco-friendly materials and to reduce carbon footprintby moving closer to the end markets. Instead, Lee (2010) presenteda case study of Esquel (a cotton shirt manufacturer based in HongKong) and showed how this company achieved the triple bottomline by making structural changes to the entire supply chain: fromthe development of raw materials (cotton) to the distribution ofproducts. We will use a PPP eco-system depicted in Fig. 1 to discussthe elements and flows involved in a company’s business activitiesrelated to the triple bottom line.

1.1. The PPP ecosystem (profit, planet, and the people)

To explore different ways for achieving multiple goals, let usview the society and the planet as an ‘‘ecosystem’’ comprising pro-ducers, supply chains (network of companies), consumers, and pla-net, which we depict in Fig. 1.4 Note that although not explicitlyincluded in Fig. 1, government is actually ‘‘omnipresent’’ in theecosystem because it plays a significant role in developing publicpolicies and creating incentives for companies and consumers to

3 Social Enterprise. Future Perfect? Critical Eye article, December 2010, down-loaded 28th December 2010 from http://www.criticaleye.net/insights-servfile.cfm?id=2502.

4 For interpretation of color in Fig. 1, the reader is referred to the web version ofthis article.

become more environmentally and socially responsible. For exam-ple, the trade/tax policy affects the supply chain flow (blue), the gov-ernment rebate/refund policy and regulations provide incentives forrecycling, remanufacturing, emissions reduction, etc. (green), andthe government policy can create incentives for companies to setup operations in rural areas so as to develop the emerging market– creating new jobs, alleviating poverty, and generating new con-sumers (red).

As shown in Fig. 1, our PPP ecosystem is comprised of five ‘‘coreelements’’ and various flows that can be described as follows. First,the consumers form the ‘‘market’’ for the products designed, pro-duced, and distributed by producers and different partners of thesupply chain. Essentially, the consumers can play a critical role inforcing companies to pay attention to the planet and people goals.Given the demand generated by the consumers, each supply chainpartner uses natural resources (water, energy, woods, metals, landuse, etc.) and employs producers (all workers in the supply chain,including those poor workers in emerging markets) to produce anddistribute the products to consumers in different geographical re-gions. In this flow, each supply chain partner takes part in all kindsof business activities, makes various decisions, from strategic tooperational, and incurs costs and revenues with an aim to maxi-mize their profit. This flow is depicted by the blue arrows inFig. 1. However, as the producers, supply chain partners (e.g., fac-tories, logistic providers, and retailers), and consumers ‘‘consume’’natural resources, their activities inevitably generate wastes andemissions (solid wastes, toxic wastes, air pollution and water pol-lution) that play havoc to the entire planet (the green arrow). In or-der to minimize the negative impact on the planet, they need totake into account the environmental factors (consume less naturalresources, dispose of fewer wastes, generate fewer greenhousegases) in their decision-making and daily operations. Finally, whilePrahalad (2004) suggested that large multi-nationals can growtheir businesses by selling to an untapped market of over 2 billionpeople at the ‘‘bottom of the pyramid’’ with per capita income be-low $2 per day, Karnani (2007) presented counter-argumentsagainst the ‘‘selling to the poor’’ idea. Moreover, Karnani proposedthat, in order to generate new revenue growth (economic growth),companies (governments) need to develop the emerging market byhelping the poor producers break the poverty cycle now so thatthey can become consumers later (the red arrow).

After examining the flows among these five core elements inthe ecosystem depicted in Fig. 1, we can gain a better understand-ing about the interactions among the triple bottom line measures.

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First, as most companies are profit-driven, they can become moreprofitable if they can develop ways to: (1) reduce cost by improv-ing its supply chain operations and/or (2) demand a higher price,capture a higher market share, or create a new market for theirproducts/services by creating new values (i.e., remanufacture/re-cycle, eco-friendly, ethical, socially responsible, etc.). In fact, com-panies can improve profitability by designing and producingproducts in an environmentally and socially responsible manner.For example, by collecting and remanufacturing used cell phones,OEMs cannot only reduce wastes but also generate additional prof-it by selling them in emerging markets. Second, to achieve profit-able growth, a company should ‘‘cultivate’’ future consumers indeveloping and emerging markets especially when the westernmarkets are getting saturated. For example, companies such asNestlé, Proctor and Gamble, Unilever have launched various ruraldevelopment initiatives to achieve the ‘‘people’’ goal by helpingthe poor to break the poverty cycle. When the ‘‘poor as producers’’become the ‘‘poor as consumers’’, these companies can achievetheir ‘‘profit’’ goals as well. Therefore, companies can achieve allthree goals simultaneously by stimulating the flows within theecosystem as shown in Fig. 1.

1.2. Scope and methodology of review

By examining various issues in the flows associated with differ-ent players in the ecosystem, we review the recent OR/MS researchdevelopments in the following way. At an aggregate level, we clas-sify the papers based on whether a strategic level or an operationallevel issue/question in a firm/supply chain is investigated. At amore detailed level, we classify the works according to the specificissues and research questions they aim to address, for example,product design. Detailed classification will be presented in Sec-tion 2. Recognizing the literature is vast especially in the area ofclosed-loop supply chain,5 we shall mainly review the most recentresearch that examines environmental sustainability and/or socialresponsibility issues. In particular, we focus on papers in OR/MS areathat develop and analyze quantitative models to address such issues.Therefore, the related empirical research, reviews, and case studieswill not be the focus of this review. And we will also identify and dis-cuss research opportunities in this area.

This paper is organized as follows. In Section 2, we present aframework that covers and classifies the planning issues we willreview, which are based on the ecosystem that illustrates the rela-tionship between the triple bottom line and the flows associatedwith different players in the ecosystem. Then based on theclassification, we summarize recent OR/MS research efforts in Sec-tion 3. Section 4 concludes this paper with future researchopportunities.

2. Framework and classification of the literature

In this section, we present the categories of arising planning is-sues and questions in the flows we described in the previous sec-tion with regard to environmentally and socially sustainablesupply chains.

We start with product design. Product design largely deter-mines the product-related environmental impacts and so it isimportant to design a product that meets the needs of societyand balances economic and environmental interests. While morecompanies are developing products with the triple bottom line inmind, it remains to be a nascent research area in the OR/MS

5 The reader is referred to Dekker et al. (2004), Kleindorfer et al. (2005), Atasu et al.(2008b), Guide and van Wassenhove (2009), and Ferguson and Souza (2010). forcomprehensive reviews on closed-loop supply chain research.

literature (Agrawal and Toktay, 2010). Some plausible reasonsare as follows. First, while there are clearer definitions for environ-mental sustainability (e.g., ISO 14000), there is no consistent mea-sure for social responsibility despite the newly establishedguidelines ISO 26000 (c.f., Bloemhof and Corbett, 2010). Second,it is challenging to measure a product’s environmental and societalaspects and their values to companies. Third, there are conflictingeconomic, societal, and environmental factors and objectives ofdifferent partners along with supply chains. Skerlos et al. (2005)provided an excellent discussion on various challenges to sustain-able product design from business incentives and inhibitors to sus-tainable design process and metrics. Two cases are presented tohighlight specific trade-offs that arise in sustainable product de-sign. The studies on sustainable product design will be reviewedin Section 3.1.

The next issue is on technology selection in production pro-cesses. Manufacturers are facing trade-offs of costs and environ-mental and societal factors when choosing productiontechnologies. For example, using a dry or wet pyro-process in ce-ment production incurs different costs and emissions (Choate,2003). And natural gas is more expensive than coal but cleanerwhen generating a same amount of energy. Choices of the produc-tion technologies also affect the remanufacturability of the re-turned products that greatly affect not only the efficiency andprofitability of remanufacturers but also the amount of wastesgenerated. We will discuss the related literature in Section 3.2.

Reverse logistics plays an important role in sustainable opera-tions because it can simultaneously create market opportunitieswhile addressing significant environmental problems. It includesvarious strategic issues such as incentives for collection and recy-cling, cannibalization issues between new and remanufacturedproducts, market competition between OEM companies and thirdparty remanufactures. On the other hand, day-to-day operationsof a reverse logistics system such as production planning andinventory management could be quite different and more compli-cated than a traditional forward supply chain and so require newideas and insights. In Sections 3.3 and 3.6 we will review the stud-ies on strategic (mostly static models) and operational level(mostly dynamic models) issues related to reverse supply chain,respectively.

Another critical strategic decision that could balance a com-pany’s profitability and its environmental impacts is the structureof distribution and transportation networks of its supply chain.Supply chain network provides the infrastructure for the produc-tion, storage, and distribution of the company’s products and thusshapes largely the company’s overall environmental performance.Meanwhile, efficiency of closed-loop supply chain management re-lies upon an appropriate logistics structure to support product re-turn and collection operations. An efficient reverse logisticsnetwork could help reduce costs and improve the profitability ofremanufacturers and so provides more incentive for them in col-lecting and remanufacturing more used products. This stream ofresearch will be reviewed in Section 3.4.

Finally, we will discuss the studies on what and how companies’operational decisions such as manufacturing, inventory control,logistics and distributions are integrated with environmental andsocietal factors. For example, under certain emissions regulationscheme, how should a manufacturer adjust its original productionplanning strategy to comply with the regulation and stay efficient?We have seen increasing OR/MS research addressing these issuesand we will review them in Section 3.5.

In summary, Section 3 will consist of two main parts, each ofwhich focuses on the issues that affect the ‘‘planet’’ and ‘‘people’’goals. The first part (Sections 3.1–3.4) deals with various strategicissues ranging from product design to supply chain design. In thesecond part, we first examine different operational issues ranging

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from manufacturing, inventory control, to logistics and distribu-tion in Section 3.5, and then we discuss the operational issues aris-ing from the ‘‘reverse’’ supply chains in Section 3.6.

3. OR/MS models of environmentally and socially responsibleoperations

3.1. Product design

Product design is an important instrument of sustainable devel-opment, whereas the related OR/MS research is rather limited. Inthe context of remanufacturing, the ‘‘optimal’’ product designwould depend on economic and regulatory factors. Subramanianet al. (2009a) examined the impact of the Extended ProducerResponsibility (EPR) on product design. Specifically, they devel-oped a model that incorporates two key product-design relateddecisions: (a) performance – environmental impact of the productduring use and (b) remanufacturability – environmental impact ofthe product post-use. By considering two possible customer types,Subramanian et al. (2009a) determined the optimal product-designdecisions and demonstrated how financial charges during use andpost-use can be used as levers to entice firms to design eco-friendlyproducts. In a similar spirit, Plambeck and Wang (2009) examinedthe impact of the EPR on new product introduction and design forremanufacturability. Two different e-waste (electronic waste) reg-ulations: ‘‘fee upon sale’’ and ‘‘fee upon disposal’’ are considered.The former regulation has been implemented in the form of Ad-vanced Recovery Fee in California under which every customerpays an additional fee when buying an electronic product so thatthe state can generate funds for collection and recycling of the usedelectronics. The latter regulation has been implemented in Japanunder which each manufacturer is responsible for collecting andprocessing its own products at the end of their life. By analyzinga duopoly model in which each firm chooses the development timeand expenditure of the new product, they showed that, in equilib-rium, the ‘‘fee upon sale’’ regulation discourages manufacturer todesign new products that are remanufacturable. However, whilethe ‘‘fee upon disposal’’ regulation does encourage design forremanufacturability, it forces manufacturers to introduce newproducts too rapidly, which generates more e-waste.

Krikke et al. (2003) presented a model that integrates productdesign and closed-loop supply chain design. Three potential de-signs of a refrigerator and different configurations of a closed-loopsupply chain are considered. With an objective function that com-bines the cost and environmental impacts (energy and waste),they formulated the model as a mixed-integer linear programand illustrated their analysis by considering the product and sup-ply chain design of a refrigerator. In essence, this model is suitablefor evaluating different potential product designs and differentsupply chain configurations, but it is not intended for decisionmaking during the early stage of the product design process.Subramanian et al. (2009b) examined the impact of a firm’sremanufacturing operations on its component commonality deci-sion. They showed that commonality decision depends on theremanufacturing decision during the product design phase andthe customer’s perceived quality between the new and remanu-factured components.

Very few papers discuss other green product design issues thanthose related to product remanufacturability. By viewing thegreen feature of a product as one quality attribute, Chen (2001)developed a quality based model for analyzing the strategic andpolicy issues concerning the development of products with con-flicting traditional and environmental attributes. Customers’ pref-erence towards green products is modeled and producer’sstrategic decision regarding the number of products introduced

and their selling prices and quantities are analyzed. Kim andChhajed (2002) derived a measure of multi-dimensional customerpreference and offered insights into the optimal product designwhen considering multiple quality dimensions. They showed thatsingle-product offering strategies are never optimal in the setting.Krishnan and Zhu (2006) considered development intensive prod-ucts for which the fixed costs of development far outweigh thevariable costs and showed that the traditional approach to prod-uct-line design developed for variable cost-intensive productsdoes not carry over. Whitefoot et al. (2011) developed aconsequential life cycle assessment (cLCA) with endogenous mar-ket-driven design (MDD). cLCA-MDD captures the environmentalimpact of the design responses resulting from industrial andpolicy decisions. A case study is used to show that how design re-sponses can be endogenously captured in a cLCA analysis. White-foot and Skerlos (2012) studied an oligopolistic-equilibriummodel in which automotive firms can modify vehicle dimensions,implement fuel-saving technology features, and trade off acceler-ation performance and fuel economy. They analyzed the impact ofthe US Corporate Average Fuel Economy (CAFE) standards andshowed that the foot-print based CAFE standards create an incen-tive for firms to increase vehicle size except when consumer pref-erence for vehicle size is near its lower bound and preference foracceleration is near its upper bound.

3.2. Technology selection

With more stringent regulations and consumers’ awareness onenvironmental protection and corporate social responsibility, com-panies should no longer simply choose the technology/processwith the lowest cost without carefully considering its environmen-tal/societal factors. Stuart et al. (1999) developed a mixed integerprogramming model to select product and process alternativeswhile considering tradeoffs of costs, yield, reliability, and environ-mental impacts. Constraints for environmental impacts such asmaterial and energy consumption, process waste generation weremodeled explicitly. The model and solutions were further appliedto an electronics assembly case. Drake et al. (2010) studied a firm’stechnology selection and capacity investment decisions under bothemissions cap-and-trade and emission tax regulation. They charac-terized the solutions and identified the conditions under which thefirm should choose both technologies, and when it should justchoose one. Numerical studies revealed that the expected profitsof the firm are higher and the expected emissions are less undercap-and-trade, while the expected production is greater under anemissions tax.

When developing a remanufacturing strategy, there are in-stances in which a firm can make upfront technology investmentthat would increase the likelihood that the returned used productis remanufacturable. Debo et al. (2005) developed a model toexamine the conditions under which a firm should invest in tech-nology for remanufacturing. By imposing a constraint that the sup-ply of remanufactured product at any point in time is limited bythe past sales of new product, they formulated the problem as aninfinite-horizon dynamic program to determine the technologyfor remanufacturing and the prices of the new and remanufacturedproducts. They showed that investing in remanufacturing is moreprofitable when there are more low-valuation customers. Also,they examined the impact of the cost structure, consumer prefer-ences, and industry structure on the profitability of remanufactur-ing. For example, consider the case when the firm increases theselling price of the new product. It was shown that, while the profitmargin for the remanufactured product would increase, the supplyof remanufactured product would decrease because of the de-creased sales of the new product.

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3.3. Strategic issues in remanufacturing

As companies are paying more attention to the ‘‘planet’’ and‘‘people’’ goals, many executives worry about profitability in acompetitive market. Before launching environmental and socialresponsibility initiatives, one needs to examine the following ques-tions: (1) How would customers respond to the company’s initia-tives? (Will more customers buy the products/services? Willcustomers be willing to pay more?) (2) How would competitors re-spond to the company’s initiatives? The OR/MS research commu-nity has examined these issues in the context of remanufacturing.

3.3.1. Cannibalization issues arising from remanufacturingIn the context of remanufacturing, firms are fearful about the

sales of the new product would be cannibalized by the sales ofthe remanufactured product. Ferguson (2010) reported some anec-dotal evidence of product cannibalization. Debo et al. (2006) exam-ined the demand of both new and remanufactured products overthe product life cycle by extending the Bass diffusion model. Tocapture the interactions between two products, their extensionincorporates the substitution effect between the new and theremanufactured products and the supply of remanufactured prod-uct at any point in time is dependent on the past sales of new prod-uct. They found that remanufacturing is more profitable for slowlydiffusing products and for products that customers tend to pur-chase repeatedly. More recently, Guide and Li (2010) conductedan experiment by listing two products (a consumer product –power tool; and a commercial product – router) on eBay in twoways: (1) new and (2) remanufactured. They found a clear differ-ence in the ‘‘willingness to pay’’ between the new and remanufac-tured products. They also found clear customer segmentation forthe consumer product but not for the commercial product. There-fore, the risk of cannibalization is much lower in the consumerproduct category. By analyzing the purchasing data obtained fromeBay, Subramanian and Subramanyam (2009) found two key fac-tors that explain the price differentials between new and remanu-factured products: the reputation of the seller of the products; andthe producers of the remanufactured products (OEM versus thirdparty manufacturers). These key findings can be useful to a com-pany when deciding whether to remanufacture a product or not.

3.3.2. Competition in remanufacturingEven when the remanufactured product is only used to serve a

new market segment (i.e., the cannibalization effect is low) andwhen the firm can collect the used products and remanufacture

Fig. 2. A framework for compe

them efficiently, there are other strategic questions to considerwhen deciding whether to remanufacture or not. First, how wouldcompeting firms react when the OEM firm announces that it willremanufacture its product? (Should they follow suit?) Second,what should the OEM firm do when some of its used productscan be collected by a third-party remanufacturer who competeswith the OEM in the market of remanufactured product?

The first question has been examined by Heese et al. (2005)who presented a single period model that is motivated by reman-ufacturing strategies selected by different suppliers of hospitalbeds. As depicted in Fig. 2, their model deals with an issue arisingin period 1 only. Specifically, they examined a situation in whichtwo competing firms need to decide on their selling prices of thenew product and the discounts they offer to customers for theremanufactured products. By assuming that customers are notstrategic, they presented a three-stage game as follows. In the firststage, firm 1 (the leader) decides on whether to remanufacture theproduct. Then a competing firm (the follower) will make its reman-ufacturing decision in the second stage. Knowing both firms’remanufacturing decisions, each firm determines its selling priceof the new product (and the discounts offered to its customersfor the case when the firm decides to remanufacture its returnedused product). By examining the equilibrium outcomes of thisthree-stage game, Heese et al. (2005) showed that, by acceptingthe return of used product, the leader can deter its competitor fromfollowing suit especially when the leader has a higher market shareof the new product or when the leader has a lower production cost.

Next, noting that the second question involves the dynamicdecisions made over time, there is a series of research work that fo-cuses on a monopolist (firm 1: the OEM firm) who sells one type ofnew product in period 1. However, only a fraction of the items soldin period 1 is returned, and the returned quantity is split betweenthe OEM and a third-party remanufacturer. By using the returnedquantity collected by each firm, both firms sell their remanufac-tured products under price competition in period 2. Also, theOEM may produce and sell the new product in period 2 (Fig. 2).By assuming linear demand function in each period, Majumderand Groenevelt (2001) analyzed a two-period dynamic game anddetermined the equilibrium outcomes (selling prices of both newand remanufactured products as well as production quantity ofthe new product) for the game that takes place in period 2. Despitethe technical difficulty, they managed to characterize the OEM’sprofit in the first period. In summary, they found that the third-party remanufacturer has incentives to reduce the remanufactur-ing costs for the OEM because it would enable the OEM to produce

tition in remanufacturing.

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and sell more at a lower price in period 1, which will increase thequantity available for the third-party to remanufacture in period 2.

When there is product cannibalization between the new andthe remanufactured product, the OEM firm’s remanufacturingdecision is more sophisticated. By incorporating the cost of collect-ing the used product at the end of period 1, Ferguson and Toktay(2006) extended the work of Majumder and Groenevelt (2001)by establishing the conditions under which the OEM firm wouldremanufacture. In the event when the OEM firm decides not toremanufacture, their model allows the OEM firm to collect the usedproduct so as to reduce its available amount to the third-partyremanufacturer that competes with the OEM firm’s new productin period 2. In a similar vein, Ferrer and Swaminathan (2006) ex-tended the 2-period model developed by Majumder and Groene-velt in two different ways: (1) the horizon is either finite orinfinite and (2) the market consists of one OEM firm or two com-peting OEM firms. By assuming that the size of the potential mar-ket is constant over time, they characterized the equilibriumoutcomes (selling prices of the new and remanufactured productsin each period) for each period. Also, in equilibrium, they showedthat the OEM firm would sell more by lowering its selling pricein the first-period so as to increase the available return of usedproducts for remanufacturing in the subsequent periods.

3.3.3. Incentives for collection and recyclingBecause remanufacturing requires used products as inputs, the

success of a remanufacturing program largely depends on the effi-ciency in collecting used products. The aforementioned researchdoes not focus on the collection process of used product, whichcan be carried out by the manufacturer, the retailer, or a third party.Savaskan et al. (2004) presented a model to examine the trade-offsamong these three collection strategies. By considering a 2-levelsupply chain and by treating the manufacturer as the Stackelbergleader, they showed that it is more economical for the retailer tocollect the used product. Walther et al. (2008) developed a coordi-nation mechanism that allows for negotiation of contracts betweena focal company and several companies of a recycling network inorder to fulfill the requirements resulting from environmental leg-islation. They showed that the mechanism can generate the con-tracts between the focal company and the recycling companiesand contain individual recycling obligations. Numerical resultsshowed that the performance of the mechanism is near the central-ized system when the step sizes are chosen properly.

Government regulations and legislations are key drivers forbusinesses to adopt product recycling and remanufacturing. Prod-uct and waste take-back is becoming more regulated in manycountries/regions. The EPR is a strategy that provides financialincentive for manufacturers to design eco-friendly products byholding manufacturers liable for the costs of managing their prod-ucts at end of life. Currently, different countries have differentviews about the entity that is responsible for the end of life prod-uct. Atasu et al. (2009) discussed the economic and environmentalimpacts of the EPR-type of legislation and identified efficiency con-ditions. They showed that the right policy would make producersresponsible for their own waste to avoid fairness concerns andfavor eco-design producers to create stronger environmental ben-efits. Esenduran et al. (2010) modeled the ‘‘take-back’’ legislationby setting lower bounds on the percentage of used products thatmust be collected and on the percentage of used products thatmust be remanufactured. They examined the impact of legislationon the remanufacturing level of an OEM when it has in-houseremanufacturing capability or is competing with a third partyremanufacturer. Jacobs and Subramanian (forthcoming) examinedthe notion of shared responsibility and its impact on the collection/recycling efforts in a decentralized two-level supply chain.By using social welfare that includes supply chain profits and

consumer surplus, they showed that the shared responsibilitymay or may not improve social welfare. As a follow on study, Atasuand Subramanian (2011) developed a model to investigate theimplications of individual responsibility and shared responsibilityin the presence of competition.

3.4. Supply chain design/restructuring

Quariguasi et al. (2008) presented a framework for the designand evaluation of logistics networks in terms of profitability andenvironmental impacts. They developed an approach that is basedon data envelopment analysis (DEA) to evaluate the efficiency ofexisting logistics networks in the pulp and paper industry inEurope. In a similar vein, Chaabane et al. (2011) developed a mul-ti-objective mixed-integer linear programming model with trade-off between economic factors (logistics cost, procurement cost,production cost) and environmental factors (carbon emissions) todetermine different supply chain design options (suppliers andsub-contractor selection, technology acquisition and transporta-tion modes). They applied their model to study a Canadian steelfirm facing a new legislation that caps carbon emissions.

Nagurney and Nagurney (2010) considered a supply chain net-work problem, involving the determination of network link capac-ities and product flows on various links for a firm. The firm aims tominimize total relevant costs as well as emissions generated. Aweighted objective function was constructed, which includes theweight that the firm places on the minimization of emissions. Analgorithm was proposed to solve the problem and applied to sev-eral numerical sustainable supply chain network design problems.Cachon (2011) examined a downstream supply chain design prob-lem by combining traveling salesmen and k-median problems. Theobjective is to minimize the mileage related variable vehicle oper-ating costs, fuel consumption costs and emissions costs. The modelaccounts for the distance consumers must travel to a retail store aswell as the distance the retailer must travel to replenish thosestores. The main research questions are how poorly a supply chaindesign performs if it is not optimized given the true cost of emis-sions and under what conditions such emissions penalty is sub-stantial. Cachon (2011) showed that the errors of input costsfrom ignoring costs of carbon have an insignificant impact on theoptimal solution. Hence, there is minimal value for measures thatare meant to correct any distortion in decisions regarding the retailsupply chain structure.

Fleischmann et al. (2001) analyzed a facility location modelwith product returns. They showed that product recovery couldbe efficiently integrated into existing logistics structures in manycases; however, there are instances, where a more comprehensiveapproach to redesigning a firm’s logistics network is needed.Jayaraman et al. (2003) discussed a reverse distribution probleminvolving issues of how many collection sites and refurbishingfacilities to open and how returned products be transported. Itaims to find an efficient strategy to return the defective productsfrom a set of origination sites to specific collection sites, which inturn will be shipped to refurbishing sites for remanufacturing/proper disposal. A math programming model was constructedand heuristic solution approaches were developed. Frota Netoet al. (2009) developed a method for visual representation of theefficient frontier for the multi-objective linear program with threeobjectives: minimizing costs, cumulative energy demand andwaste in a reverse logistics network.

3.5. Supply chain operations (manufacturing, inventory control,logistics and distribution)

We now review the literature on various supply chain opera-tions with sustainability considerations. One of the central issues

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in current sustainable supply chain operations is emissions andpollution reduction due to more stringent government regulationsand increasing awareness of environmental protection among con-sumers and society. Production operations and transportation arethe two major sources of emissions because of fuels and energiesconsumption. Thus, the following research questions arise natu-rally: How would various regulations, e.g., emissions tax, cap-and-trade, affect a firm’s operational strategies? How firms’ choiceof production technologies and/or transportation modes affecttheir extant operational policies and performance and how arethe tradeoffs managed? How will consumers surplus and socialwelfare be impacted by the companies’ compliance with the regu-lations, i.e., will the cost of compliance be passed along to consum-ers via price increases? The extant studies, many of which are stillon-going, have provided some answers to these questions and wesummarize them in this section.

Pollution control had been an active research area in 1970s ofOR/MS society and the reader is referred to Greenberg (1995) fora comprehensive review. For this stream of research, mathematicalprogramming models are often formulated with constraints thattake into account environmental impacts. Recently, Caldenteyand Mondschein (2003) studied pollution control investment andoperational decisions in the copper industry. A nonlinear integerprogramming model was developed to optimize smelter capacityand investments decisions in pollution control plants. And a net-work flow model was exploited to describe the economic behaviorof the sulfuric acid market. These two models interact through theinput that each receives from the other. Computational experi-ments showed that the expected profit of the copper industrycan increase significantly when the sulfuric acid market is incorpo-rated into the model.

To curb emissions, governments have proposed and imple-mented different types of emissions regulation schemes such ascarbon tax and emissions trading (or cap-and-trade).6 Theseschemes provide economic incentives for manufacturers to use cleanenergy and/or adopt green technologies in their production pro-cesses. To model the interactions of firms under emissions regula-tion, game theoretic models are often exploited. Subramanian andSubramanian (2009) developed a three-stage game model in a sym-metric oligopoly setting as follows. In the first stage firms decide onthe abatement level; in the second stage firms bid for emissionallowances; and in the third stage firms determine production quan-tities. How the number of available permits affects the abatementdecisions is examined. Carmona et al. (2010) developed an oligopolymodel in which each firm uses multiple technologies differing inemission intensity and cost to produce multiple types of goods tosatisfy inelastic demand over a finite horizon. Each firm holds anumber of emission allowances that can offset their emissions atcompliance time and avoid penalty. They characterized the equilib-rium prices of goods as well as the optimal production and tradingstrategies of the firms and show that the equilibrium allowance priceis unique. The results also confirm the presence of windfall profitsfor the firms and demonstrate the shortcomings of tax and subsidyalternatives in emissions regulation. Regarding initial allocation ofemissions allowances, the commonly used mechanisms include auc-tion, grandfathering (giving away fixed amounts), and allocatingbased on present or recent outputs, investment, or other attributesof companies. Zhao et al. (2010) studied how different initial emis-sion allowance allocation mechanisms can affect investment, opera-tions and product pricing in a market with multiple power plants.

6 A carbon tax is an environmental tax levied on the carbon content of fuels and isimplemented by a few countries, for example, India. Emission trading is more popularas it is a market-driven mechanism and has been implemented in Europe (EuropeanUnion Emission Trading Scheme (EU-ETS)), North America (the Sulfur Dioxide (SO2)emissions trading scheme) and several other regions.

They proposed a nonlinear complementarity model and showedthe existence of equilibrium under mild conditions. Solutions forsimple systems showed that allocating allowances to new capacitybased on fuel use or generator type can yield large distortions incapacity investment, invert the operating order of power plants,and inflate consumer costs. The distortions can be smaller for tighterCO2 restrictions and if allowances are allocated based on sales ratherthan plant capacity.

Production process generates most emissions in energy inten-sive industries, like power plants, cement, petro-chemical, metal,pulp and paper. For example, the cement industry contributes anapproximately 5% to total global carbon dioxide (CO2) emissions.Several papers have examined the impact of emissions regula-tions on production planning. Benjaafar et al. (2010) used a ser-ies of traditional lot sizing models to illustrate how carbonemission concerns could be integrated with procurement andproduction planning. They showed that operational adjustmentsalone can lead in some cases to significant emissions reductionswithout significant increases in costs. And the full impact of dif-ferent regulatory policies can only be assessed when accountingfor the operational adjustment firms could make in response tothe regulation. Gong and Zhou (2010) integrated emissions trad-ing into a multi-period production planning problem and formu-lated the problem as a Markov decision process. Facing withrandom demand and emissions allowance prices in each period,the firm needs to determine emissions trading, technologychoice, and production strategies to minimize its costs. Optimalpolicies were characterized and practical data were used in anumerical study to demonstrate the value of green technologyto the firm.

Transportation is another major source of greenhouse gas emis-sions that accounts for approximately one-third of US emissions(Environment Protection Agency, 2011). However, only a limitednumber of OR/MS models deal with emissions reduction in trans-portation. Winebrake et al. (2008) presented an energy and envi-ronmental network model to explore the tradeoffs among cost,energy and emissions for differential freight modes in freighttransport. Yoshida et al. (2009) proposed a system through whichsmall-lot emission credits can be purchased by consumers to offsettheir vehicle CO2 emissions during the purchase or renewal ofautomobile insurance. A consumer survey was conducted in Japanand showed that the average willingness to pay for emissions cred-its is about 2171 yen per ton-CO2. Yoshida and Matsuhashi (2009)proposed a method of input–output analysis for physical distribu-tion to evaluate potential CO2 emissions reduction. A case studyshowed the potential for CO2 reduction by considering a modalshift from truck transportation to rail and marine transportation.Hoen et al. (2010) considered two regulation alternatives: emissioncost and emission constraints, and evaluated their effect on thefirm’s transport mode selection strategies. They estimated carbonemissions of different modes of transport based on empirical dataand formulated a model to analyze the trade-off between inven-tory, transport, and emission costs. The main finding is that eventhough large emission reductions can be obtained by switchingto a different transportation mode, the actual decision dependson the regulation and other practical issues. Yan et al. (2010) devel-oped an interval-parameter inter-community traffic model for sup-porting vehicle emissions management under uncertainty. Electricvehicles (EVs) have been regarded as a solution to reduce transpor-tation emissions. However, due to current technology limitation ofbattery technologies, EVs can only travel for a limited number ofmiles on a single battery charge and so it is important to have awell-designed battery swapping and recharging stations network.Mak et al. (2011) developed various models that aid the planningprocess for deploying battery swapping infrastructure based on arobust optimization framework. They demonstrated the potential

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impact of battery standardization and various technology advance-ments on the optimal infrastructure deployment strategy.

3.6. Reverse supply chain operations

Because reverse supply chain management involves manyexternal entities, it is probably the most studied area in sustainableoperations. Reverse supply chain activities range from product col-lection and acquisition, remanufacturing, remarketing, to resellingof remanufactured product. Efficient management of these activi-ties helps companies generate largest benefit from their reversesupply chains. Due to product return flows, new features inmodeling and new techniques in solving the problems are often re-quired. Related research in this field abounds. Because the strategicaspects (mostly single-period models) have been discussed in Sec-tion 3.1 and because of space limitation, we shall focus more on therecent developments on dynamic models (mostly in a multi-periodsetting).

Remanufacturing is one of the central operations in reverse sup-ply chain operations, which differs from the traditional productionsystem due to the presence of uncertain quantity and quality ofreturned products. With the rising costs of raw materials and ener-gies, remanufacturing has been viewed by many companies as astrategic activity that can improve profitability by reducing pro-duction and inventory costs rather than a regulation complianceactivity. Most of the dynamic models focus on remanufacturing/manufacturing and inventory management. Van der Laan et al.(1999) analyzed and compared the push and pull inventory poli-cies of a continuous-review remanufacturing system. One findingis that efficient planning and control in these remanufacturing sys-tems tends to be more complex than in traditional systems with-out remanufacturing. Motivated by the procurement problem ofKodak’s single-use camera, Toktay et al. (2000) used a closedqueueing network model to investigate the inventory policies thatminimize the procurement, inventory holding and lost sales costsof a system with product returns. In addition to developing a heu-ristic to solve the problem, they investigated the effects of varioussystem characteristics such as informational structure, procure-ment delay, demand rate, and length of the product life cycle.Inderfurth (2004) studied a single-period model with both newand remanufactured products, where the excess demand of reman-ufactured product can be filled by the surplus of new products. Theoptimal policies when remanufacturing and manufacturing leadtimes are different are characterized. DeCroix (2006) and DeCroixand Zipkin (2005) examined the optimal inventory policies for aserial and an assembly remanufacturing inventory system, respec-tively. Gong and Chao (2011) characterized the optimal remanu-facturing/manufacturing policies when a firm only has finitecapacities in manufacturing, remanufacturing, or in total manufac-turing/remanufacturing operations. Using the concept L# convexityand the lattice analysis, they showed that the firm’s optimal poli-cies in each period are characterized by a modified remanufac-ture-down-to policy and a modified total-up-to policy.

The preceding works focus on single-type of product return. Thereturned products, however, are often in diversified conditions andso require different remanufacturing costs/efforts. Zhou et al.(2011) developed a remanufacturing system with multiple typesof returns and showed that optimal manufacturing–remanufactur-ing–disposal policies are determined by two series of state-inde-pendent thresholds. Based on the optimal policies for systemswith identical manufacturing and remanufacturing lead times,they also developed a heuristic for managing systems with differ-ent manufacturing and remanufacturing lead times. Tao et al.(2010) extended the model further by considering random reman-ufacturing yields that are often observed in remanufacturingpractice. They derived properties of the optimal policies, provided

non-intuitive observations, and developed several simple heuris-tics that perform very well numerically.

Besides inventory and remanufacturing control, there are dy-namic models that deal with product pricing and returned productacquisition. Nagurney and Toyasaki (2005) proposed a multi-tierede-cycling network model and analyzed the equilibrium materialflows and prices associated with the different tiers of the deci-sion-makers. Geyer et al. (2007) investigated the cost savings ofremanufacturing under basic supply loop constraints such asaccessibility of end-of-use products, technical feasibility of reman-ufacturing, and market demand for remanufactured products. Theydemonstrated the need to coordinate collection rate, product lifecycle, and component durability to maximize cost savings. Zhouand Yu (2011) incorporated product acquisition effort and sellingprices into a dynamic remanufacturing system by modeling ran-dom but price-dependent demand and acquisition-effort-depen-dent random product returns. They showed that when the priceis exogenous, the optimal manufacturing–remanufacturing–dis-posal policy can be determined by three constant parameters whilethe acquisition effort depends on the aggregate serviceable and re-turned product inventory; when the price is endogenous, the opti-mal policies are complex and state-dependent.

4. Research gaps and concluding remarks

We have presented an ecosystem to capture the interactions offlows (or activities) that affect the triple bottom line performancemeasures. By doing so, it has enabled us to classify the existingOR/MS literature that deal with some of these three performancemeasures by improving the flows in this ecosystem. Given thecomplexity and practical relevance, environmentally and sociallysustainable operations will continue to be an important and richresearch stream. Through this review, we find that extensive re-search has been done in closed-loop supply chain while other areasneed more investigation. Specifically, we propose four researchdirections that deserve further investigation.

First, the studies on emissions and pollution reductions focusmostly on the impacts of government regulations, whereas largelyignoring the market forces. The regulations like carbon tax, cap-and-trade, are certainly one major propellant for companies tocurb emissions. Nevertheless, consumers’ response and prefer-ences towards greener products as well as the resulting marketcompetition also put pressure on firms to make their businessesgreener. To understand and analyze these market drivers, it re-quires careful modeling of consumers purchasing behavior whenthey choose among products with different prices and green attri-butes. A few recent papers have modeled the consumer responsesas well as competitor’s behavior when firms offer products withvarious attributes (e.g., Frischknecht et al., 2010; Morrow andSkerlos, 2012). With consumers becoming more environmentallyconscious, they will play a more important role in shaping firms’investment and management in sustainability. This will alsostimulate more market-driven OR/MS research on sustainableoperations.

Second, there are very few (almost none) quantitative procure-ment/sourcing models that deal with environmental/social respon-sibility issues. In practice, however, many companies haveimplemented procurement policies to ensure the suppliers meetcertain environmental and social standards. For example, Star-bucks established the Coffee and Farmer Equity (CAFE) Practicesas guidelines for sourcing coffee beans. These guidelines ensureits coffee suppliers pay the farmers fairly according to the ‘‘fairtrade’’ criteria, that the suppliers provide safe and humane condi-tions for their workers, and that the suppliers have establishedprocess to manage waste, reduce consumption of water and

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energy. So, to fill the gap between the practice and theoretical re-search, we need more studies that integrate sustainable issueswith traditional supplier selection criteria, e.g., costs, responsive-ness (lead time), quality, which would further provide more toolsand insights for procurement managers.

Third, the extant quantitative research in OR/MS is still mainlyfocused on the planet measure (emissions, remanufacturing, wastereduction, etc.), while models that examine the people measure arelacking. One challenge could lie in how to measure and model theimpacts on people/society. Sodhi and Tang (2011c) presented styl-ized models to analyze how companies can profit in emerging mar-kets by engaging micro-entrepreneurs. Specifically, they consideredbusiness models that involve the poor through different operationalmechanisms that use aggregation, dis-intermediation, info-mediationor efficient distribution (e.g., using micro-entrepreneurs in first milepickup or last mile delivery, postponement). Their work has the po-tential to open up new avenues for future research that include:exploring other operational mechanisms that use any of the fourcategories of value creation (i.e., aggregation, dis-intermediation,info-mediation, and efficient distribution); developing a mecha-nism to divide the created value between a large company and indi-vidual micro-entrepreneurs; and applying some of the operationalmechanisms to developed countries that face social problems.

Fourth, an individual firm’s sustainable operational strategieswould generate largest benefit only when these strategies arealigned with those of their upstream suppliers and downstreamcustomers. Lee (2010) showed how Esquel uses a holistic solutionand works closely with its supply chain partners to manage thetrade-offs among environmental sustainability, social responsibil-ity, and business performance. Nevertheless, the extant researchmostly focuses on single-location models, which are often lack ofinteractions, both vertical and horizontal, between different com-panies in supply chains. By considering multi-location systems,we will be able to study issues like how environmental regulationsaffect the operations and performance of the whole supply chain?How coordination of sustainable activities can be achieved be-tween different operations within a firm or between supply chainpartners? And how horizontal competitions between firms affecttheir sustainable operations? Hence, there is a need to developand analyze end-to-end supply chain models that incorporate theissue of sustainable operations.

Overall, the OR/MS research community has just started to de-velop models to deal with the ‘‘people’’ performance measure. Thiscreates an excellent research opportunity for the OR/MS to makeimportant contributions in the near future by analyzing ways tohelp corporations to achieve the triple bottom line objectives.

Acknowledgments

We thank two anonymous referees for their helpful commentsand suggestions. The second author is partly supported by HongKong GRF Grants CUHK-419010 and CUHK-419411.

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