Environment, Development and Sustainability

[Link]

A holistic optimization framework for production, pricing,

and preservation of deteriorating products under carbon
emission policies

Prerna Gautam1 · K. M. Kamna2 · Chandra K. Jaggi2

Received: 12 February 2024 / Accepted: 18 November 2024

© The Author(s), under exclusive licence to Springer Nature B.V. 2024

Abstract
In dynamic markets driven by technological advancements and intense competition, align-
ing production rates with fluctuating demand is essential for minimizing operational costs.
This study develops an optimization framework for managing deteriorating products,
where production rates are adjusted in response to changes in demand to reduce losses and
ensure efficiency. Recognizing the natural deterioration of products, investing in preserva-
tion technology is explored as a viable solution to mitigate spoilage and extend product
shelf life, balancing preservation costs against potential losses from decay. Additionally,
with increasingly stringent government regulations on carbon emissions, manufacturers
face the dual challenge of optimizing production schedules while minimizing environ-
mental impact. To address this, the study incorporates emissions costs and examines the
implications of carbon policies. Marketing activities also influence product demand, which
varies significantly across product categories. To capture this effect, two demand functions
are analyzed: one that depends solely on price and another influenced by price and adver-
tising. By integrating these factors, the study aims to maximize total earnings through opti-
mal adjustments in selling price, preservation investment, and production rate. A numerical
example illustrates the model’s practicality, and sensitivity analysis provides insights into
how changes in core parameters affect the optimal solution.

Keywords Production · Volume agility · Deterioration · Preservation technology · Carbon-

emissions, Cap-and-trade policy

* Chandra K. Jaggi
ckjaggi@[Link]
Prerna Gautam
prerna3080@[Link]
K. M. Kamna
[Link]@[Link]
1
Department of Management Sciences, Indian Institute of Technology Kanpur, Kanpur, UP 208016,
India
2
Department of Operational Research, Faculty of Mathematical Sciences, University of Delhi,
Delhi 110007, India

Vol.:(0123456789)
 P. Gautam et al.

1 Introduction

In manufacturing inventory studies, the prevailing assumption has often been a constant
production rate, which functions well only under conditions of perfectly predictable
demand. However, in today’s dynamic and unpredictable markets, product demand fluc-
tuates, making a flexible production rate essential to adapt to changing needs and mini-
mize unnecessary costs. When production remains constant, a decline in demand results
in higher holding costs, while an increase in demand leads to stock shortages and poten-
tial loss of sales. Volume agility has emerged as a valuable solution to address these chal-
lenges, allowing production systems to adjust rates in response to demand fluctuations.
Additionally, production cost per item is influenced by the production rate. Sethi and Sethi
(1990) initially introduced the concept of agility in manufacturing.
A substantial body of research has focused on the influence of flexible production rates
across various production models. Khouja and Mehrez (1994), Khouja (1997), and Sana
et al. (2004) explored foundational models in this area, with Sana et al. (2007) later exam-
ining a production model incorporating defective items and volume agility. Singh et al.
(2013) studied an ordering model that integrates volume agility with elastic demand under
inflationary conditions. Dem et al. (2014) formulated a model with a flexible production
rate, followed by Dem and Singh (2015), who analyzed an ordering system with multiple
items and a greening approach under this assumption. Gautam et al. (2020) then developed
an inventory model featuring variable production rates, carbon emissions, and investments
in preservation technology. More recently, Alkhtani et al. (2021) created a COVID-19
supply chain model emphasizing variable production. Moon et al. (2022) investigated the
effects of variable setup costs, reliability, and production costs in a controlled carbon-emis-
sion system. Bachar et al. (2023) introduced a sustainable, adaptable manufacturing system
model that includes reworking, green investment, and an emphasis on product outsourcing
policies.
Products prone to deterioration require careful management to minimize potential
losses. Ignoring the effects of deterioration in an inventory system can lead to increased
total costs and decreased profitability. Recognizing the importance of this issue, Research
on decaying inventory has been significant over recent decades, with foundational insights
provided by Ghare and Schrader (1963). Later, Dave and Patel (1981), Chakrabarti and
Chaudhari (1997), and Goyal and Giri (2001) analyzed the topic in detail. Some models
with constant and Weibull deterioration rates were also developed by Singh et al. (2013),
and Mishra (2015). Recently, Khanna et al. (2016), Dye and Yang (2016), Khanna et al.
(2017), Giri et al. (2017) and Jaggi et al. (2019) explored the field of deterioration under
various realistic scenarios.
Many companies have sought to identify the underlying causes of product deteriora-
tion to enhance profitability and have developed preservation technologies to mitigate
these issues. Different industries require customized preservation techniques to minimize
spoilage. For instance, perishable items such as fruits necessitate mechanical refrigeration,
while dairy products like milk need cooling tanks. Certain products must be stored in air-
tight containers to prevent corrosion, and preservatives are often added to sauces and pick-
les to extend their shelf life. Additionally, fermentation is used for items like wine, yogurt,
and pickled vegetables to delay spoilage. This study focuses on fruits, vegetables, and dairy
products, which have specific shelf lives, highlighting the need for investment in preserva-
tion methods to enhance longevity and reduce losses. Advanced cold storage solutions are
typically employed for these products. Several researchers have noted the advantages of
A holistic optimization framework for production, pricing,…

investing in preservation technology for managing deteriorating items, including Hsu et al.
(2010), Dye and Hsieh (2012), Dye (2013), Singh Sharma (2013), Zhang et al. (2015), and
Xu et al. (2016). However, it remains evident from these studies that the combined impact
of preservation technology and volume agility on optimal policies has yet to be explored.
In today’s competitive market, price strongly influences demand, making it essential
for companies to treat selling price as a critical decision factor. Setting an optimal price
is crucial for manufacturers striving to maximize their profits. This has inspired many
researchers to explore pricing and inventory strategies across various scenarios, as dem-
onstrated by studies such as Abad et al. (2003), You and Chen (2007), Dye et al. (2007),
Chang et al. (2006), Sinha and Sarmah (2010), Chen et al. (2010), Shi et al. (2012), Samadi
et al. (2013), and Chao et al. (2016). In addition to pricing, advertising is a powerful tool
to engage customers. Products are frequently promoted through popular media like film,
radio, newspapers, magazines, and television to increase demand. Consequently, product
demand depends not only on price but also on the extent of advertising efforts. Several
studies have examined this dual influence, including those by Bhunia and Shaikh (2011),
Panda et al. (2017), Chanda and Kumar (2017), Mishra (2018), and Rada et al. (2018). Kar
et al. (2023) recently introduced an advertising strategy within a flexible production system
designed to lower harmful carbon emissions.
Environmental sustainability has received more attention in the last few decades. Rapid
industrialization is the main cause of global warming, which produces significant carbon
emissions. Reducing the carbon footprint of manufacturing facilities has drastically risen
on the priority list as environmental awareness increases. The cap-and-trade plan is the
most significant policy to reduce emissions out of all those available. Under the cap-and-
trade system, the government first provides the corporation with free emission credits.
Then, they might think about buying or selling anything on the carbon trading market.
Several scholars have studied environmental considerations in the supply chain literature.
Wang et al. (2019) looked into pricing and inventory decisions made under various green
growth processes. Mishra et al. (2020) conducted study on reducing waste and carbon
emissions for sustainable closed-loop supply chain management. Zhao et al. (2021) investi-
gated the best production methods for remanufacturing outdated products in light of quality
uncertainty and a carbon cap-and-trade policy. Alkahtani et al. (2021) explored the vari-
able production rate as a remedy for manufacturers dealing with disrupted demand during
the COVID-19 pandemic. Astanti et al. (2022) investigated low-carbon supply chain mod-
els under vendor-managed inventory partnerships and carbon cap-and-trade regulations.
Zhang et al. (2022) investigated consignment inventory management for perishable items
in a closed-loop supply chain under a carbon cap-and-trade policy. In recent Research, Dar-
yanto (2023) examined the optimal approaches to maximize production inventories in the
context of a cap-and-trade system, considering both direct and indirect carbon emissions.
Recently, the effect of carbon cap-and-trade regulations on the low-carbon supply chain’s
equilibrium pricing mechanism was investigated in a study by Zou et al. (2023). Research
conducted by San-José et al. (2024) developed an important inventory model for perishable
goods under the conditions of a carbon tax. This model encompasses power consumption,
complete backlog management, ad sustainability. Furthermore, under varying emissions
regulations, Sebatjane, M. (2024) investigated a three-tiered circular economic production-
inventory model for low-quality items prone to deterioration over time while factoring in
carbon emissions.
Despite the growing focus on sustainable production and adopting environmentally
conscious practices, there is a significant research gap in the intersection of the flexible
output, price-sensitive demand, advertising, preservation investment, and carbon cap and
 P. Gautam et al.

trade regulations. While previous Research has explored different aspects of these vari-
ables separately, there is a dearth of comprehensive studies that integrate these dimensions
to provide a holistic comprehension of how investment decisions in preservation can be
optimized in the context of carbon cap and trade policies. This study additionally considers
the preferences of price-sensitive consumers for environmentally friendly products within
a production structure that allows for flexibility. A scarcity of study has been undertaken
to examine the intricate relationship between production flexibility and the correspond-
ing pricing strategies implemented to accommodate price-sensitive consumers. Moreover,
there is a scarcity of scholarly investigations that have examined the importance of preser-
vation investment. This term pertains to investments made in technologies and practices
to enhance resource efficiency and reduce emissions. These investments are made within
the context of flexible production systems operating in an environment that imposes limi-
tations on carbon emissions. One area of Research that requires attention is the lack of a
comprehensive analytical framework that considers the collective impacts of production
flexibility, price-responsive demand, preservation investment, and carbon cap and trade
policies. Gaining a comprehensive understanding of these factors’ interplay and mutual
impact is crucial for firms to make educated decisions regarding their sustainability strat-
egies and investment choices. The primary aim of this research article is to bridge the
current knowledge gap by examining the intricate interplay between flexible production,
consumer preferences shaped by price and advertisement sensitivity, investment choices
pertaining to preservation, and the ramifications of carbon cap and trade legislation. The
main aim of this Research is to provide significant insights into the enhancement of pro-
duction processes, pricing strategies, and resource allocation for companies functioning
within a market that is limited by carbon constraints. The achievement of this objective
will be facilitated through the development of a comprehensive model that successfully
integrates several aspects, allowing firms to simultaneously pursue environmental objec-
tives while ensuring economic viability. By acknowledging and investigating this area of
Research that has not been adequately explored, there is an opportunity to make substantial
additions to the current body of knowledge on sustainable production management.

2 Notations and assumptions

2.1 Notations

The suggested model is developed using the notations shown below:

Level of inventory at the time t during the time interval 0, t1

[ ]
I1 (t)

Level of inventory at the time t during the time interval t1 , T

[ ]
I2 (t)
t1 The time where the production stops (weeks)
T The time where the inventory cycle end (weeks)
h1 Storage cost of the item ($/unit/unit time)
Cd Deterioration cost of the item ($/unit/unit time)
K Setup cost per order
𝜓 Material cost per unit
𝛾 Labour and energy cost
𝜔 Tool/ die cost
A holistic optimization framework for production, pricing,…

Level of inventory at the time t during the time interval 0, t1

[ ]
I1 (t)

Rate of deterioration with preservation technology (units/ unit time), 𝜒(𝜐) = y0 e−u𝜐
( )
𝜒(𝜐)
u The critical factor of investment in preservation technology relative to the rate of deterioration
y0 Deterioration rate when there is zero investment in preservation technology(units/ unit time)
𝜆(S) The demand rate as a function of the selling price (units/ unit time)
𝛼 Demand scale
𝛽 Price sensitive parameter
Cp Quota price of carbon ($/unit(kg))
Z Emission quota of carbon per unit time (kg)
𝛿p Carbon emission rate per produced unit, a random variable with known p.d.f
j(𝛿 p )
h
Carbon emission rate per holding unit, a random variable with known p.d.f j 𝛿 h
( )
𝛿
Ac Advertisement cost per unit item
𝜁 Shape parameter
Decision Variable
𝜐 Cost of preservation technology investment ($/unit/unit time)
P Production rate
S Selling price ($/unit)

2.2 Assumptions

1. The model considers only a single item.

2. The lead time is negligible, and no shortages are permitted.
3. The demand rate 𝜆(S) depends on selling price S and is given as: 𝜆(S) = 𝛼 − 𝛽S where
𝛼 is the
( demand scale and 𝛽 is price sensitive parameter (for case 1). The demand
rate 𝜆 Ac , S is a function of advertisement Ac and price S dependent and is given as
)

𝜆 Ac , S = Ac 𝜁 (𝛼 − 𝛽S) where, 𝜁 (0 ≤ 𝜁 ≪ 1) is the shape parameter, 𝛼 is the demand

( )

scale, and 𝛽 is price sensitive parameter (for case 2), see Gautam et al. (2022).
4. The production rate per unit time( P is variable,)which is more than the demand rate.
5. The unit production cost 𝜂(P) = 𝜓 + 𝛾
P
+ 𝜔P where 𝜓, 𝛾, 𝜔 are all positive constants.

The material cost 𝜓 for every item is fixed. Some costs like labor costs are equally distrib-
uted over a large
( ) number of units when the production rate increases. Hence the production
cost per unit P𝛾 decreases as the production rate (P) increases. The third item (𝜔P) associated
with tool/die costs is proportional to the production rate. Bachar et al. (2023)

6. The proportion of reduces deterioration rate after using preservation tech-

nology investment is 𝜒(𝜐) where this function satisfies the conditions
𝜒 � (𝜐) > 0, 𝜒 �� (𝜐) < 0 and 𝜒(0) = y0 and 𝜒(𝜐) = y0 e−𝛿𝜐 . Priyamvada et al. (2021)
7. Carbon emissions are due to production and holding. Carbon emission rate during pro-
duction and holding is a random variable with a known probability density function.
 P. Gautam et al.

3 Mathematical model

As shown in Fig. 1, the inventory cycle begins at t = 0 with no stock, then rises due to pro-
duction until t1, while simultaneously decreasing due to the combined effects of demand
and deterioration. In the interval t1 , T , the inventory declines further, impacted only by
( )

demand and deterioration. The inventory reaches zero at time T .

According to the abovementioned representation, the differential equation expressing
inventory status during the time period 0, t1 is given by.
( )

Case 1: When demand is price dependent 𝜆(S) = (𝛼 − 𝛽S)

+ 𝜒(𝜐)I1 (t) = P − 𝜆(S), 0 ≤ t ≤ T1

dI1 (t)
(1)
dt
With the condition I1 (0) = 0, the solution of Eq. (1) is
(P − 𝜆(S)) (
1 − e−𝜒(𝜐)t
)
I1 (t) = (2)
𝜒(𝜐)

In the second interval t1 , T , the differential equation below represents the inventory
( )

status:

+ 𝜒(𝜐)I2 (t) = −𝜆(S), t1 ≤ t ≤ T

dI2 (t)
(3)
dt
With the condition I2 (T) = 0, the solution of Eq. (3)
𝜆(S) ( 𝜒(𝜐)(T−t1 ) )
I2 (t) = e −1 (4)
𝜒(𝜐)

Now put t = t1 in Eq. (2) and (4), we find the value of t1 as

[ ]
1 𝜆(S) ( 𝜒(𝜐)T
(5)
)
t1 = ln 1 + e −1
𝜒(𝜐) P

Now calculate the different inventory costs as:

Setup cost
SC = K (6)
The holding cost is given by (HC)

Fig. 1  Inventory scenario

A holistic optimization framework for production, pricing,…

t T
⎡ 1
⎢∫ ∫
⎤
HC = h1 ⎢ I1 (t)dt + I2 (t)dt⎥
⎥
⎣0 t1 ⎦

h1 {[ )] [ ( )]}
(P − 𝜆(S)) t1 𝜒(𝜐) + e−𝜒(𝜐)t1 − 1 + 𝜆(S) e𝜒(𝜐)(T−t1 ) − 1 − T − t1 𝜒(𝜐)
( ( )
=
𝜒(𝜐)2
(7)
Deterioration cost (DC)
tT
⎡ 1
⎢∫ ∫
⎤
DC = Cd 𝜒(𝜐)⎢ I1 (t)dt + I2 (t)dt⎥
⎥
⎣0 t1 ⎦

Cd {[ )] [ ( )]}
(P − 𝜆(S)) t1 𝜒(𝜐) + e−𝜒(𝜐)t1 − 1 + 𝜆(S) e𝜒(𝜐)(T−t1 ) − 1 − T − t1 𝜒(𝜐)
( ( )
=
𝜒(𝜐)
(8)
Preservation cost
PC = 𝜐.T (9)
Production cost (PC)
t
) 1
∫
( 𝛾 ( 𝛾 )
PC = 𝜓 + + 𝜔P Pdt = Pt1 𝜓 + + 𝜔P (10)
P P
0

The total amount of carbon emission during the production and holding = 𝛿 P .P.t1 + 𝛿 h .(HC)

{
𝛿h
The total carbon emission (EC) = 𝛿 P .P.t1 +
𝜒(𝜐)2
{[ ( )] [ ( ( ) )]}}
(P − 𝜆(S)) t1 𝜒(𝜐) + e−𝜒(𝜐)t1 − 1 + 𝜆(S) e𝜒(𝜐)(T−t1 ) − 1 − T − t1 𝜒(𝜐)
(11)
( )
With carbon cap − and − trade policy Capc
{( {[ )]}) }
𝛿h ( )] [ ( ( )
= Cp 𝛿 P .P.t1 + (P − 𝜆(S)) t 1 𝜒(𝜐) + e −𝜒(𝜐)t1
− 1 + 𝜆(S) e𝜒(𝜐)(T−t1 )
− 1 − T − t 1 𝜒(𝜐) − Z
𝜒(𝜐)2
(12)
Total Revenue (TR) = 𝜆(S) ⋅ T ⋅ S (13)

Total profit (TP) = TR − SC + HC + DC + PC + PC + Capc

[ ( )]
 P. Gautam et al.

( ){ ( )}
⎛K h + Cp 𝛿 h [ ( )] 𝜒(𝜐)(T−t1 ) ( ) ⎞
+ (P − 𝜆(S)) t1 𝜒(𝜐) + e−𝜒(𝜐)t1 − 1 + 𝜆(S) e − 1 − T − t1 𝜒(𝜐) +⎟
⎜ T
T𝜒(𝜐) 2
⎜ ⎟
𝜆(S)TS ⎜ C {[ ( )] (
𝜒(𝜐)(T−t1 ) ( )
)} ⎟
TP =
T
−⎜ d
⎜ T𝜒(𝜐)
(P − 𝜆(S)) t1 𝜒(𝜐) + e−𝜒(𝜐)t1 − 1 + 𝜆(S) e − 1 − T − t1 𝜒(𝜐) + ⎟
⎟
(14)
⎜ [( ) ] ⎟
⎜ Pt 1 𝛾 P − (C Z) ⎟
⎝ 𝜐 + 𝜓 + + 𝜔P + C p 𝛿 p ⎠
T P

Expected total profit with Carbon Cap-and-Trade Policy

( [ ] ){ ( )}
⎛K h + Cp E 𝛿 h + Cd 𝜒(𝜐) [ ( )] 𝜒(𝜐)(T−t1 ) ( ) ⎞
⎜ + (P − 𝜆(S)) t1 𝜒(𝜐) + e−𝜒(𝜐)t1 − 1 + 𝜆(S) e − 1 − T − t1 𝜒(𝜐) ⎟
D(S)TS ⎜ T T𝜒(𝜐)2
E[TP] = − ⎟
T ⎜ [( ) [ ]] ⎟
⎜ +𝜐 + Pt1 𝜓 + 𝛾 + 𝜔P + C E 𝛿 P − (C Z) ⎟
⎝ p p ⎠
T P
(15)
Case 2: When demand is advertisement and price dependent 𝜆 Ac , S = A𝜁c (𝛼 − 𝛽S)
( )

+ 𝜒(𝜐)I1 (t) = P − 𝜆 Ac , S , 0 ≤ t ≤ T1
dI1 (t)
(16)
( )
dt
With the condition I1 (0) = 0 , the solution of Eq. (16) is
( ( ))
P − 𝜆 Ac , S (
1 − e−𝜒(𝜐)t (17)
)
I1 (t) =
𝜒(𝜐)

In the second interval t1 , T , the following differential equation describes the inven-
( )

tory status:

+ 𝜒(𝜐)I2 (t) = −𝜆 Ac , S , t1 ≤ t ≤ T
dI2 (t)
(18)
( )
dt
With the condition I2 (T) = 0 , the solution of Eq. (18)
( )
𝜆 Ac , S ( 𝜒(𝜐) T−t )
I2 (t) = e ( 1) − 1 (19)
𝜒(𝜐)

Now put t = t1 in Eq. (17) and (19), we find the value of t1 as

[ ( ) ]
1 𝜆 Ac , S ( 𝜒(𝜐)T
(20)
)
t1 = ln 1 + e −1
𝜒(𝜐) P

Now calculate the different inventory costs as:

Setup cost
SC = K (21)
The holding cost is given by (HC)
t T
⎡ 1 ⎤
⎢∫ ∫ 2
HC = h1 ⎢ I1 (t)dt + I (t)dt⎥
⎥
⎣0 t1 ⎦
h1 {[( ( ))( )] [ ( )( ( ) )]}
= P − 𝜆 Ac , S t1 𝜒(𝜐) + e−𝜒(𝜐)t1 − 1 + 𝜆 Ac , S e𝜒(𝜐)(T−t1 ) − 1 − T − t1 𝜒(𝜐)
𝜒(𝜐)2
(22)
Deterioration cost (DC)
A holistic optimization framework for production, pricing,…

t T
⎡ 1
⎢∫ ∫
⎤
DC = Cd 𝜒(𝜐)⎢ I1 (t)dt + I2 (t)dt⎥
⎥
⎣0 t1 ⎦
Cd ��� �� � � �� ���
P − 𝜆 Ac , S t1 𝜒(𝜐) + e−𝜒(𝜐)t1 − 1 + 𝜆 Ac , S e𝜒(𝜐)(T−t1 ) − 1 − T − t1 𝜒(𝜐)
� ��� � �
=
𝜒(𝜐)
(23)
Preservation cost
PC = 𝜐.T (24)
Production cost (PC)
t1

∫
𝛾( )
PC = 𝜓 + + 𝜔P Pdt
P
0 (25)
( 𝛾 )
= Pt1 𝜓 + + 𝜔P
P
Total carbon emission (EC)
{ {[( )]}}
𝛿h ( ))( )] [ ( )( 𝜒(𝜐)(T−t ) ( )
= 𝛿 P .P.t1 + P − 𝜆 A , S t 1 𝜒(𝜐) + e −𝜒(𝜐)t1
− 1 + 𝜆 A , S e 1 − 1 − T − t 𝜒(𝜐)
1
𝜒(𝜐)2
c c

(26)
Total carbon emission with cap − and − trade policy(Cap ) c

{( {[( )]}) }
𝛿h ( ))( )] [ ( )( ( )
= Cp 𝛿 P .P.t1 + 2
P − 𝜆 Ac , S t1 𝜒(𝜐) + e−𝜒(𝜐)t1 − 1 + 𝜆 Ac , S e𝜒(𝜐)(T−t1 ) − 1 − T − t1 𝜒(𝜐) −Z
𝜒(𝜐)
(27)
Total Revenue (TR) = 𝜆(S) ⋅ T ⋅ S (28)
[ ( )]
Total profit (TP) = TR − SC + HC + DC + PC + PC + EC

⎛ ( h
)⎧ ⎛ 𝜒(𝜐)(T−t1 ) − 1−⎞⎫ ⎞
⎜ K + h + Cp 𝛿 ⎪[(P − 𝜆(A , S))(t 𝜒(𝜐) + e−𝜒(𝜐)t1 − 1)] + 𝜆(A , S)⎜ e ⎟⎪+⎟
⎨ 1
⎜T T𝜒(𝜐)2 ⎪
c c
⎜ (T − t )𝜒(𝜐) ⎟⎬ ⎟
⎜ ⎩ ⎝ 1 ⎠⎪
⎭ ⎟⎟
( ) ⎜
𝜆 Ac , S TS ⎜ ⎧ ⎫ ⎟
TP = −⎜ − 1−⎞⎪
𝜒(𝜐)(T−t1 )
T Cd ⎪[( ( ))( )] ( )⎛ e ⎟
⎨ P − 𝜆 Ac , S t1 𝜒(𝜐) + e − 1 + 𝜆 Ac , S (
⎜ ⎟
⎜ −𝜒(𝜐)t ⎟
1 +
⎜ T𝜒(𝜐) ⎪ ⎜ T − t )𝜒(𝜐) ⎟⎬ ⎪ ⎟
⎝ 1 ⎠⎭
⎜ ⎩ ⎟
⎜ ⎟
⎜ Pt1 [( 𝛾 ) ]
⎟
⎝𝜐 + 𝜓 + + 𝜔P + Cp 𝛿 P − (Cp Z) ⎠
T P
(29)

Expected total profit with carbon cap-and-trade Policy

⎛ ( [ ] )⎧ ⎫⎞
− 1−⎞⎪⎟
𝜒(𝜐)(T−t1 )
⎜K h + Cp E 𝛿 h + Cd 𝜒(𝜐) ⎪[( ( ))( )] ( )⎛ e
( ) + P − A , S t + e −𝜒(𝜐)t1
− 1 + A , S ⎜ ⎟
𝜆 Ac , S TS ⎜ T
𝜆 1 𝜒(𝜐) 𝜆
T𝜒(𝜐)2
⎨ c c
⎜( ) ⎟⎬⎟⎟
E[TP] = −⎜ ⎪
⎩ ⎝ T − t1 𝜒(𝜐) ⎠⎪ ⎭⎟
T ⎜
⎜ Pt1 [( 𝛾 ) [ P ]] ⎟
⎜ +𝜐 + 𝜓 + + 𝜔P + Cp E 𝛿 − (Cp Z) ⎟
⎝ T P ⎠
(30)
 P. Gautam et al.

4 Solution procedure

To establish the optimality of Eq. (30), we first identify the necessary conditions that the
system of equations must satisfy, given as:
𝜕TP(S, 𝜐, P)
=0 (31)
𝜕S

𝜕TP(S, 𝜐, P)
=0 (32)
𝜕P

𝜕TP(S, 𝜐, P)
=0 (33)
𝜕𝜐
The sufficient condition to maximize the total profit are H1 < 0, H2 > 0, H3 < 0, the
hessian matrix H is estimated as:
𝜕 2 TP 𝜕 2 TP 𝜕 2 TP
𝜕 2 TP 𝜕 2 TP
⎡ ⎤
𝜕𝜐2 𝜕𝜐𝜕S 𝜕𝜐𝜕P � �
⎢ 𝜕 2 TP 𝜕 2 TP 𝜕 2 TP ⎥ 𝜕 2 TP �
𝜕𝜐2 𝜕𝜐𝜕S
�
H=⎢ and H1 = , H 2 = �
𝜕 2 TP 𝜕 2 TP
�
𝜕S𝜕𝜐 𝜕S2 𝜕S𝜕P 𝜕𝜐2
⎥ � �
⎢ 𝜕 2 TP 𝜕 2 TP 𝜕 2 TP ⎥ �
� 𝜕S𝜕𝜐 𝜕S2
�
�
⎣ 𝜕P𝜕𝜐 𝜕P𝜕S 𝜕P2 ⎦

| 𝜕 2 TP 𝜕 2 TP 𝜕 2 TP |
| 𝜕𝜐2 𝜕𝜐𝜕S 𝜕𝜐𝜕P |
| |
| |
| |
H3 = det H = || 𝜕 2 TP 𝜕 2 TP 𝜕 2 TP |
|
| 𝜕S𝜕𝜐 𝜕S2 𝜕S𝜕P |
| |
| 𝜕 2 TP 𝜕 2 TP 𝜕 2 TP
|
| |
| 𝜕P𝜕𝜐 𝜕P𝜕S 𝜕P2 |

where, H1 , H2 , and H3 are the minors of the Hessian matrix H .

Due to the highly non-linear nature of the profit function, the sufficient condition can-
not be proven mathematically. Therefore, a graphical method is employed to establish the

Fig. 2  Concavity graph with

respect to P and u
A holistic optimization framework for production, pricing,…

Fig. 3  Concavity graph with

respect to s and P

Fig. 4  Concavity graph with

respect to 𝜐 and s

Fig. 5  Concavity graph with

respect to 𝜐 and P
 P. Gautam et al.

Fig. 6  Concavity graph with

respect to s and P

Fig. 7  Concavity graph with

respect to 𝜐 and s

concavity of the profit function, and the same is presented in Figs. 2, 3, 4, 5, 6, 7. The con-
cavity graphs are plotted with the help of the software Mathematica 11.
( = )(𝛼 − 𝛽S).
Concavity graph for Case 1: 𝜆(S)
Concavity graph for Case 2: 𝜆 Ac , S = A𝜁c (𝛼 − 𝛽S).

5 Numerical example

Case 1: When demand is price dependent.

The developed model is illustrated through a numerical example. The parameter values
listed below should be used in appropriate units for the numerical demonstration:
u = 0.05, y0 = 0.1, h = 1.5, Ψ = 200, 𝛾 = 1500, 𝜔 = 0.01, K = 600, 𝛼 = 200, 𝛽 = 0.2,

Cd = 250, T = 11, Cp = 1, m = 0.18, n = 0.37, Z = 60

A holistic optimization framework for production, pricing,…

Table 1  Results for case 1

Optimal value of With emission Without emission With cap-and-
trade Policy

Production Rate ( P) 302.01 327.95 317.76

Selling Price (S) 458.54 456.99 457.63
Amount of preservation technol- 124.99 125.32 125.2
ogy investment (𝜐)
Production Time (t1) 1.7605 1.6315 1.6795
Demand 𝜆(S) 48.29 48.60 48.48
Profit ( E[TP]) 11,386.97 11,567.15 11,500.16

Table 2  Results for case 2

Optimal value of With emission Without emission With cap-and-
trade Policy

Production Rate ( P) 298.19 325.43 314.79

Selling Price (S) 458.44 456.94 457.55
Amount of preservation technol- 125.59 125.93 125.80
ogy investment (𝜐)
Production Time (t1) 1.8545 1.7102 1.7635
Demand 𝜆(Ac , S) 50.24 50.55 50.42
Profit ( E[TP]) 11,852.36 12,038.43 12,023.59

The rates of carbon emission 𝛿 p and 𝛿 h follows a Beta distribution j(𝛿) with parameters
m, n. Thus, the p.d.f. of 𝛿 is given as

,0 ≤ 𝛿 ≤ 1
⎧ 𝛿 m−1 (1 − 𝛿)n−1
⎪
j(𝛿) = ⎨ 𝜎(m, n)
⎪ 0 ,otherwise
⎩

where 𝜎(m, n) = Γ(m)Γ(n)

Γ(m+n)
.
For p = 1 and h = 2 we get.
m
E[𝛿 p ] = m+n m(m+1)
, E[𝛿 h ] = (m+n)(m+n+1) . Table 1 below shows the optimal results.
Case 2: When demand is advertisement and price dependent.
The developed model is illustrated through a numerical example. The parameter val-
ues listed below should be used in appropriate units for the numerical demonstration:
u = 0.05, y0 = 0.1, h = 1.5, Ψ = 200, 𝛾 = 1500, 𝜔 = 0.01, K = 600, 𝛼 = 140, 𝛽 = 0.2,
Cd = 250, T = 11, Cp = 1, m = 0.18, n = 0.37, Ac = 50, 𝜁 = 0.01, Z = 60 . See Table 2 for
resuts.
Tables 1 and 2 support incorporating advertising into the model, as demonstrated
in scenario 2, as it will lead to increased demand and, subsequently, higher profits.
This finding underscores the importance of considering advertising strategies within
 P. Gautam et al.

the industry. Moreover, comparing outcomes between different scenarios, such as in

the cap-and-trade scenario, highlights the significance of comprehending and adapting
to changing market dynamics for more favorable results.

6 Sensitivity analysis

This section conducts a sensitivity analysis on several parameters. a, b, y0 , h, u, 𝜇, g, 𝛿

( )

by varying each individually by − 40%, − 20%, + 20%, and + 40%, while leaving the
other parameters unchanged. Based on the numerical example provided, the findings
from this analysis are detailed in Tables 3 and 4.

7 Observations and managerial inferences

• As the demand parameter ( 𝛼 ) increases, there is a decrease in the production rate

while the investment in preservation technology, production time, and total profit
all rise. An increase in demand leads to greater output, consequently extending the
production time and resulting in a notable profit increase. A longer production run,
despite the declining production rate, helps lower the overall production costs due to
the flexibility of the production process. However, more investment in preservation
methods is necessary with extended production time.
• Conversely, when the demand parameter ( 𝛽 ) increases, the production rate, preserva-
tion technology investment, production time, and total profit decrease significantly.
In this scenario, heightened demand can adversely impact profitability, potentially
reducing selling prices to stimulate demand.
• When the investment sensitivity parameter (u ) increases, and the production rate
rises. In contrast, the investment in preservation technology decreases, leaving pro-
duction time and selling price unchanged, contributing to an increase in total profit.
Enhanced investment effectiveness improves the preservation process, resulting in
greater efficiency and reduced preservation costs. To capitalize on this opportunity,
increasing the production rate can further improve overall profits.
• As carbon emission costs rise, the production rate and total profit decline, while
the investment in preservation technology and production time remain unaffected.
Although increasing carbon emissions rates ( 𝛿 p and 𝛿 h ) do not significantly affect
production rates or selling prices, they do lead to a slight drop in profit. This high-
lights the need for greener and cleaner production options to mitigate the environ-
mental impacts of production and storage.
• Rising costs for material ( 𝜓 ), labor ( 𝛾 ), and tool/die ( 𝜔 ) negatively impact total
profit. Shortening production time may be advisable in response to rising material
and labor costs. However, with rising tool and die costs, extending production time
can prove beneficial.
• For case 2, the demand rate is expressed as:𝜆 Ac , S = Ac 𝜁 (𝛼 − 𝛽S) where, 𝜁
( )

(0 ≤ 𝜁 ≪ 1) is the shape parameter. The sensitivity analysis reveals that as the

shape parameter (𝜁 ), increases, the production rate, preservation technology invest-
ment, and selling price exhibit minimal sensitivity, yet profit significantly increases.
A holistic optimization framework for production, pricing,…

Table 3  Sensitivity analysis for Value 𝜐 P S t1 𝜆(S) E[TP]

case 1
𝛼 100 116.11 347.24 358.41 0.8985 28.32 3820.53
120 121.42 332.84 408.01 1.2705 38.39 7156.46
140 125.2 317.78 457.62 1.6795 48.48 11,500.16
160 127.95 301.95 507.23 2.1347 58.55 16,857.59
180 129.9 285.13 556.81 2.6496 68.64 23,211.11
𝛽 0.16 126.49 311.09 544.96 1.8687 52.81 17,162.56
0.18 125.86 314.48 496.43 1.7729 50.64 13,990.91
0.20 125.20 317.78 457.62 1.6795 48.48 11,500.16
0.22 124.49 321.09 425.88 1.5878 46.30 9504.72
0.24 123.72 324.37 399.46 1.498 44.13 7880.85
u 0.03 191.60 315.32 457.73 1.6928 48.45 11,420.40
0.04 150.91 316.86 457.66 1.6845 48.47 11,469.44
0.05 125.20 317.78 457.62 1.6795 48.48 11,500.16
0.06 107.38 318.43 457.59 1.676 48.48 11,521.32
0.07 94.24 318.82 457.57 1.6739 48.48 11,536.84
𝜓 160 124.59 311.56 437.48 1.8555 52.51 13,521.60
180 124.94 314.76 447.55 1.7661 50.49 12,490.71
200 125.20 317.78 457.62 1.6795 48.48 11,500.16
220 125.38 320.86 467.7 1.5942 46.46 10,549.96
240 125.49 323.91 477.78 1.5107 44.44 9640.11
𝛾 1100 124.12 246.32 456.69 2.1750 48.66 11,569.09
1300 124.77 284.38 457.20 1.8800 48.56 11,532.42
1500 125.20 317.78 457.62 1.6795 48.48 11,500.16
1700 125.51 347.99 457.99 1.5314 48.40 11,471.03
1900 125.76 375.78 458.32 1.4162 48.34 11,444.28
𝜔 0.006 125.98 410.12 457.07 1.3043 48.59 11,569.75
0.008 125.57 355.31 457.36 1.5037 48.53 11,532.73
0.01 125.20 317.78 457.62 1.6795 48.48 11,500.16
0.012 124.86 290.12 457.86 1.8378 48.43 11,470.74
0.014 124.55 268.59 458.07 1.9833 48.38 11,443.71
0.5 125.61 357.15 455.72 1.5061 48.86 11,729.33
1.0 125.42 337.96 456.69 1.5853 48.66 11,613.99
h 1.5 125.2 317.78 457.62 1.6795 48.48 11,500.16
2.0 124.92 296.36 458.51 1.7942 48.29 11,388.01
2.5 124.61 273.47 459.33 1.9378 48.13 11,277.81
Emission parameters Cp , 𝛿 h , 𝛿 p for Case 1:
( )

Cp 0.5 125.25 322.91 457.31 1.6549 48.54 11,533.59

0.75 125.23 320.34 457.47 1.6671 48.51 11,516.86
1 125.20 317.78 457.62 1.6795 48.48 11,500.16
1.25 125.17 315.24 457.78 1.6919 48.44 11,483.49
1.5 125.14 312.65 457.93 1.7049 48.41 11,466.85
 P. Gautam et al.

Table 3  (continued) Value 𝜐 P S t1 𝜆(S) E[TP]

𝛿h 0.149 125.19 317.79 457.56 1.6794 48.48 11,522.8

0.199 125.22 319.86 457.53 1.6692 48.49 11,511.51
0.249 125.20 317.78 457.62 1.6795 48.48 11,500.16
0.298 125.18 315.73 457.71 1.6897 48.46 11,489.13
0.348 125.15 313.64 457.8 1.7004 48.44 11,477.85
𝛿p 0.16036 125.19 317.81 457.54 1.6799 48.49 11,508
0.22909 125.19 317.81 457.57 1.6797 48.49 11,504.93
0.327273 125.20 317.82 457.62 1.6792 48.48 11,500.16
0.42545 125.21 317.81 457.67 1.679 48.47 11,495.4
0.55309 125.22 317.82 457.74 1.6785 48.45 11,489.21

Higher advertising costs can lead to more significant sales and, subsequently, higher
profits.
• With increased holding costs (h), the production rate and investment in preservation
technology decrease while production time and selling price ( S ) increase, ultimately
reducing total profit. Thus, lowering the production rate is essential to maintain a
minimum stock level, which can help manage high holding costs more effectively.
• The numerical results in Tables 1 and 2 show that the model with price and adver-
tisement-dependent demand yields better profits for the production firm. Further-
more, comparing carbon emission costs to cap-and-trade policies yields more favora-
ble results in both scenarios. As shown in Tables 3 and 4, reductions in the quota
price of carbon, the carbon emission rate per unit of inventory held, and the carbon
emission rate per unit produced lead to increased total profit for the manufacturer.
This highlights the importance for stakeholders to advocate for and implement strin-
gent carbon reduction strategies to achieve net-zero emissions and enhance profit-
ability through lower emission costs. By investing in efficient production processes
and sustainable practices, stakeholders can drive environmental responsibility and
economic resilience, positioning the organization competitively in today’s climate-
conscious landscape.

8 Conclusion and future recommendations

With the growing complexity of production systems, minimizing the difference in demand
and supply and remaining environmentally balanced is of utmost significance. The devel-
oped study provides optimal inventory strategies for deteriorating items considering vol-
ume agility. An investment in the preservation process is considered to deal with deteriora-
tion competently. Moreover, with growing awareness about environmental impact, the cost
incurrence in carbon emissions is considered. Further, the model considers two cases to
depict the fundamental nature of demand. In the first case, the demand for the product is
considered price-dependent. In the second case, it is considered price plus advertisement
A holistic optimization framework for production, pricing,…

Table 4  Sensitivity analysis of key parameters for case 2

Value 𝜐 P S t1 𝜆(Ac , S) E[TP]

𝛼 100 116.82 345.65 358.36 0.9389 29.46 4035.11

120 122.08 330.57 407.95 1.3305 39.94 7505.22
140 125.80 314.79 457.55 1.7635 50.42 12,023.59
160 128.48 298.12 507.14 2.2491 60.91 17,590.28
180 130.33 280.38 556.69 2.8029 71.40 24,205.74
𝛽 0.16 127.06 307.75 544.87 1.9648 54.93 17,912.61
0.18 126.45 311.29 496.35 1.8630 52.68 14,614.05
0.2 125.80 314.79 457.55 1.7635 50.42 12,023.59
0.22 125.09 318.33 425.82 1.6659 48.17 9948.22
0.24 124.35 321.69 399.38 1.5713 45.91 8259.26
u 0.03 192.60 312.27 457.65 1.7781 50.4 11,943.43
0.04 151.66 313.86 457.59 1.7689 50.42 11,992.72
0.05 125.80 314.79 457.55 1.7635 50.42 12,023.59
0.06 107.88 315.41 457.52 1.7600 50.43 12,044.86
0.07 94.67 315.87 457.51 1.7574 50.43 12,060.45
𝜓 160 125.17 308.25 437.39 1.9508 54.62 14,126.26
180 125.53 311.52 447.47 1.8562 52.52 13,053.94
200 125.8 314.79 457.55 1.7635 50.42 12,023.59
220 125.98 317.94 467.63 1.6735 48.33 11,035.22
240 126.12 321.22 477.71 1.5845 46.23 10,088.8
𝛾 1100 124.62 242.39 456.59 2.2993 50.62 12,096.19
1300 125.33 280.94 457.12 1.9796 50.51 12,057.51
1500 125.8 314.79 457.55 1.7635 50.42 12,023.59
1700 126.13 345.17 457.92 1.6058 50.35 11,993.03
1900 126.39 373.24 458.26 1.483 50.28 11,965
𝜔 0.006 126.62 406.38 457.01 1.3691 50.54 12,095.29
0.008 126.19 351.95 457.29 1.5789 50.48 12,057.16
0.01 125.8 314.79 457.55 1.7635 50.42 12,023.59
0.012 125.44 287.37 457.78 1.93 50.38 11,993.28
0.014 125.11 266.05 457.99 2.0828 50.33 11,965.43
𝜁 0.006 125.56 316.02 457.58 1.7292 49.64 11,833.8
0.008 125.68 315.39 457.56 1.7464 50.03 11,928.32
0.010 125.8 314.79 457.55 1.7635 50.42 12,023.59
0.012 125.92 314.16 457.53 1.7811 50.82 12,119.63
0.014 126.04 313.54 457.52 1.7987 51.23 12,216.43
h 0.5 126.26 355.99 455.69 1.5714 50.81 12,260.08
1.0 126.05 335.95 456.64 1.6587 50.61 12,141.01
1.5 125.8 314.79 457.55 1.7635 50.42 12,023.59
2.0 125.49 292.22 458.41 1.893 50.25 11,908.08
2.5 125.12 267.94 459.19 2.0579 50.08 11,794.78

dependent. The study aims to maximize the total profits by jointly optimizing the sell-
ing price, investment in preservation technology, and production rate. Numerical
 P. Gautam et al.

Table 4  (continued)
Value 𝜐 P S t1 𝜆(Ac , S) E[TP]

Emission parameters Cp , 𝛿 h , 𝛿 p for Case 2:

( )

Cp 0.5 125.86 320.16 457.24 1.7362 50.49 12,030.95

0.75 125.85 317.47 457.39 1.7498 50.46 12,027.25
1 125.80 314.79 457.55 1.7635 50.42 12,023.59
1.25 125.76 312.05 457.7 1.7779 50.39 12,019.97
1.5 125.74 309.36 457.85 1.7923 50.36 12,016.38
𝛿h 0.149 125.85 319.16 457.37 1.7407 50.46 12,046.97
0.199 125.83 316.99 457.46 1.7519 50.44 12,035.29
0.249 125.80 314.79 457.55 1.7635 50.42 12,023.59
0.298 125.78 312.61 457.63 1.7752 50.41 12,012.22
0.348 125.73 310.45 457.72 1.7869 50.39 12,000.6
𝛿p 0.16036 125.79 314.74 457.46 1.7644 50.44 12,032.02
0.22909 125.79 314.75 457.49 1.7641 50.44 12,028.55
0.327273 125.80 314.79 457.55 1.7635 50.42 12,023.59
0.42545 125.81 314.75 457.59 1.7634 50.41 12,018.64
0.55309 125.82 314.79 457.66 1.7627 50.4 12,012.20

demonstration and sensitivity analysis are carried out to impart the developed model’s
validity and strength.
The model addresses the issue of carbon emissions and studies the impact of carbon
caps and trade and emission policies in the proposed framework. Carbon policies, like
cap-and-trade systems, are vital because they encourage innovation and the reduction
of carbon footprints by businesses through a market-based mechanism for decreasing
emissions of greenhouse gases. These regulations provide a financial incentive to reduce
emissions by limiting overall emissions and enabling the purchase and sale of emis-
sion permits. Emissions reductions can be made more cost-effective overall if compa-
nies with lower-cost reduction options sell their excess permits to those with higher-cost
options. To accomplish environmental goals more effectively than conventional regula-
tory approaches, this system encourages the creation of greener technology and prac-
tices. The government can reinvest the money it earns from the sale of licenses under
cap-and-trade, which has a multiplicative effect on sustainability efforts and renewable
energy projects. The developed framework is decisive and assists the management board
in analyzing the impact of volume agility, carbon emissions, and preservation technol-
ogy in a manufacturing setting. Notably, Tesla is known for its innovative approach in
the automotive industry, which is characterized by flexible production, dynamic adver-
tising, price-dependent strategies, and participation in carbon credit trading. Tesla’s
flexible production procedures optimize output and resource use by quickly adapt-
ing to demand and technological advances. Their adaptive advertising strategy targets
demographics and responds to real-time market trends using data analytics and social
media. Tesla’s pricing varies based on production cost, market demand, and competitive
positioning.
Moreover, Tesla reduces emissions and trades carbon credits to offset its carbon foot-
print, complying with environmental requirements and supporting sustainability. This
multifaceted strategy showcases Tesla’s innovation and responsiveness in the automotive
A holistic optimization framework for production, pricing,…

industry. By examining such practices, this study equips decision-makers with actionable
strategies to optimize production processes and invest in preservation technologies, thereby
reducing carbon emissions and resource waste. This alignment of operational practices
with sustainability goals enhances environmental stewardship and yields economic ben-
efits, ultimately fostering a competitive edge in a climate-conscious marketplace.
The current Research offers substantial opportunities for future Research. A promis-
ing direction involves developing a closed-loop and integrated framework with various
stakeholders to enhance collaboration and sustainability. Additionally, the model can be
expanded to include factors such as imperfect production systems, production disruptions,
and maintenance actions, providing a more comprehensive understanding of the challenges
and solutions in manufacturing contexts. These avenues will deepen insights and contrib-
ute to the existing body of knowledge.
Acknowledgements The authors sincerely appreciate the editors and anonymous reviewers for their
thoughtful and constructive comments, which have significantly improved the manuscript.

Data availability statement The data supporting this study’s findings are available within the manuscript.
For any additional information, please feel free to contact the authors.

Declarations
Conflict of interest There are no competing interests, whether financial or non-financial, to disclose.

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