Production, Manufacturing and Logistics Supply chain efficiency and security: Coordination for collaborative investment in technology Jongkuk Lee a,⇑ , Udatta S. Palekar b,1 , William Qualls b,2 a Ewha School of Business, Ewha Womans University, 11-1 Daehyun-Dong, Suhdaemoon-Ku, Seoul, Republic of Korea b College of Business, University of Illinois at Urbana-Champaign, 350 Wohlers Hall, 1206 S. Sixth Street, Champaign, IL 61820, USA article info Article history: Received 12 June 2009 Accepted 12 October 2010 Available online 20 October 2010 Keywords: Supply chain management Collaborative investment in technology Supply chain efficiency Supply chain security abstract Despite the potential value of information technologies for supply chain management, they are not always adopted as expected. We examine coordination problems and corresponding incentive mecha- nisms between a manufacturer and a retailer for jointly investing in a new technology that has the poten- tial to improve the efficiency and security of the supply chain. We show that depending on the relative strength of the efficiency and security concerns, supply chain stakeholders in a decentralized supply chain face two different coordination problems in investing in the new technology: (1) when security concerns are not strong enough to dominate efficiency concerns, stakeholders may not have a sufficient incentive to invest; therefore, at least one stakeholder under invests. Our analysis shows that internal incentive mechanisms, such as investment cost sharing between stakeholders, are not likely to resolve this underinvestment; instead, external financial incentive mechanisms, such as tax incentives, need to be considered. (2) When security concerns are strong enough to dominate efficiency concerns, stakehold- ers may not invest at all because of the uncertainty of other stakeholders’ behavior, rather than the lack of an incentive to invest in the technology. Our analysis shows that external interventions, such as imposing a penalty for a breach of security, can be used as a way of reducing such behavioral uncertainty. Ó 2010 Elsevier B.V. All rights reserved. 1. Introduction The collaborative investment in information technologies among supply chain stakeholders has become a strategic thrust to achieve more transparent and efficient supply chains (Corsten and Kumar, 2005; Zhou, 2009). Such information technologies include electronic data interchange, the Internet, and, more recently, radio-frequency identification (RFID). Retailers improve the efficiency of their out-of- stock restocking and replenishment tasks by replacing or complementing a labor-intensive bar-code system with an automated scanning and data entry process based on RFID (Pisello, 2006; Srivastava, 2004). At the same time, recent events, such as the mad cow disease outbreaks in January 2004 (Weintraub, 2004), the contamination of pet food in February 2007 (Carey, 2007), the lead contamination of toys in August 2007 (Sun, 2007), the outbreak of salmonellosis in tomatoes in April 2008 (Weise, 2008), and the continuing risks of counterfeit products (Silcox and Colburn, 2005), have shown that supply chain security is an equally important reason for using such ad- vanced technologies. As a consequence, there is a growing interest in adopting new technologies, such as RFID, to improve the ability to track and trace the source of contamination, and ultimately to improve consumer confidence in product security (Lee, 2004; Unnevehr, 2000). However, the investment required among supply chain stakeholders to adopt new information technologies often does not occur as desired, even though such collaborative efforts can create unique value that a single firm cannot attain independently (Dutta et al., 2007; Zajac and Olsen, 1993). For instance, in the pharmaceutical industry, even though RFID tagging was expected to significantly reduce the expenses resulting from counterfeiting and increase the supply chain visibility (Swedberg, 2004), pharmaceutical firms and their dis- tributors have been slow to invest in RFID compared with earlier expectations by the US Food and Drug Administration (Bacheldor, 2006). Therefore, it is critical to explore why technology investments that may remedy some of these problems have not been as widespread as was anticipated. 0377-2217/$ - see front matter Ó 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.ejor.2010.10.015 ⇑ Corresponding author. Tel.: +82 2 3277 6713; fax: +82 2 3277 2776. E-mail addresses: jongkuk@ewha.ac.kr (J. Lee), palekar@illinois.edu (U.S. Palekar), wqualls@illinois.edu (W. Qualls). 1 Tel.: +1 217 333 1665. 2 Tel.: +1 217 265 0794. European Journal of Operational Research 210 (2011) 568–578 Contents lists available at ScienceDirect European Journal of Operational Research journal homepage: www.elsevier.com/locate/ejor