Theory and Methodology Coordinating an innovation in supply chain management Bowon Kim * Graduate School of Management, Korea Advanced Institute of Science and Technology (KAIST), 207-43 Cheongryangri Dongdaemoon, Seoul 130-012, South Korea Received 1 July 1998; accepted 1 January 1999 Abstract The importance of a long-term relationship between a manufacturing ®rm and its supplier(s) has been emphasized in the literature on supply chain management. Essential to such a relationship is the coordination among participants in a supply chain. In order to sustain the relationship, the coordination should enhance the pro®tability of not only the manufacturer, but also the supplier(s). In this paper, we consider a particular supply chain situation in which the manufacturer coordinates, e.g., supports, its supplier's innovation that can eventually lead to supply cost reduction. Developing a mathematical model, we show that although the coordination could improve the manufacturing ®rm's own pro®tability, it might not be attractive to the supplier unless the supply cost reduction should ultimately increase the market demand to a certain extent. Under particular circumstances, if the market demand stays constant, the manufacturer's pro®t increase due to the coordination equals the amount of pro®t loss to the supplier. The analysis presents exact mathematical criteria to determine whether the coordination strategy can be agreeable to both the manufacturer and the supplier. Numerical examples are employed to show the applicability of the criteria. Ó 2000 Elsevier Science B.V. All rights reserved. Keywords: Purchasing; Supply chain management; Optimal control theory; Supplier innovation 1. Introduction Studies on supply chain management have emphasized the importance of a long-term strate- gic relationship between a manufacturing ®rm and its suppliers (Spekman, 1988; Doyle, 1989; Choi and Hartley, 1996). The fundamental assumption underlying this emphasis is that the long-term re- lationship makes both the manufacturer and the suppliers better o than when there is no such re- lationship (Asanuma, 1989; Cusumano and Ta- keishi, 1991; Parlar and Weng, 1997). Therefore, we can infer that in order to be sustainable, the supplier±manufacturer relationship must result in enhancing the pro®tability of the suppliers as well as the manufacturer itself (Iyer and Bergen, 1997). The essence of this relationship is concerned with coordination between the two participants (Reyniers, 1992; Whang, 1995; Sox et al., 1997). Much work has been carried out for research on European Journal of Operational Research 123 (2000) 568±584 www.elsevier.com/locate/dsw * Tel.: +82 2 958 3610; fax: +82 2 958 3604. E-mail address: bwkim@cais.kaist.ac.kr (B. Kim). 0377-2217/00/$ - see front matter Ó 2000 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 7 - 2 2 1 7 ( 9 9 ) 0 0 1 1 3 - 7