Supply chain coordination under manufacturer´s supporting innovation activities

The problem of coordination of a supply chain in the situation that the manufacturer supports its supplier´s innovation that can eventually lead to supply cost reduction is studied. In order to sustain a long-term relationship between a manufacturing firm and its supplier, the manufacturer´s supporting innovation activities should achieve a win-win solution. When the market demand is constant, it is proved that the trade-off between the manufacturer and the supplier is a zero-sum game, and hence a win-win outcome is never obtained through the manufacturer´s coordination schemes. When the demand is affected by the product price, it is shown that the manufacturer prefers a higher price than the system´s optimal one under no coordination, resulting in the double marginalization. However, a coordination scheme exists and thereby it improves the performance of the supply chain.