Innovation Much Harder to Measure than Cost and Quality

Research from a couple of supply chain academics finds that while nearly all procurement organizations see a lot of value in innovation by suppliers, not many of them have really put processes and structure in place to drive that innovation on a consistent basis.

Supply Chain Digest Says... Having innovative suppliers is of no value if the organization can't identify or assimilate their innovations. What do you say? Click here to send us your comments Click here to see reader feedback

Recently, CAPS Research, a program jointly sponsored by Arizona State University and Institute for Supply Management (ISM), funded research to understand how buying organizations could better assess and manage supplier innovation. That research was led by Dr. Tingting Yan, associate professor of supply chain management at Wayne State University in Detroit, and Dr. Kevin Dooley, professor of supply chain management at Arizona State University

Of course, the very subject begs the question of what supplier innovation really is. Yan and Dooley, writing in a recent issue of ISM's Inside Supply Management magazine, offer the following definition: "Supplier innovation is a process where drivers (supplier pushes and buyer pulls) lead to outcomes. In the case of supplier push, a supplier innovates and attempts to sell that innovation to a buyer. In the case of buyer pull, a buyer requests a supplier to solve a problem, and the solution requires an innovation."

We'll note that the innovation could be to the physical product itself, or a process innovation, such as a buyer requesting a supplier find some way to reduce its cycle times.

The research was small scale - a survey completed by 21 companies, and more in-depth interviews with 11 of those firms. Still a full% of the respondents felt that it is important to assess supplier innovation for potential new suppliers, and 90% felt it important to do so for current suppliers. On a seven-point scale ranging from "not at all important" (1) to "extremely important" (7), the average score was 5.5 for current suppliers and 5.8 for new suppliers.

No surprise there of course - today, what companies are not interested in supplier innovation, especially as the old vertically integrated company structure has almost completely disappeared, and firms continue to outsource a growing number of processes, from manufacturing to logistics?

What may be surprising is that companies are not backing up that interest with processes to make supplier innovation work.

Yan and Dooley found only 25% of procurement executives agreed that their organization had a system that actively evaluates supplier innovation performance, and only 33% of them indicated that their organization had a system that actively puts innovative ideas from suppliers into practice.

That survey data was supported in the in-depth interviews. Only four of the 11 organizations Yan and Dooley spoke with had formal supplier evaluation systems, and in two of those cases, supplier innovation was included as a criterion, and in two cases it was not.

(See More Below)

In the former two cases, superior suppliers were recognized in a formal award program, and in one case, the organization had an annual supplier innovation award.

In total, "The data indicates that many organizations do not have formal systems and processes in place to find, assimilate and use innovation from a supplier," Yan and Dooley note.

The reality is that unlike common metrics around cost and quality, innovation is more difficult to quantify and measure. In the interviews, one purchasing executive described innovation as a "moving target" that calls for "free thinking," illustrating the size of the challenge.

Yan and Dooley also note that the assessment of innovations can easily be influenced by subjective opinions or personal preferences, and that there were substantial differences across the procurement executives they interviewed in terms of how supplier innovation was defined.

They also note that buying organizations rarely have full visibility into what suppliers are doing internally in terms of innovation.

The article closes with two interesting observations: (1) a supplier's historical innovation performance does not necessarily predict its future innovation potential; and (2) having innovative suppliers is of no value if the organization can't identify or assimilate their innovations.

In the end, Yan and Dooley recommend doing assessments of current and potential suppliers' history of innovation as well as views on their future innovation potential. Those two efforts should be combined with an honest assessment of a procurement organization's own ability to identify and capture value from your supplier innovations.

"By understanding the current state and future of supplier innovation assessment and management, supply management executives should play critical roles to prepare their organizations for the ever-changing future in assessing and managing supplier innovations," Yan and Dooley conclude.

Are you surprised by this data on supplier innovation? What are the keys to driving supplier innovation? Let us know your thoughts at the Feedback section below.

Your Comments/Feedback