How To Measure Supplier Innovation With KPIs

A procurement world reader asked us: How can you measure supplier innovation with KPIs?

The Holy Grail of supplier development is supplier innovation. The Hackett CPO Agenda identifies it as a critical development area in procurement. And out of all the critical development areas – it’s the most difficult one to achieve. “One of the main hurdles,” says Hackett, “is a lack of innovation-specific KPIs and processes designed to support the generation of creative, game-changing ideas”.

The Tricky Problem of Measuring Supplier Innovation

If you’re not Google or Tesla, this is an intimidating goal. Measuring supplier innovation using a KPI seems difficult.

Supplier innovation is a soft metric so it can be really subjective. Your colleague might think that a supplier brings innovation, and you might think something completely different.

But supplier innovation helps your supply chain get a competitive advantage over the market. It’s also one of the ways to turn procurement into a function that brings value.

So how do you tackle this? There is no silver bullet because every procurement organization, business and market is different. But here is a two-step path to start thinking about this differently and help set up your KPIs to measure supplier innovation.

Step 1: Set the Right KPI

Here’s an example. During the British occupation of India, the government wanted to reduce the number of snakes swarming the streets of Delhi.

They decided to do this by encouraging local people to kill the snakes. So they gave a bounty for every dead snake brought in. This went wrong very quickly.

Soon, people were breeding snakes to kill and then hand in to earn more money. All the government was doing was encouraging the breeding of snakes. Obviously, not the right KPI.

Setting the right KPI is everything, but this requires a mindset shift.

Do you really want to measure and incentivize all supplier innovation? Not all innovation has value. Instead, do you want to measure and incentivize the positive effects of supplier innovation?

Figuring out what results you want supplier innovation to bring is the best way to put a KPI against a soft metric. This also brings a focus on the strategic benefits and not the tactics themselves.

How a supplier innovates isn’t the goal (and isn’t really trackable), but what comes out of this innovation should be.

Step 2: Break It Down

Supplier innovation and new ideas are good – if they have a business impact.

The best approach to supplier KPIs is to link them to what the innovation brings. A few examples are:

• Savings – is this innovation making your supply chain cheaper? Does it make your production process more efficient? Maybe the innovation is in fewer costs in shipping and logistics?
• New market shares – this is a more transformative change. Is the innovation making a change to your product or service that means you actually heading into new markets?
• Risk reduction – is the supplier reducing the risk they pass on to you? Or maybe the innovation is improving their agility to react to your needs?
• Better usability of the product – is this bringing value to the consumer?

If you don’t have the resources to track these things, you could try a simple approach. For example, you can measure the number of ideas from the supplier retained in the design of your product or service.

However, for deeper insights and better relationship management, a Supplier Management solution will give you an intuitive platform to manage all of your suppliers and report on KPIs.

For more insight to get more value from your suppliers, check out this free report from The Hackett Group, How to Navigate Persistent Digital Supply Chain Issues to Drive Strategic Value.

Learn more here