How to leverage the innovation capabilities in your supply chain through organizational climate

From the November 2025 edition of Supply Chain Management Review.

November 2025

The November 2025 issue of Supply Chain Management Review explores the topics of global supply chain resilience, innovation leadership, and data-driven transformation. Highlights include strategies for building…

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In light of accelerating digital disruption and rising geopolitical tensions, innovation remains a key success strategy among global multinational firms. As few firms are able to continuously turn internal ideas into new offerings, an increasing number are turning to their supply networks as a vital source of external knowledge and innovation outcomes. In contrast to investing in internal research and development (R&D) capabilities, today’s competitive edge often comes from learning within firms and from suppliers. Firms with a broad and diverse supply base benefit from better access to information and knowledge which can accelerate the development of product and service innovations. But even firms with similar supply network structures achieve dramatically different innovation outcomes. What sets the high-innovation performers apart remains a key question among CEOs and thought leaders. Recent research suggests a critical but underappreciated internal factor: the “organizational climate” of buying firms.

Our study, first published in the Journal of Supply Chain Management and summarized here, finds that the firms with wider collaborating supplier bases (measured by in-degree centrality; that is the number of suppliers a firm is directly connected to) succeed in leveraging supplier-led innovation only when their organizational climate encourages learning and sharing behaviors. Specifically, an organizational climate characterized by strong social support, fair rewards, and well-managed work pressure enables employees to build intra- and interorganizational relationships, capture valuable ideas beyond firm boundaries, and disseminate them internally to translate into innovative outcomes. This practitioner piece presents key insights from the above study and outlines actionable steps for supply chain leaders aiming to drive innovation through organizational climate.

The innovation imperative in supply chains

Innovation is no longer confined to isolated R&D labs of your own. As global supply networks become more complex and knowledge-intensive, suppliers’ contributions play a vital role in developing next-generation products and services. For instance, leading firms in industries such as consumer goods, pharmaceuticals, and electronics are increasingly turning to suppliers not just for materials or components, but also to leverage their technical expertise, process know-hows, and even breakthrough ideas. One such successful initiative is P&G’s ‘Connect + Develop,’ which encourages firms to systematically collaborate with external partners. The initiative sources ideas, technologies, and solutions from outside the company, including suppliers, rather than relying solely on internal R&D within the firm. Subsequently, P&G evaluates and integrates these external inputs into its product development pipeline. Through this model, P&G successfully integrated upstream innovations such as new packaging materials and formulation of technologies into painted products like Tide Pods, which became blockbuster successes in their markets.

But how exactly does supplier-led innovation happen in practice? It often begins with informal idea exchange through meetings, plant visits, technical workshops, or joint development sessions. Suppliers may suggest new materials, components, or processes based on their expertise. These ideas, once introduced, are rarely implemented directly. Instead, they go through a series of internal evaluations, adaptation, and refinement, with procurement, R&D, and product management teams playing key roles in the process. However, these supplier-led ideas only turn into actual innovations when the firm’s internal climate supports risk-taking, collaboration, and informal learning.

Hence, being exposed to suppliers’ information and knowledge does not automatically translate into innovation output. For example, consider pharmaceutical companies from our study sample, many of which occupy similar positions in their respective supply networks. Each firm is directly connected to a wide range of innovative, capable suppliers giving them equal opportunity to engage with external ideas, technologies, and expertise. However, the respective firms’ knowledge outcomes diverge sharply. Some firms consistently translate supplier knowledge into patents, new products, and competitive advantages. Others, despite having access to similar external opportunities, fail to capitalize. Meaning, innovation projects stall, supplier ideas go unnoticed, and the company struggles to convert potential into tangible results.

What accounts for this gap? The answer lies not only in collaboration with the external network but also in the status of the internal organizational climate, specifically in how the organization enables or hinders employees from engaging, learning, and acting on supplier inputs for innovation, as well as interacting internally with their colleagues to share their learnings. The traditional supply chain metric, supply network breadth and collaboration, only tells part of the story. What matters just as much, if not more, is how a firm manages its internal organizational climate as a catalyst to effectively leverage the benefits of its external partnerships. This is where organizational climate becomes critical.

The critical role of organizational climate

Organizational climate refers to employees’ shared perceptions of day-to-day life in the firm, including the policies and practices in place. It is well known that organizational culture can influence employee behavior. Unlike organizational culture, which is deep-rooted and slow to change, organizational climate is more flexible due to its temporal nature and can be actively shaped through managerial actions with ease, making it a powerful lever for shaping employees’ behaviors. This is particularly relevant when considering the importance of specific behaviors, such as learning and sharing, which help leverage input from suppliers into actual innovation outcomes.

This means that a similar degree of supply network breadth and collaboration, which indicates the amount and quality of external input for innovation, can produce very different innovation outcomes depending on the organizational climate for innovation-related behaviors. Microsoft, for instance, undertook a clear shift under Satya Nadella’s leadership to foster a climate that encouraged openness, learning, and collaboration. Employees were empowered to explore new ideas, including those coming from external partners. This shift in daily practices and managerial tone enabled the company to better leverage external input for innovation, despite operating within the same overarching corporate culture.

Our study examined more than 300 large U.S. firms across multiple industries and found that while supply network breadth and collaboration supports innovation, it alone is not sufficient to fully leverage external inputs. Instead, companies with learning and sharing supportive organizational climates were more effective at converting inputs from relationships with wider suppliers into innovation. By analyzing over 130,000 employee reviews, the study assessed how different organizational climates affect a firm’s ability to turn information and knowledge obtained through broader supplier collaboration into innovation performance measured by the number of patents.

Our findings show that employees are more likely to act on supplier ideas when they feel encouraged to go beyond their defined roles. This includes learning from external partners, sharing knowledge internally, and exploring new approaches. In such climates, employees are not only more open to informal conversations with suppliers but also more proactive in recognizing and communicating those insights across departments within the company. As a result, the information and knowledge gained from suppliers is more easily absorbed into the firm’s operations, refined through internal collaboration, and eventually developed into patentable innovations and new product concepts.

The three facets of organizational climate that matter

Building on current research, our study identifies three specific facets of organizational climate (see Table 1). This includes “social support,” “rewards & career progress,” and “work pressure management,” each found to facilitate supplier-led innovation. Figure 1 illustrates this relationship, which we describe in more detail below.

 

Social support

In practice, social support creates interpersonal trust and openness among employees and line managers, making them feel safe to act on external insights. Social support is thought to facilitate supplier-led innovation by enabling employees to share external input, advocate for new approaches, and engage in informal collaboration. For instance, at IDEO, psychological safety is a cornerstone of team dynamics. Employees are encouraged to build on others’ ideas and share rough concepts early. Even junior staff are empowered to bring forward suggestions from external sources, including clients and vendors. In such a climate, ideas from suppliers are more likely to be surfaced, refined collaboratively, and tested without fear. In this way, social support serves as a catalyst unlocking supplier-driven innovation. Interestingly, in our study, we did not find a statistically significant effect of social support on supplier-led innovation. However, this does not mean it lacks theoretical or practical relevance. Rather, its effects may be more subtle or contingent, emerging more clearly when paired with strong incentives or sufficient time to explore.

Rewards & career progress

Rewards and career progress refer to whether employees believe their innovation-related efforts, especially those involving external collaboration, are recognized, valued, and rewarded within the organization, even when such efforts go beyond their job descriptions. This includes not only financial incentives (e.g., bonuses, stock options) but also career advancement opportunities, visibility in performance evaluations, and positive recognition from leadership. In practice, when employees see a clear link between external engagement and professional growth, they are far more likely to seek ideas from suppliers, bring them into the organization, and push them through internal innovation processes. Conversely, if such behavior is viewed as risky, time-consuming, or unrewarded, employees will likely default to safer, more routine tasks, even if supplier ideas have real potential. At P&G, for instance, this mechanism is institutionalized through its ‘Connect + Develop’ program. Employees are not only encouraged but structurally supported to scout external innovations from suppliers and start-ups. Success stories, such as the integration of novel packaging films from MonoSol, are highlighted internally and tied to employee recognition and promotion. By aligning incentives with supplier-led innovation, P&G has created an organizational climate where employees are motivated to act on external input and bring it into the product development pipeline.

Work pressure management

Work pressure management refers to the extent to which employees have the time, mental capacity, and organizational support to engage in non-routine, creative, or exploratory work, particularly in collaboration with external partners. Innovation requires slack in terms of unstructured time to think, process, and test ideas. When employees are overloaded with operational tasks or tight deadlines, they may lack the capacity to respond to supplier input, follow up on novel suggestions, or experiment with alternative approaches. Our study found that firms with more manageable workloads and flexible structures were significantly more effective at turning supplier insights into actual innovation. These firms often use techniques such as protected innovation time, flexible scheduling, or de-emphasizing short-term output in favor of long-term learning. At 3M, for example, employees are given dedicated time, famously known as the “15% rule,” to work on side projects outside their formal job responsibilities. This policy allows individuals to use up to 15% of their paid working hours for self-initiated, exploratory work, without prior managerial approval. Many of these projects are sparked by conversations with suppliers and other external partners. This organizational breathing room creates the conditions under which supplier ideas can be explored, prototyped, and eventually scaled into new products.

 

Case insights: What differentiates innovation leaders

To complement the empirical findings from our study, we conducted follow-up interviews with managers from pharmaceutical firms to explore how organizational climate shapes the use of supplier knowledge in practice. These interviews revealed that even when supply network structures appear similar on the surface, firms differ significantly in how they perceive and manage collaborations with their suppliers.

Specifically, one firm described a practice of supplier engagement that treated it as a strategic opportunity. Managers promoted informal conversations and collaborative ideation, supported by organizational climate features such as psychological safety and systems that recognized cross-boundary innovation. In contrast, another firm, despite a similarly central supply network position, tended to discourage supplier interaction beyond formal scopes, reflecting a cautious, compliance-focused organizational climate. Employees hesitated to share external input due to fears of reputational risk or organizational disapproval.

These case insights reinforce a key takeaway from the study: supplier-led innovations depend not only on access to a broad supply network and collaboration, but also on the internal environment that enables or suppresses learning and sharing behaviors. Even in knowledge-intensive sectors like pharmaceuticals, the organizational climate can determine whether supplier knowledge becomes an innovation asset or remains unexplored.

From insights to managerial action

The findings suggest that simply increasing the breadth of the supply base collaboration and the innovation potential is not enough. For supplier-led innovation to take root, buying companies must cultivate an internal organizational climate that supports exploration, learning, and collaboration across boundaries. Following are five actionable strategies that supply chain leaders can adopt to activate this potential.

• Audit organizational climate regularly. Use employee review platforms like Glassdoor, pulse surveys, or internal feedback mechanisms to continuously monitor employee perceptions of workload, psychological safety, and recognition. These data can help identify whether current conditions support or inhibit innovation behavior.
• Align incentives with learning behaviors. Ensure that key performance indicators (KPIs), performance evaluations, and promotion criteria reflect the value of supplier engagement and cross-boundary innovation. Publicly recognize individuals and teams who successfully bring in and act on supplier ideas.
• Protect time for innovation. Create structures that allow for unstructured thinking. This could include setting aside dedicated ‘innovation time,’ offering flexible work hours, or reducing operational burdens during certain periods. Such time creates space for employees to explore, absorb, and refine supplier inputs.
• Build supplier-engagement capabilities. Develop the ability of employees, particularly those in procurement, engineering, and R&D, to collaborate formally as well as informally with suppliers. This includes training in communication, factory visits, collaborative problem-solving, trade shows and innovation facilitation, which help turn external inputs into implementable solutions.
• Break down the silos. Facilitate collaboration between functional departments such as R&D, operations, and procurement within a firm. Such cross-functional collaboration ensures that supplier knowledge flows efficiently into measurable innovation outputs such as patents, or new product features.

By implementing even some of these, firms can begin to move beyond transactional supplier relationships and toward dynamic collaborative partnerships that generate innovation. The more these practices are integrated, the greater the potential for unlocking supplier-driven value propositions. Creating the right internal organizational climate is not just a human resource issue; it’s a strategic enabler of innovation performance in supply chains.

Rethinking innovation metrics in supply chains

To manage what matters, firms must first also measure it. Traditional supply chain KPIs, such as cost savings, inventory turnover, and on-time delivery, remain necessary but are no longer sufficient in an era where value increasingly comes from supply-led innovation. Supplier collaborations are not just about efficiency and compliance; they are also sources of creativity and growth. Leading firms are beginning to adopt innovation-oriented supply chain metrics such as patents or innovation awards.

In parallel, firms should consider tracking organizational climate indicators, using employee review platforms or pulse surveys, as part of their internal performance reviews. While metrics like supply network breadth collaboration (in-degree centrality) can provide structural insight, they are not always easy to calculate without access to comprehensive network data. Still, when such data is available, combining network structure with internal sentiment analysis can offer powerful diagnostics, revealing whether a company is well-connected externally but hindered internally by a poor organizational climate for innovation.

Consequently, by embedding innovation and organizational climate metrics into regular management dashboards, firms can shift from reactive to proactive supply chain leadership, anticipating where innovation bottlenecks may occur and addressing them before opportunities are lost.

Organizational climate as a strategic lever

Findings of our study reinforce a critical insight: The next frontier in supply chain innovation is not just about finding better suppliers. It is about becoming a better collaborative partner. This requires an internal organizational climate that cultivates psychological safety, rewards cross-functional collaboration, and reduces structural barriers to acting on external input. The implications are clear. Supplier-led innovation does not happen by default; it depends on firms’ internal climate that supports boundary-spanning, learning, and experimentation. Supply chain leaders must collaborate closely with business unit heads to intentionally cultivate an environment that fully unlocks the value of supplier collaborative partnerships. As supplier networks grow more complex and innovation cycles accelerate, the firms that will thrive are not merely those with the most connections, but those that know how to leverage them effectively. For leaders in procurement and operations, shaping this organizational climate is no longer optional but a strategic imperative.

About the authors

Seongtae Kim is an assistant professor of supply chain management at Aalto University School of Business. His research focuses on supply chain sustainability, risks and disruptions in global supply chains, complex supply networks, and the innovation and digital transformation of supply chains.

Byung Gak Son is a reader in supply chain management at Bayes Business School, City St. George’s, University of London. His research focuses on how supply network structures function as a form of governance, influencing the behavior of their members, including in areas such as
innovation and ESG controversies. He can be reached at [email protected].

Jörg M. Ries is a reader in operations management at Bayes Business School, City St George’s, University of London. His research focusses on the impact of supply chain structures, operations processes and digital technologies on financial performance, risk and innovation.

Nachiappan Subramanian is a professor of operations and logistics management and supply chain management at the University of Sussex Business School, UK. His research focuses on supply chain resilience, innovation, sustainability, and digital transformation.

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