Making innovation a measurement priority

From the January-February 2025 edition of Supply Chain Management Review.

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To ensure precision and efficiency, supply chain organizations look for the right measures to track their performance. These efforts focus on identifying key performance indicators for standard supply chain functions such as planning, procurement, manufacturing, and logistics.

Yet many organizations do not factor in the measurement of innovation in the supply chain. Innovation is often seen as less standardized than traditional processes. Even with its opportunities for experimentation and emphasis on relationship building, innovation requires measurement so that the organization can identify what works. As innovation expert Steve Wunker says, “How should a company measure innovation? Innovative companies know that innovation has many faces, and that they can’t boil innovativeness down to just a single metric.”

Related infographic: Supply chain innovation 

Many organizations want to incorporate more innovation in their supply chains, but they must first determine which types of innovation to focus on and how to measure the success of their innovation efforts. APQC places innovation into the following four categories.

1. Product/service innovation
2. Operational/process innovation
3. Business model innovation
4. Innovation enablers

Organizations have a wide array of available measures to track, and selection is often tied to the type of innovation, areas of strategic focus, and the maturity of the organization’s innovation efforts.

Innovation as an area of focus

As part of its annual Supply Chain Management Priorities and Challenges research, APQC evaluated where organizations invested resources and hiring for 2024. Innovation is one of the top areas, with 87% of organizations focused on it in 2024. In a related finding, 56% of survey respondents expect their budgets for supply chain management tools, technology, innovation, and initiatives to grow—a 6% increase from 2023.

Respondents also indicated their organizations’ innovation focus areas for the year. The largest group has made operational or process innovation their top area, followed by product and service innovation (Figure 1). One-quarter of organizations are focused on improving collaboration, indicating an openness to increasing work across teams.

 

In its research, APQC asked respondents to name the strategies their organizations intend to use to meet their focus area goals. More than half indicated that their organizations prioritize integrating innovation into organizational goals and implementing new technologies (Figure 2).

These are interesting results given that in 2023 organizations named adopting a structured approach to innovation as their top strategy. Organizations now appear to recognize that their employees are key to ensuring innovation success. Organizational culture must shift from viewing innovation as something undertaken by a defined set of staff to viewing it as something tied to organizational goals.

The tied for third top strategy is increasing open innovation and external ecosystem collaboration. This connects directly to organizations’ focus on improving collaboration. Open innovation is based on collaboration and co-creation with an organization and its partners. It is a natural extension of the close relationships many organizations have with suppliers and other partners to ensure mutual benefit. These types of relationships are the foundation of open innovation, with each party bringing its own expertise to strengthen the innovation efforts.

 

Innovation is many-faceted so its measures must be too

Part of ensuring that an organization is on the right track for innovation is establishing innovation measures. Leaders must consider different categories of measures that are aligned to the different types and facets of innovation. There are several approaches to picking measures, and organizations can apply or combine different approaches depending on their goals and the types
of innovation.

BALANCED SCORECARD APPROACH

Organizations often apply a balanced scorecard approach for other company activities, but it can be applied to innovation as well. This approach ensures a mix of measures that go beyond just financial. Balanced scorecards often have the following four measurement categories.

1. Financial. Lagging measures that track values like cost, revenue, and profitability
2. Customer. Leading or lagging measures that focus on how the organization is perceived by customers
3. Internal processes. Measures of productivity, risk, and compliance
4. Learning and growth. Sometimes referred to as people measures, these focus on employees, infrastructure, and culture

INPUT, ACTIVITY, AND OUTCOME MEASURES APPROACH

This approach looks at the inputs to innovation, the efficiency and effectiveness of the innovation process, and the outputs of innovation.

» Input-related measures: These evaluate the investment in the innovation process. They
include financial investment, time spent by senior management on innovation efforts, and employee engagement.

» Process- and oversight-related measures: These gauge the efficiency and effectiveness of an innovation effort. They include the innovation portfolio balance and the percentage of ideas approved per stage.

» Output-related measures: These consider the impact of the organization’s innovation processes. They include the percentage of revenue in core categories from new products, customer retention rate or satisfaction rate for new concepts, and return on innovation investment.

Although these three groups of measures span the innovation process from initiation to results, the weight an organization places on each category can change based on its innovation maturity. Those just starting out focus more on input-related measures, whereas mature organizations focus more on output-related measures.

INNOVATION TYPE/CATEGORY APPROACH

Organizations can also develop measures based on the four categories of innovation outlined by APQC: product/service, operational, business model, and innovation enablers. APQC has selected example measures for each type of innovation with data from APQC’s Open Standards Benchmarking repository.

Product/service innovation measures

For new product or service innovation, organizations look at a combination of revenue and efficiency. Common measures include revenue growth normalized by R&D spend, average time to profitability, and average time to market for new products/services. Figure 3 shows how organizations perform in their time-to-market for developing new products or services.

 

At the median, organizations take 210 days to develop their new products or services. There is a broad range of performance for organizations, with those at the 25th percentile taking 150 days and those at the 75th percentile needing 310 days. The time needed for product development varies based on an organization’s industry and types of products/services, but tracking the performance over time can show changes in the internal efficiency of the organization’s development processes.

Operational innovation measures

Measures for operational innovation examine the effectiveness of adjustments to organizational processes. Common measures for this type include selling, general, and administrative expenses (SG&A) as a percentage of revenue; fixed assets utilization rate; and cost of goods sold as a percentage of revenue.

Cost of goods sold includes those related to materials, labor, and carrying inventory. A higher cost of goods sold indicates inefficient production or procurement processes, which pose a financial risk for the organization. As shown in Figure 4, at the median organizations spend 61.4% of their revenue on the cost of goods sold.

 

The overall range among organizations is somewhat small: at the 25th percentile organizations spend 49% of their revenue on the cost of goods sold, and at the 75th percentile they spend 72%. This speaks to the limited amount of power organizations have over the cost of materials and other aspects of procurement and production. Still, it is helpful to track changes
over time.

Business model innovation measures

For organizations looking to innovate the types of business they undertake, common measures include the percentage of revenue by fulfillment channels, customer retention rate, and number of new businesses launched in the past three years. The number of new businesses launched indicates the effectiveness of an organization’s innovation process. As shown in Figure 5, at the median organizations launch 5.1 new businesses per $1 billion in revenue within a three-year period.

 

Across the data set, there is a wide range in the number of businesses launched, with 1.5 at the 25th percentile and 27.1 at the 75th percentile. This may be due in part to an organization’s industry. For some, it makes sense to launch over 20 new businesses within a three-year period, but for others it does not. However, looking at this measure in the context of the organization’s industry and investment in innovation can reveal whether its innovation process is effective and where changes are happening.

Innovation enabler measures

Innovation enablers ensure the organization’s environment fosters innovation. Common measures for enablers include employment of cross-functional teams, collaboration practices, customer satisfaction, and the percentage of employees tasked with innovation goals. Figure 6 shows the quantity of employees with at least one innovation goal.

Caption

Part of creating an environment conducive to innovation is making innovation part of employees’ everyday work. At the median, organizations task only 5% of their employees with at least one innovation goal. This number decreases to only 2% at the 25th percentile, but jumps to 20% at the 75th percentile. The types of roles within an organization as well as its industry can affect this percentage.

Criteria for selecting measures

It can be a balancing act for organizations to select innovation measures that best meet their needs. There are five typical selection criteria that organizations can use to select key performance indicators.

1. Strategic alignment. Whether the measure directly links to organizational objectives
2. Reliability. Whether the organization can consistently gather inputs for
3.  the measure
4. Familiarity. Whether the measure is used in the organization’s industry or the organization has collected data on the measure historically
5. Relevance. Whether the organization can track trends on the measure over time
6. Ease. How easy it is to collect and analyze data for the measure

PROVIDE CONTEXT

Organizations must take informed action on the data collected for their measures. They should ensure that they gather appropriate context by analyzing external factors that can affect the data, as well as considering performance over time and among peer groups. Context should be communicated to stakeholders so that they can make informed decisions.

Organizations can use a dashboard to track innovation performance, and it should include the following to provide a complete picture.

»  Current performance. Tracking the value of the measure for each month

»  Performance trends. Showing how the measure has performed over the last four quarters

»  External benchmarks. Comparing the performance against the top quartile, median, and bottom quartile performance of the organization’s
peer groups

VARY MEASURES BY ROLE

Top-performing organizations vary the measures reported to stakeholders based on role. This ensures that every decision-maker receives information relevant to their position. For example, senior management should receive reports on high-level measures that focus on the organization’s strategic performance. Mid-management should receive information on measures related to efficiency, productivity, and costs to provide an accurate picture of operational performance. Front-line employees need information related to team performance. These decision-makers should receive data on measures related to project milestones, budgets, and quality of outcomes
or deliverables.

Keep measures relevant

Innovation provides supply chain organizations with the ability to develop new offerings, reimagine their processes, and create new lines of business. It also provides an opportunity to strengthen relationships with key partners through collaboration.

With so many aspects of innovation, measuring its performance can take different forms. To select the right innovation measures, organizations should consider the type of innovation they are undertaking, the maturity of their innovation efforts, and the roles of decision-makers. Even after the deliberate, strategic process of identifying the best measures, the work does not end.

In addition to the actual collecting and reporting of data, organizations must establish a schedule for reviewing their innovation measurement. Each evaluation should consider whether the measures are still relevant to the business, or if changes require adjustments to the measures tracked. Regular evaluations also provide a clear picture of whether the measurement efforts are working efficiently and providing maximum value. This ensures that innovation provides strategic benefit to the organization and that performance management provides actionable information to decision makers.

About APQC

APQC (American Productivity & Quality Center) is the world’s foremost authority in benchmarking, best practices, process and performance improvement, and knowledge management (KM). With more than 1,000 member organizations worldwide, APQC provides the information, data, and insights organizations need to support decision-making and develop internal skills. Learn more at apqc.org/about.

This content includes median values sourced from APQC’s Open Standards Benchmarking database. If you’re interested in having access to the 25th and 75th percentiles or additional metrics, including various peer group cuts, they are either available through a benchmark license or the Benchmarks on Demand tool depending on your organization’s membership type.

APQC’s Resource Library content leverages data from multiple sources. The Open Standards Benchmark repository is updated on a nightly cadence, whereas other data sources have differing schedules. To provide as much transparency as possible, APQC will always attempt to provide context for the data included in our content and leverage the most up-to-date data available at the time of publication.

About the author

Marisa Brown is senior principal research lead, supply chain management, APQC. She can be reached at [email protected].

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