I am pleased to present the first installment of "Byrne on Excellence," a monthly column that will examine the changing face of supply chain management and the value it contributes to today's high-performance businesses.

That value—the extent to which supply chain excellence begets marketplace excellence—is becoming more tangible. A team of researchers from Accenture, Stanford University, and INSEAD (the French school of international business) recently succeeded in demonstrating that supply chain excellence makes a quantifiable contribution to marketplace performance. In other words, they confirmed that superior supply chain performance is rewarded while poor supply chain performance can have a punishing effect.

The team analyzed data from 636 companies in 24 industries. For each company, three variables were measured: inventory turns, cost of goods sold as a percentage of revenue, and return on assets. Two time periods—1995 to 1997, and 1998 to 2000—were studied in order to associate gains or slips in supply chain performance with improvements or deterioration in financial performance.

The team defined superior supply chain performers as companies whose supply chain execution ranked in the top third of their industries for two of the three variables. Companies were assessed according to those criteria for each time period, and then were placed in one of four categories:

Leader: Superior supply chain performance demonstrated across both time periods;

Transformer: Supply chain performance migrated into the superior range over time;

Decliner: Supply chain performance deteriorated from within the superior range in the first period to below it in the next; and

Laggard: Superior supply chain performance was not achieved in either period.

Next, researchers categorized each company's financial performance. They defined superior financial performance as better-than-average compound average growth rate (CAGR) of market capitalization within an industry. Again, each company was defined as a leader, transformer, decliner or laggard based on its financial performance across both time periods.

Next, the team compared the supply chain and financial performance of each company. They found a consistent relationship between supply chain excellence and financial performance. That is, supply chain leaders showed a higher-than-expected probability of being financial leaders; supply chain transformers showed a higher-than-expected probability of also being financial transformers; and so on.

Two critically important messages are contained in these findings. First, supply chain excellence is rewarded. The findings showed that the market cap CAGR of supply chain leaders was 7 to 26 percentage points higher than their industries' average growth rates.

Second, transforming supply chain operations can have a substantial impact on market capitalization. The research showed that companies that invest in supply chain excellence have the potential to catch up with—and even outpace—supply chain leaders.

But what does it mean to "transform" a company's supply chain operations? Simply put, leaders and transformers avoid the "cost efficiency trap" by changing their cost structure rather than just cutting costs. That "trap" can, for example, lead a company to focus on cutting the last nickel per mile from its transportation costs while competitors are saving millions by redesigning their operations.

Leaders and transformers also position their supply chains as flexible, adaptive engines of differentiated market positioning and sales growth. Here are four of their mantras:

1. Emphasize end-to-end process integration Leading companies' supply chain processes are easily executed and wholly integrated. End-to-end integration is important because it helps align supply with demand. Companies with superior supply/demand-matching capabilities are more responsive to changing market conditions.
2. Execute supply chain initiatives selectively Leaders mesh their supply chain initiatives with their business strategies. They're also selective in their deployment of technology, often using unique systems to support their operating models.
   Dell, for example, developed a "dynamic pricing" application that helps manage demand by frequently changing the price of specific products. This lets Dell shift demand to available stocks, thereby stabilizing supply chain operations and reducing inventory-carrying costs.
3. Challenge the status quo Leading performers frequently revisit the assumptions that underlie their supply chain approaches. Consider Tesco, the U.K. supermarket chain. Refusing to follow the lead of failed online grocers, Tesco initially did not invest in dedicated distribution centers for its online business. Instead, it began by picking and packing online orders in its stores, learning how to refine its online offerings while leveraging store assets.
4. Embrace leading-edge strategies and technologies Supply chain leaders are more likely to implement next-generation management approaches and tools. Some food companies, for example, have implemented collaborative transportation management strategies, while innovative retailers such as Staples and Wal-Mart combine cross-docking and advanced warehouse management systems to reset the bar for distribution efficiency.

In the coming months, we'll take a closer look at each of the above ideas. And we'll show how business leaders—the companies that are capturing more customers, ruling more markets, or reaping more profits—are leveraging their supply chains to make it all happen.