The Supply Chain Top 25: Raising the bar
The 2012 ranking of supply chain leaders from Gartner includes a broad mix of global companies—a few new to the list, but most having recorded multiple appearances. These leaders share certain characteristics that drive day-to-day performance while solidifying the foundation for future growth. Their standout performance is raising the supply chain leadership bar for companies everywhere.
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Gartner’s Supply Chain Top 25, published since 2004, is an annual ranking of leaders in the global supply chain. At its core, the Supply Chain Top 25 is about demand-driven leadership. Every year, we identify the companies that push the envelope of supply chain innovation. Our goal is to raise awareness of the supply chain discipline, as well as how it impacts the business, and to catalyze the debate and the cross-fertilization of ideas about what supply chain excellence really means.
What Is the definition of excellence?
Our methodology, detailed below, is based on a composite score for each company that is made up of a set of financials combined with an opinion component, providing a balance between objective and subjective components. In completing their ballots, voters are asked to identify those companies they believe are furthest along the journey toward the demand-driven ideal, as defined in Gartner research and on the voting website.
What does it mean to be demand-driven? Exhibit 1, on page 12 captures the organizational ideal of demand-driven principles as applied to the global supply chain. This model has three overlapping areas of responsibility:
Supply management—Planning, sourcing, manufacturing, logistics.
Demand management—Marketing, sales, and service.
- Product management—R&D, engineering, and product development.
Excellence is a matter of visibility, communication, and reliable processes that link all three of these functional areas together. When these processes work together, the business can respond quickly and efficiently to opportunities arising from market or customer demand. Defining characteristics of supply chains built to this design include the ability to manage demand rather than just respond to it, a networked rather than linear approach to global supply, and the ability to embed innovation in operations rather than keep it isolated in the laboratory. The demand-driven model is inherently circular and self-renewing, unlike the push supply chains of our factory-centric industrial past.
Inside the numbers
In the 2012 ranking, the top five contenders include three perennials and two relative newcomers. (See table on page 14 for the complete rankings.) First is Apple, maintaining its No. 1 position despite some bumps this year, using first-to-market advantage, scale and brand to wield supply chain as a competitive weapon. Already a stellar performer on the financial metrics we use for the ranking and well-respected in the voting portion of the methodology, Apple astoundingly raised the bar even further, getting to a near-perfect score.
Both Dell and Procter & Gamble have been in the top 5 every year of the ranking. Dell, having paved the way with its configure-to-order model, has transformed itself and developed a sophisticated go-to-market strategy that tailors supply chains by segment. Procter & Gamble, an iconic supply chain thought leader, has an unparalleled ability to orchestrate demand and connect the supply chain to the shelf and its customers’ moments of truth. P&G continues to push the envelope of innovation and performance.
Amazon and McDonald’s were both new to the ranking in 2010 and have moved steadily up since then. With a three-year weighted average revenue growth approaching 40 percent, Amazon delivers consistently reliable product supply to its shoppers—no small feat given the range of products it offers, the complexity of its network, and its continued expansion into new channels and services. McDonald’s, back to double digit growth this year, gets a lot of respect from peers for its ability to deliver growth in same-store profitability while managing a more complex product portfolio driven by its McCafe line.
Movers and shakers in the middle of the ranking include Unilever (10), Intel (7), and Nike (14), three companies that have been steadily rising on the list and leading the way for others in their global supply chain transformations with impressive results. Coca-Cola, known for its “last mile” distribution prowess, returns at No. 6 with strong peer recognition and ROA—even while it navigates the integration of its bottlers in North America. Cisco returns at No. 8, setting the pace with a robust risk management program and collaboration up and downstream in its value chain. Ranked ninth, Walmart remains a mainstay. And despite some challenges in the past year in Mexico, the company continues to get a lot of respect from peer voters for its contributions to supply chain best practices over the years.
Colgate rises to No. 11 this year on consistently industry-leading, double-digit return on assets and a strong governance model. Long a recognized leader in direct store delivery, PepsiCo (12) is collaborating with retail partners to reduce out-of-stocks at the shelf and increase the visibility and accuracy of its demand signal. Samsung (13), well known for its advanced S&OP process, continues with strong growth and profitability in a tough market. Inditex, the European-based retailer best known for its Zara brand and the tight integration between product design and supply chain, returns for the third time to the ranking at No. 15.
Rounding out the list in the 16-25 section we see a combination of newcomers, the newly-returning, and old-timers who continue to lead the way in supply chain. We’re excited to welcome two heavy industrials among the newcomers: Caterpillar (20), an early leader in the concept of segmentation with its well-known “lane strategy,” and Cummins (23) a major player in the engine and power generation markets recognized for its best-in-class parts and service network. Leading industrials are traditionally strong in upstream supply management, including the agility required to profitably balance their long and complex supply chains against volatile demand. We look forward to seeing them share best practices with the supply chain community through the Top 25.
Two remaining newcomers come from the consumer and retail sectors. H&M, the successful Swedish retail apparel group, joins the list for the first time this year at No. 17, with a consistently high-flying ROA on top of a proprietary distribution network of centrally controlled stores. Kimberly Clark, joining at No. 25, has brought an innovative approach to logistics partnerships to North America and is now focusing on continued improvements in on-shelf availability and predictive demand planning.
Johnson & Johnson (22), the only life sciences company on the list, returns with a compelling vision for an ambitious supply chain transformation program. Hewlett-Packard (24), another perennial, runs one of the most complex supply chains in high tech, and is reaping the cost benefits from being the first PC OEM to move from coastal to Western China.
Research in Motion (RIM), the maker of BlackBerry mobile devices, fell to No. 19 this year, after a difficult 2011. Given that our methodology relies on financial metrics for 50 percent of each company’s score, this fall is not a surprise. Yet RIM also took a hit in the voting portion of the score, despite its impressive Value Chain Express strategy.
New to the ranking last year and coming back strongly this year are Starbucks (16), with a return to growth and a focus on supply chain talent; Nestle (18), focusing on supplier development and raw material sourcing strategies; and 3M (21), best known for product innovation and returning to double-digit growth and ROA.
The companies populating our Supply Chain Top 25 ranking this year are an impressive group and all have some best practice aspect of their supply chain operations that is applicable to the rest of the community of practice. In addition to each supply chain’s unique value proposition, there are commonalities that we see across them in terms of underlying characteristics and trends on where they are focusing their transformation efforts.
Characteristics of Leaders
At Gartner, we’ve been researching and writing about the importance of being demand-driven since 2003. Since that time, we’ve published hundreds of pieces on the transformation to a demand-driven value network. We continue to research these concepts and advise companies as they recognize the value of becoming a demand-driven organization.
While every supply chain organization develops unique strategies and focuses on differentiated initiatives, we’ve found in our research that there are certain key characteristics that define the leaders. We have talked about some of these in past articles, and they remain important foundational elements to being demand-driven. But they are not easy to attain, and what differentiates the leaders in the Top 25 is that they are further along the journey than others. Demand-driven leaders go beyond best practices to build a foundation for growth and continual learning that constitutes an engine for superior competition.
These are among the key characteristics of the leaders we’ve observed:
Outside-in Focus. The concept of developing and maintaining an outside-in focus is almost synonymous with the phrase “demand driven.” The galvanizing principle here is to design the supply chain starting with the customer experience, and work back upstream through the supply chain. While the concept is relatively simple, its implementation is anything but. It requires a fundamental re-orientation not only in mindset, but in the way groups are measured and in the way networks and business processes are designed. An outside-in focus is not synonymous with a customer focus: companies can be—and often are—focused on the customer from the inside-out, as witnessed in service metrics such as on-time shipments or fill rates.
Embedded Innovation in Supply Chain. In our Demand Driven Value Network model, first published in 2004, the inclusion of a “product” circle to accompany supply and demand carried an explicit message about the importance of connecting traditional notions of supply chain with the new product development and launch process. The point is to ensure that new products are brought to market that satisfy the total customer experience profitably and effectively. Leaders understand the balance between operational excellence and innovation excellence (see Exhibit 2). Supply chain considerations must be taken into account early on in the new product development and launch process. And the fact that new products require different supply chain strategies than existing products must be taken into account in the supply chain design process.
Extended Supply Chains as Networks. Leaders take the notion of the organization as value chain one step further, designing and managing their supply chains as the extended networks of trading partners—customers’ customers, suppliers’ suppliers, logistics providers, contract manufacturers, third-party warehouses, etc. —that they really are. What they’re doing is orchestrating a set of activities across the network, aligning goals based on each player’s value proposition that will result in the desired outcome from that network—the profitable delivery of final product to a customer.
Excellence Addicts. All companies measure. What most still struggle with is how to focus on the metrics that matter—and even more importantly, how to interpret and then act on those metrics to achieve a desired outcome, namely to improve operational results. From our years of research in this area, we find that most organizations are, in fact, awash in supply chain metrics. They find themselves so caught up in the tactical aspects of measuring—defining, collecting, sorting, translating, rationalizing differences—that it becomes an end in itself, and suddenly they realize they’ve lost sight of the bigger picture.
The best companies—the ones we call “excellence addicts”—have a very different approach to metrics. First, they know what to measure. But they also understand that the whole is greater than the sum of the parts, that it is, in fact, a system, and that the purpose of the metrics is to make the entire system work better. When individuals in these companies get together to discuss and interpret a set of numbers, the conversation isn’t about whose fault something is; it’s about where things broke down in the system, how to fix them, and then how to take it to the next level. They are ruthless in constantly examining their own processes to push the envelope of performance.
Three trends evident
Each year, our analysts talk to and research the supply chains of hundreds of companies. Through these discussions, we note the trends: What are the leaders focusing on, where are they investing time and effort, and what can be applied broadly? Overall, we’ve seen companies continuing to invest in resources and assets for growth, a trend that started last year and is continuing. The global economic recovery has been uneven and halting in some cases, but, companies’ outlooks are increasingly expansionary in terms of the markets they serve and the products they offer.
There are three trends to note:
1. Supply Chain Risk Management and Resilience. Despite investing for growth, companies also know that the potential for disruption at anytime remains real. Many are looking to improve the resiliency of their supply chains to mitigate this risk. In turbulent times, and in the face of growing complexity and risk, leading companies need sustainable, resilient supply chains that support profitability and drive industry leadership. This requires managers to re-evaluate the layout of their supply network designs to make them more resilient to future catastrophes. It may also include designing products that allow more flexibility in supply and manufacturing, increasing long-term alternative sources of raw materials and logistics capabilities, and expanding outsourced manufacturing capacity.
Leading companies such as Intel, P&G and Unilever improved multitier supply chain visibility and advanced network management capabilities to be agile in the face of disruptions. Overall, leaders have remained focused throughout the past year on building resiliency into their global supply chains. We see this continuing to be a highly valued supply chain characteristic.
2. Simplification. Many companies tell us that they have exhausted easily gained efficiencies within their existing supply networks and product portfolios. Further improvement will require structural changes to streamline the flow of supply, and eliminate less profitable product and portfolio complexity. Supply chain leaders are adopting complexity optimization strategies to eliminate infrequently used product features, service offerings, suppliers and distribution network capacity that does not add sufficient value to customers. Supply chain segmentation has emerged as a critical enabler of supply chain simplification, and while this is a concept that has been around for a few years, leaders are aggressively adopting it to reduce complexity.
3. A Shift Toward Multi-Local Operations. Manufacturers and retailers have long sought ways to balance the trade-off in their supply network designs between global economies of scale and the demand for local responsiveness. Leading companies are reassessing their sourcing and manufacturing networks, and rebalancing their supply network strategies in favor of multi-local design, supply and support. More specifically, they are shifting from a centralized model, where these functions support global markets, to a regionalized approach, where capabilities are placed locally, but architected globally.
Top 25 methodology
One of the reasons this list has worked over the years is its transparent methodology. From the beginning we have sought direct feedback from supply chain professionals and incorporated suggested changes into the methodology where possible. As a result, the list reflects not only what Gartner analysts think about supply chain leadership, but what the community as a whole respects.
The Supply Chain Top 25 ranking comprises two main components: financial and opinion (see Exhibit 3). Public financial data provides a view into how companies have performed in the past. The opinion component offers an eye to future potential and reflects future expected leadership, which is a crucial characteristic. These two components are combined into a total composite score.
We derive a master list of companies from a combination of the Fortune Global 500 and the Forbes Global 2000, with a revenue cutoff of $10 billion. We then pare the combined list down to the manufacturing, retail and distribution sectors, thus eliminating certain industries, such as financial services and insurance, which do not have physical supply chains.
ROA is weighted at 25 percent, inventory turns 15 percent, and growth 10 percent. Inventory offers some indication of cost, and ROA provides a general proxy for overall operational efficiency and productivity. Revenue growth, while clearly reflecting myriad market and organizational factors, offers some clues to innovation. Financial data is taken from each company’s individual, publicly available financial statements.
The weighting within the financials is the same as last year. Prior to 2010, inventory was weighted at 25 percent. We had considered dropping it altogether. As much as inventory is a time-honored supply chain metric—one of the few “real” supply chain metrics on a company’s balance sheet—there have always been issues with it, not the least of which is that higher turns don’t always point to the better supply chain. At the same time, it’s a metric that’s widely known and understood, both inside and outside the supply chain community. Despite the issues, it’s not entirely invalid as an indicator, particularly if combined with other metrics. Therefore, we decided to leave inventory in, but reduce its weighting.
Since 2009, we’ve used a three-year weighted average for the ROA and revenue growth metrics (rather than the one-year numbers we had previously used), and a one-year quarterly average for inventory (rather than the end-of-year number we had previously used). The yearly weightings are as follows: 50 percent for 2011, 30 percent for 2010, and 20 percent for 2009.
The shift to three-year averages was put in place to accomplish two goals. The first was to smooth the spikes and valleys in annual metrics, which often aren’t truly reflective of supply chain health, that result from events such as acquisitions or divestitures. It also accomplishes a second, equally important goal: to better capture the lag between when a supply chain initiative is put in place (a network redesign or a new demand planning and forecasting system, for example) and when the impact can be expected to show up in financial statement metrics, such as ROA and growth.
Inventory, on the other hand, is a metric that’s much closer to supply chain activity, and we expect it to reflect initiatives within the same year. The reason we moved to a quarterly average was to get a better picture of actual inventory holdings throughout the year, rather than the snapshot, end-of-year view provided on the balance sheet in a company’s annual report.
The opinion component of the ranking is designed to provide a forward-looking view that reflects the progress companies are making as they move toward the idealized demand-driven blueprint. It’s made up of two components, each of which is equally weighted: a Gartner analyst expert panel and a peer panel.
The goal of the peer panel is to draw on the extensive knowledge of the professionals that, as customers and/or suppliers, interact and have direct experience with the companies being ranked. Any supply chain professional working for a manufacturer or retailer is eligible to be on the panel, and only one panelist per company is accepted. Excluded from the panel are consultants, technology vendors, and people who don’t work in supply chain roles (such as public relations, marketing, or finance).
We accepted 246 applicants for the peer panel this year, with 173 completing the voting process. Participants came from the most senior levels of the supply chain organization across a broad range of industries. There were 37 Gartner panelists across industry and functional specialties, each of whom drew on his or her primary field research and continuous work with companies.
Organizations must receive votes from both panels to be included in the ranking. Therefore, a company that had a composite score fall within the Supply Chain Top 25 solely based on the financial metrics would not be included in the ranking.
The regional breakdown of voters continued to be a particular emphasis for us, and we made significant progress this year. In the past, North American voters made up 80 percent of the total, despite many efforts to get a more even regional distribution. Last year, we made some inroads toward increasing the percentage of voters from Europe and Asia/Pacific. This year, the improvement was even more robust, providing a more balanced global view of supply chain leadership, with 43 percent from North America, 33 percent from Europe, and 24 percent from Asia/Pacific. We expect this trend to continue towards fully balanced regional representation.
Peer panel polling was conducted in April 2012 via a Web-based, structured voting process identical to previous years. Panelists are taken through a four-page system to get to their final selection of leaders that come closest to the demand-driven ideal, which is provided in the instructions on the voting website for the convenience of the voters.
Here’s a breakdown of the voting system:
The first page provides instructions and a description of the demand-driven ideal.
The second page asks for demographic information.
The third page provides panelists with a complete list of the companies to be considered. We ask them to choose 30 to 50 that, in their opinion, most closely fit the demand-driven ideal.
- After the subset of leaders is chosen, the form refreshes, bringing just the chosen companies to a list. Panelists are then asked to force-rank the companies from No. 1 to No. 25, with No. 1 being the company most closely fitting the ideal.
Individual votes are tallied across the entire panel, with 25 points earned for a No. 1 ranking, 24 points for a No. 2 ranking and so on. The Gartner analyst panel and the peer panel use the exact same polling procedure.
By definition, each person’s expertise is deep in some areas and limited in others. Despite that, panelists aren’t expected to conduct external research to place their votes. The polling system is designed to accommodate differences in knowledge, relying on what author James Surowiecki calls the “wisdom of crowds” to provide the mechanism that taps into each person’s core kernel of knowledge and aggregates it into a larger whole.
All this information—the three financials and two opinion votes—is normalized onto a 10-point scale and then aggregated, using the aforementioned weighting, into a total composite score. The composite scores are then sorted in descending order to arrive at the final Supply Chain Top 25 ranking.
Raising the leadership bar
The goal of the Supply Chain Top 25 is to help raise the bar for leadership in the global supply chain. Companies that move fastest into global markets with innovative products—coupled with supply chains that are customer-driven, adaptable to change and resilient to disruption—will be the winners. We look forward to continuing to share the lessons learned, providing a platform for informed and provocative debate, and helping the supply chain community provide vital contributions to the global economy.
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