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The Supply Chain Top 25: Raising the bar


September 01, 2012

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.

 

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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.

Financial component
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.

Opinion component
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.

Polling procedure
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.

Composite score
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.

Debra Hofman is Managing Vice President and Stan Aronow is a Research Director at Gartner Inc. They can be reached at .(JavaScript must be enabled to view this email address) and .(JavaScript must be enabled to view this email address).

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