This Week in SCDigest

So, how on earth is the top 25 determined?

Gartner starts with the Fortune 500 list of top US companies by revenue and the Forbes global 2000 list that basically does the same thing on a worldwide basis. It then eliminates a lot of those companies because they do not much operate what most of us would think of as a real physical supply chain - companies in banking, insurance, software, and many more.

From that culled list, Gartner analyzes publicly available financial data, specifically looking at three metrics: 

Return on assets (ROA): Net income / total assets
Inventory turns: Cost of goods sold / inventory levels
Revenue growth: Change in revenue from prior year

ROA and revenue growth use a three-year weighted average, meaning the most recent year gets the most weight and the two prior years somewhat less. Inventory turns, smartly, uses the prior year's quarterly average (reducing impact of end of year games). These three metrics together are given a full 50% of the total score weight (25% to ROA, 15% to turns, and 10% to revenue growth).

Now keep in mind that this formula gives a tremendous advantage to some companies, such as Amazon given its huge revenue growth or McDonald's and its 157 inventory turns per year. It also penalizes companies like a Home Depot or a Lowes, for example, which are only going to have turns in the mid-single digits, because of their need to stock every item under the sun to meet customer service goals, many of which are very slow movers. In general, this approach also penalizes a company within a given sector that strategically decides on a higher service, lower turns strategy (even though we can all agree that inventory efficiency is a very important attribute of supply chain excellence).

Companies that have heavily outsourced production and distribution also have an inherent advantage. Why? Because they have chosen to shed assets, and that drives their ROA metric higher. While outsourcing can be a very smart thing for many reasons, it is not inherently a better supply chain move. This metric also inherently discriminates against asset-intensive businesses, such as chemicals and automotive. That no doubt why we see only three such companies (3M, Cummins, and Toyota) in the top 25, towards the end of the list, and probably a big factor in having the separate list of the top 25 industrial supply chains.

So, at this point, you must be a decently large and public company to be considered in the analysis. The smallest company on the Fortune 500 list for 2014 had about $5 billion in sales. Private companies do not have the public financial data needed for this part of formula and cannot make the list.

Another 25% of the final rankings come from so-called "peer opinion." For 2015, this consisted of about 200 apparently very influential respondents who first select a group of companies from the master list that they believe are doing the best job of being a "demand-driven value network orchestrator." Sure, we all have that list in our heads.

From those selections, respondents are then asked to rank those companies from first to last, from which points are assigned to companies making that cut.

So, the reference point, in theory at least, is not "the best supply chain," but rather leadership in "DDVN orchestration." Are these the same things? I would say certainly not. But I suspect the panelists in the end are probably really voting based on their perceptions of which companies the best supply chains, DDVN orchestrators or not. (And yes, being "demand-driven" is again certainly an attribute of supply chain excellence, all things being equal.)

The final 25% comes from votes from Gartner's own supply chain analysts. They use the same tool  and criteria that the peer group does in ranking company supply chains.

Take the financial rankings and the votes from peer group and Gartner analyst group (again, 50%, 25%, and 25%, respectively), and voila, out spits the top 25 in something like a mathematical fashion.

Is the process perfect? Certainly not. The unstated assumption is, for example, that stellar financial results equals supply chain excellence.

And it is a bit mysterious - while Amazon has strong revenue growth, it had 0% ROA and a middling 8.7 inventory turns, yet it somehow winds up on top even though those two measures account for 40% of the total score. It did have by far the top score in the peer rankings, I will note, so I guess that's what did it. Amazon is an innovator, that's for sure, and spends a lot of money on facilities and technology,  but DDVN orchestration is not something I associate with Amazon.

So, with all that, here in general is the advice I give to companies looking to crack the top 25: (1) understand the methodology, especially with regard to the financial data. Not much you can really do about that, but you can at least understand how it works and do some comparisons to key competitors; (2) encourage others outside your organization to participate in the peer review process and rate you highly; and (3) most important, if you are really serious about this, arrange "briefings" with Gartner analysts touting what you are doing in supply chain in the same way that software vendors do it. Ladle on significant helpings of demand-driven orchestration-ness. Is there a Dummies book? (Shoot me an email if you would like to discuss any of this.)

The Gartner top 25 supply chains - it has many faults, but it is the best we've got. I look forward to it every year. It certainly stirs the pot.

What are your thoughts on the Gartner top 25 for 2015? Do you see any ways it could be improved? Let us know your thoughts at the Feedback button (email) or section (web form) below.

No. 6 - The Universal Product Code: Though the idea to use some form of printed and even wireless automatic product identification had been around for decades, lack of standards had precluded individual ideas from gaining any sort of critical mass. In 1970, a company called Logicon wrote a standard for something close to what became known as the Universal Product Code (UPC) to identify via a bar code a specific SKU, an effort that was finalized a few years later by George Laurer at IBM. The first implementation of the UPC was in 1974 at a Marsh's supermarket in Troy, OH north of Dayton. The invention triggered the auto ID movement, forever changing supply chain practice and information flow.

Interestingly, Computer Identics' October 1971 deployment of a laser scanner for inventory tracking at Buick soon followed by use of the technology for warehouse management at General Trading (New Jersey) and Kroger (Nashville) predates UPC and, with the latter, laid the foundation for broader use of automatic identification throughout the supply chain.

John M. Hill
The St. Onge Company

That's a good list and of course it was great to see our Continuous Replenishment Program (CRP) and CPFR included. Some others than had a significant industry impact were Total Order Management (TOM), The Perfect Order and Streamlined Logistics Pricing (SLOG).

Keep up the good work,

Ralph Drayer
Supply Chain Insights LLC
(Drayer is formerly a supply chain executive at Procter & Gamble)

I would suggest that two other developments belong on the list:

1. Development of the first Multi-Modal Freight Rating system in the mid-70's by Distribution Sciences, Inc. This including the capability to capture rates published by carriers for truck and rail with many different characteristics (e.g. products/product groups/classes, geography of different types/levels including zones, service levels, restrictions) and then to calculate the cost or create a list of qualifying carriers and their cost. This capability is the foundation of the TMS as we know it today and still elusive for many companies trying to get an audit quality answer. Sears was one of the first companies to build their logistics operations around this capability. Distribution Sciences was acquired by American Software/Logility in 1982 and is now called Logility Transportation Solutions.

2. Load Building/Optimization which is also an integral component of a TMS. I believe it originated with a product called Sunflower that later became Optimal Decision Systems. It was the forerunner of the operational ROI application with the biggest saving available today in the TMS application set - dynamic load building/consolidation considering multi-stops, pools, continuous moves, and many-to-many opportunities combined with selecting the " best" carrier. All of the leading TMS vendors today offer this functionality.

Bill Pritz
VP, Logility Transportation Solutions
Logility