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  First Thoughts

    Dan Gilmore

    Editor

    Supply Chain Digest



 
May 29, 2020

Understanding the Gartner Top 25 Supply Chains 2020

Cisco Systems Tops the List for First Time, as We Explain the Methodology in Detail

For the past two months I have used this space to write about the supply chain and the coronavirus, which is what was needed and appropriate in that time.

But now with the US "opening up" and frankly the news decreasing, I am for now going to come out of my own lock down of sorts and get back to regular supply chain business.

 

And with that, my question this time each year: What are the best supply chains in the world?

The reality is there is no way to determine that, absent an incredibly detailed study of leading candidates that would even then lead to potentially dubious results and certainly be obsolete by the time the research was finished. Or, we could look at the Gartner top 25 supply chains list.

That famous ranking is usually released at a dinner the Gartner Supply Chain Executive Conference that has always been in May in Phoenix, but for the first time in 2020 was scheduled for Orlando. Of course, that event had to be postponed and rescheduled for late fall. But the top 25 report was issued in May anyways, so let's take a look.

Gilmore Says....

If you are really serious about this, arrange "briefings" and/or written submissions to Gartner analysts touting what you are doing in supply chain in the same way that technology vendors do

What do you say?

Click here to send us your comments
 

The former AMR Research brilliantly came up with the top 25 idea in 2004. Gartner then acquired AMR in 2010. Over the last few years, the concept has been extended, so that we now have a "Next 25," plus the top 25 healthcare, industrial, and consumer goods supply chains, etc.

At previous Gartner conferences, when asking around a bit, I found - not surprisingly - that very few supply chain practitioners have any real idea how the list is determined. They only know if they are in or they are out, and that's about all that matters.

This year Cisco Systems came out on top for the first time - sort of.

I put it that way because again in 2020, Apple, Procter & Gamble, Amazon, McDonald’s and Unilever were left off the formal top 25, as those five companies have been placed in a separate relatively category called "supply chain masters," a sort of supply chain hall of fame. To get there, Gartner says a company needs to have attained top-five composite scores for at least seven out of the last 10 years.

 

In fact, it appears these five companies would have been the top five for 2020, meaning Cisco is really rated as sixth best supply chain.

Why does Gartner do this? It frankly may have to do with in effect getting more companies in the top 25 plus the new masters category combined - Gartner clients like that recognition, of course. It may also allow the top 25 list to appear a bit more dynamic.

As I have said before, I find the masters list idea a little goofy, but so be it.

With Amazon, Apple, P&G, McDonald’s and Unilever withdrawn from the competition, the rest of the top 10 after Cisco was (2) Colgate-Palmolive; (3) Johnson & Johnson; (4) Sch neider Electric; (5) Nestle; (6) PepsiCo; (7) Alibaba; (8) Intel; (9) Inditex (Zara) and (10) L'Oréal.

Five new companies made the Supply Chain Top 25 this year versus 2019, those being Lenovo, healthcare products copany Abbvie, (oddly) British American Tobacco, consumer products company Reckitt Benckiser, and Kimberly-Clark, which often rotates in and out.

 

Falling out of the top 25 were AkzoNobel (a pharma company), Home Depot, Samsung, BASF and Addidas.

Below is a chart of this year's Top 25, also with where each company placed in the previous two years (NA means not in the top 25 that year).


So, you ask, how on earth is the top 25 determined?

Gartner said it 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.

What's more, the minimum revenue to be included in the final evaluation list was again an amazing $12 billion. The end result is about 300 candidates.


From that culled list, Gartner analyzes publicly available financial data, specifically looking at three metrics from 2019 financial reports:

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


This represents a modest change. The assets metric used to regular return on assets or ROA. By moving to ROPA, it brings more of a supply chain focus. Revenue growth uses 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 35% of the total score weight (20% to ROA, 5% to turns, and 10% to revenue growth). That also represents a change, as the weighting for turns fell to 5% from 10% - a good thing, as I will explain later.

This formula gives a tremendous advantage to some companies, such as Amazon given its huge revenue growth or McDonald's and its 175 or so 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 at best, because of their need to stock every item under the sun to meet customer service targets, many of which are very slow movers. So the reduction in the weighting for turns is smart.

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). It also gives an advantage to companies that are aggressive acquirers in terms of the revenue growth factor.

Companies that have heavily outsourced production and distribution also have an inherent advantage. Why? Because they have chosen to shed assets, and that often drives their ROPA metric higher. While outsourcing can be a very smart thing for many reasons, it does not inherently improve a supply chain. This metric also discriminates against asset-intensive businesses, such as chemicals and automotive. That is in why we see only two such industrial companies (Schneider Electric and BMW) in the top 25.

So, at this point, you must be a very large and public company to be considered in the analysis. Private companies do not have the public financial data needed for this part of formula and cannot make the list.

 

In another change, the corporate social responsibility factor has been replaced with the similar one for what is called Environmental, Social, and Governance (ESG), which now represents 15% of the total composite score, up from 10%. This factor, entered in the end as a number between 1 and 10, comes from a combination of publicly available 3rd party scores on this criteria (which you can trust as accurate or not) and if a company produces a sustainability report. Seven of the top ten received a perfect 10 score on this measure, as did a number of other in the top 25.

Another 25% of the final rankings come from so-called "peer opinion." For 2020, this consisted of 151 apparently very influential respondents who first select a group of 25 companies from the master list of about 300 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 the companies selected based on how they are scored across respondents.

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. Gartner defines DDVN orchestration as is being "characterized by an understanding of customer value with processes and metrics that enable business trade-offs to deliver products and services profitably. Companies that work toward the DDVN ideal use demand management as a key differentiating capability, so they can plan, sense and shape in a way that brings profitable balance to the business."

The final 25% of the composite score came from votes from 44 of 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, the external ESG scores, and the votes from the peer and Gartner analyst groups (again, 35%, 15%, 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. Only very large companies are considered. I am not sure demand-driven orchestration should really be the evaluation framework. Who really knows how good most other company supply chains are? And it seems clear to me that working with Gartner and even better speaking at the Executive Conference always has a beneficial effect on a company's placement.

So, with all that, here in general is the advice I give to companies hoping 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" and/or written submissions to Gartner analysts touting what you are doing in supply chain in the same way that technology vendors do. Ladle on significant helpings of demand-driven orchestration-ness. (Shoot me an email if you would like to discuss any of this.)

And speak at the conference.


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 – but there must be a better way. Or maybe not. More on this next week.

What do you think of the Gartner Top 25 supply chain list and methodology? How could it be done better? Let us know your thought at the Feedback section below.

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