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May 21, 2015 - Supply Chain Flagship Newsletter

This Week in SCDigest

bullet Understanding the 2015 Gartner Top 25 Supply Chain Rankings bullet SC Digest On-Target e-Magazine
bullet Supply Chain Graphic & by the Numbers for the Week bullet Holste's Blog/Distribution Digest
bullet Cartoon Caption Contest Winners Announced bullet Trivia      bullet Feedback
bullet Supply Chain by Design, Stifel Weekly & Expert Insight bullet Videocasts/On Demand Videocasts

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Supply Chain Graphic of the Week
The Hidden Source of Supply Chain Risk

Cisco Thinks Analytics Can Reduce Its Electric Bill Big Time
Target Rolling Out RFID to Support Ecom
Impact of Rising Minimum Wage on DC Labor Costs
On-Line Sales Still Growing Rapidly


April 21, 2015 Contest

See Who Took Home The Prize!

Holste's Blog: Guidelines For A Successful Project Development



Weekly On-Target Newsletter:
May 20, 2015 Edition

Last Chance Cartoon, Target RFID, Q1 LTL Review, Maersk Ups the Ante and more

Using Transactional Data to Estimate Truckload Market Conditions in Near-Real-Time

by Dr. Michael Watson

Stifel Transportation Weekly for April 20, 2015

by John Larkin
Managing Director and Head of Transportation Capital Markets Research Stifel Financial Corp

Managing China's Changing Regulatory Landscape

by Scott Byrnes
Vice President, Marketing
Amber Road


What iconic operations term was first used in a journal article by MIT researcher John Krafcik in 1988?

Answer Found at the
Bottom of the Page

Understanding the 2015 Gartner Top 25 Supply Chain Rankings

What are the best supply chains in the world?

The reality is there is really almost 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 chain list.

I spent two days at the Gartner Supply Chain Executive Conference last week in Phoenix (See Trip Report: Gartner 2015 Exec Conference)  but left before the big dinner Tuesday night where the top 25 list has now become unveiled each year.


"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."


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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," a top 25 healthcare supply chains, top 25 industrial supply chains, and maybe some others I have missed.

So this year, I asked around a bit, and found - not surprisingly - that very few supply chain managers have any real idea how the list is created. They only know if they are in or they are out, and that's about all that matters.


This year for the first time Amazon came out on top, after Apple had grabbed the top spot for a few years running.

Somewhat oddly, to my view, Apple and Procter & Gamble were left off the top 25 this year because they have been consistently near the top of the list. So both those companies have now been placed in a separate new category, called "supply chain masters," a sort of "hall of fame" we might say.


Not sure the reasoning behind this. It frankly may have to do with in effect getting more companies in the top 25 plus the new master's category - Gartner clients like that recognition, of course. Was the move in reaction to some criticism last year from an ex-AMR/Gartner executive, who said the top 25 was becoming boring because it changed so little?


Regardless, this new construct seems to me something that will be tough to manage over the years. If P&G stumbles, will it be moved out of the masters list but maybe still be in the top 25? Will the masters list grow and grow over time, so that we have these competing masters and top 25 lists each year?


With Apple and P&G withdrawn from the competition, the rest of the top 10 was number 2 McDonald's, followed by Unilever, Intel, Inditex (Zara), Cisco, H&M, Samsung, Colgate-Palmolive and Nike. L'Oreal, Toyota and Home Depot rejoined the top 25 this year. In addition to Apple and P&G, Caterpillar dropped off.


Here is a quick visual of the top 5 for 2015, with a link to the full chart of all 25 companies:

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.

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Katrin Schulenburg, Senior Director IT at AMD, shares the AMD journey and success in this outstanding Videocast. Also features Geoffrey Annesley of E2open and SCDigest's Dan Gilmore

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Andre Martin , Flowcasting Inventor, JDA Software, Kevin Smith of DePaul University, Parag Jategaonkar of Accenture and Fred Baumann of JDA Software.

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We received a good number of comments after we recently updated our list of the top 12 supply chain innovations of all-time. You will find a sampling below. We'll publish some more next week.

Feedback on Top Supply Chain Innovations of All-Time:


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



Q: What iconic operations term was first used in a journal article by MIT researcher John Krafcik in 1988?

A: "Lean," Krafcik's term for the Toyota Production System.

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