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.

What's more, the minimum revenue to be included in the final evaluation list was an amazing $12 billion.

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 40% of the total score weight (20% to ROA, 10% to turns, and 10% to revenue growth). Those percentage weightings are actually down 10 percentage points this, year, as I will explain in a moment.

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 156 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 targets, many of which are very slow movers. In general, this approach 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 grow through acquisition.

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 four such companies (3M, Schneider Electric, BASF and BMW) in the top 25, towards the end of the list.

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.

New this year is a factor for corporate social responsibility, which now represents 10% of the total composite score. This score, entered in the end as a number between 1 and 10, comes from a combination of some publicly available 3rd party scores on this criteria (which you can trust as accurate or not). This is as much as I know at present, other than in can be impactful. Number 1 Unilever received a perfect 10 score on this factor.

Another 25% of the final rankings come from so-called "peer opinion." For 2016, this consisted of about 185 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. But I suspect the panelists in the end are probably really voting based on their perceptions of which companies have 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 38 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 CSR scores, and the votes from peer group and Gartner analyst group (again, 40%, 10%, 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, 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 (see Schneider Electric) always has a beneficial effect.

There are other mysteries: GlaxoSmith Klein has mediocre financial numbers and middling peer and analyst scores, but cracked the top 25, it appears due to its CSR score. Is it really a top 25 supply chain? (It is in the midst of totally revamping and outsourcing its logistics operations).

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" with Gartner analysts touting what you are doing in supply chain in the same way that software vendors do. Ladle on significant helpings of demand-driven orchestration-ness. (Shoot me an email if you would like to discuss any of this.) I talked with two companies at the conference which had done just that.

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.

Any reaction to this year's Gartner Top 25 or methodology? Do you see any ways it could be improved? Let us know your thoughts at the Feedback button below.

As always, you have a knack for finding the sensitive point - like an acupressure point.

System go-live testing. Damned while you do it, damned if you don't do it.

You rightly point out that a really robust test plan can really save your bacon before you "flip the switch." The embarrassment of a delay is so much better than the debacle you describe above.

The systems implementation veterans have learned these lessons the hard way, and they will make sure the test plan is rigorous and complete. It would seem that none of the parties involved had one of them in the implementation team.

I learned this the hard way at a client, and now every new client will benefit from the experience of my very near miss. In my case, I had a veteran looking over my shoulder, and he kept me out of trouble. God bless Ray Healy and may he bask in the gratitude of the many younger staff he helped develop and grow!

Nick Seiersen

Finish Line most likely encountered the tendency to customize systems to accommodate familiar practices utilized within their operations. These practices are often considered "unique" to their business and are the result of legacy processes created to work around the shortfall in the capabilities of their obsolete systems. Folks working with these systems are comfortable with the processes and seek to re-create them in the new system rather than adopt what are considered standard or best practices in the industry on which the new WMS and DOM are based.

Strong operational leadership needs to be exercised during any WMS or DOM implementation to prevent or minimize customization by evaluating the current processes and making changes to fit accepted standard industry practices. Change is difficult for many who are wed to doing things the same way because that way is "unique" to the business. Leadership must educate the team on the need to change and persuade the majority to embrace it.

Rich Marshall

As they say, the highway to success in Project Management is littered with failures due to underestimating the risk. Rule number one - Never, never turn on a new system during Q4 or your prime business quarter. Rule number two - Validate all processes at full scale. Sure there are many "rules" you could point too but these two are key. Add to his the need to benchmark the solution providers successes and failures.

One might say it is hard to find this out - it is not. Due diligence is an expertise that requires background checks on the solution provider's customers and a review of the good, the bad and the ugly. And if they say they have no ugly they are not truthful. Not all implementations go well. Some due to the solution provider, some due to the customer being ill prepared to take on a major project. Lastly, with a project of this magnitude, trial runs and simulations of the full blown system should be presented to the CEO and staff before the system is green lighted!!

Tom Dadmun
Retired VP, Supply Chain
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