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  First Thoughts

    Dan Gilmore


    Supply Chain Digest

May 20, 2016

Understanding the 2016 Gartner Top 25 Supply Chain Rankings

Dissecting this Year's List, as New Corporate Social Responsibility Factor Added to Scoring Mix

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 chain list.

I spent two days at the Gartner Supply Chain Executive Conference last week in Phoenix (See Trip Report: Gartner 2016 Executive Conference) but left before the big dinner Wednesday night where the top 25 list has now become unveiled each year.

Gilmore Says....

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.

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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," top 25 healthcare, industrial, and consumer goods supply chains, etc.

So once again at the conference this year, I asked around a bit, and 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.


More on that in a second.

This year for the first time Unilever came out on top, replacing Amazon (link to full list a little later in this column).

Again this year, Apple and Procter & Gamble were left off the formal top 25, as both those companies have now been placed in a separate new category, called "supply chain masters," a sort of supply chain "hall of fame." To get there, Gartner says a company needs to hav =e attained top-five composite scores for at least seven out of the last 10 years.

Both Apple and Procter & Gamble have done just that, and each would have made the top 5 again here in 2016

Why do this? It frankly may have to do with in effect getting more companies in the top 25 plus the new master's category combined - Gartner clients like that recognition, of course. It may also have been in part in in reaction to some criticism two years ago from an ex-AMR/Gartner executive Kevin O'Mara, who said the top 25 was becoming boring because it changed so little year to year.

I find the master's list idea a little goofy, but so be it.

With Apple and P&G withdrawn from the competition, the rest of the top 10 was number 2 McDonald's, followed by Amazon, Intel, apparel retailer H&M, Inditex (Zara), Cisco, Samsung, Coco-Cola, and Nestle.

Five new companies made the Supply Chain Top 25 this year versus 2015, with Schneider Electric, BASF and BMW joining the list for the first time, and the new HP and GlaxoSmithKline rejoining after several years' absence. Cummins, Home Depot, Qualcomm, Seagate, and Toyota fell out of the top 25.

Here is a quick visual of the top 5 for 2016, compared with 2015 and 2014 ratings, with a link to the full chart of all 25 companies:

View Full Top 25 List in 2016 Plus Results in 2014-15

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 acquistion.

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 section below.

Your Comments/Feedback




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