The Gartner Supply Chain Top 25 for 2016
This research unveils the 12th annual global Supply Chain Top 25,25 identifying global supply chain leaders and highlighting their best practices for heads of supply chain and strategy organizations. Gartner delivers world-class objective research and advice to help supply chain leaders design and execute a demand-driven supply network that is profitable, flexible and predictable. We provide actionable insights you can’t get anywhere else on executing the right supply chain strategies to deliver excellent customer service amid demand fluctuations while maximizing productivity, minimizing risk and enabling product innovation. Our trusted research, analysis and advice will help you: • Advance your initiatives through partnering with experts • Design and execute a roadmap for success • Run a world-class supply chain organization • Learn from industry leaders, and connect with valuable peers
For more information on how Gartner can help you transform your supply chain, contact your account executive or email [email protected]. G00295801 The Gartner Supply Chain Top 25 for 2016 Published: 18 May 2016
Analyst(s): Stan Aronow, Michael Burkett, Kimberly Nilles, Jim Romano
This research unveils the 12th annual global Supply Chain Top 25, identifying supply chain leaders and highlighting their best practices for heads of supply chain and strategy organizations.
Key Findings ■ Three key trends emerged among the leaders: closer, customer-driven partner integration, further adoption of advanced analytics and a strong focus on corporate social responsibility.
■ In recognition that running an ethical and sustainable supply chain is a key aspect of leadership, Gartner has added a quantitative measure of corporate social responsibility to the Supply Chain Top 25 methodology.
■ For the first time, Unilever topped the ranking, followed by McDonald's, Amazon, Intel and a newcomer to the top group, H&M. Apple and P&G continued to qualify for the Masters category recognizing sustained leadership over the last 10 years.
■ Five new companies made the list this year. Schneider Electric, BASF and BMW joined the list for the first time, and two companies rejoined this year after a hiatus: HP and GlaxoSmithKline.
Recommendations ■ Build closer integration with suppliers, partners and customers in support of more value-added end-user solutions.
■ Invest in advanced analytics capabilities to make step-function improvements in performance within and across supply chain functions.
■ Link corporate strategy and social responsibility-focused efforts within supply chain. Describe how you are capitalizing on opportunities or mitigating risks to drive your company's competitive advantage.
Table of Contents
Analysis...... 3 The Notable Trends...... 3 Customer-Driven Partner Integration...... 4 Adoption of Advanced Analytics...... 4 Increasing Emphasis on Corporate Social Responsibility...... 5 Inside the Numbers...... 6 Return of the Supply Chain "Masters"...... 6 The Top Five...... 11 Movers and Shakers: No. 6 Through No. 15...... 13 Rounding Out the List: No. 16 Through No. 25...... 16 Honorable Mentions...... 19 What Is Demand-Driven Excellence?...... 20 Operational Excellence and Innovation Excellence...... 22 Measuring Demand-Driven Excellence...... 22 The Metrics We Wish We Had...... 22 Supply Chain Top 25 Methodology...... 26 Business Data...... 27 Opinion Component...... 28 Polling Procedure...... 32 Composite Score...... 32 Looking Ahead...... 33 Gartner Recommended Reading...... 33
List of Tables
Table 1. The Gartner Supply Chain Top 25 for 2016 ...... 8 Table 2. Metrics for Operational Excellence and Innovation Excellence...... 23 Table 3. Industries Not Included in the Supply Chain Top 25 ...... 26
List of Figures
Figure 1. Gartner Supply Chain Masters for 2016...... 6 Figure 2. The DDVN Maturity Journey...... 21 Figure 3. The Hierarchy of Supply Chain Metrics: Operational Excellence...... 24 Figure 4. The Hierarchy of Product Metrics: Innovation Excellence...... 25 Figure 5. 2016 Peer Opinion Panel Composition: Region...... 29 Figure 6. 2016 Peer Opinion Panel Composition: Industry...... 30
Page 2 of 35 Gartner, Inc. | G00295801 Figure 7. 2016 Peer Opinion Panel Composition: Function...... 30 Figure 8. 2016 Peer Opinion Panel Composition: Role...... 31 Figure 9. 2016 Peer Opinion Panel Composition: Revenue...... 31
Analysis In our 12th edition of the Supply Chain Top 25, we have several longtime leaders with new lessons to share and a number of more recent entrants from the high tech, industrial, chemical, auto and life science sectors.
A key aspect of the Supply Chain Top 25 ranking is the demonstration of demand-driven leadership. We've been researching and writing about demand-driven practices since 2003, highlighting the journey companies are taking — from inward-focused supply management functions to supply chains that orchestrate a profitable response to demand. This year we are also elevating corporate social responsibility (CSR) as a critical element of supply chain leadership by incorporating a new quantitative measure into our methodology.
Through this research we seek to foster the celebration and sharing of best practices as a way to raise the bar of performance for everyone. Another objective of the Supply Chain Top 25 is to highlight and elevate the importance of the supply chain function and profession across our community, within corporate boardrooms and for the investment community, at large.
In 2015, the CEO's focus continued to be on jumpstarting growth,1 organically and through record levels of merger and acquisition (M&A). Supply chain did its part to enable and help lead this charge. The global economy stumbled through another mixed year, facing headwinds ranging from a downshift in the Chinese economy, stagnation and/or decline in many other major markets. Moderate growth in the U.S. was enough to strengthen the dollar and impact trade flows and corporate earnings, particularly in consumer products (CP). The oil price shock that started in mid-2014 continued dramatically throughout 2015, eventually leading to a slowdown that decimated earnings in related industries, offsetting some of the gains from lower consumer energy prices.
The approximately 300 large corporations we track in our survey delivered an average annual revenue growth rate of 2.5% in 2015, down from 5.9% the year prior, even when higher recent M&A activity was included. Sometimes, necessity is the mother of invention and, in this challenging economic environment, companies continued to increase the pace of innovation in supply chain.
The Notable Trends Each year, our analysts research the supply chains of hundreds of companies. Through this work, we note the trends: What are the leaders focusing on, where are they investing time and effort, and what can be applied broadly? Three key trends stand out this year for these leaders that are accelerating their capabilities and further separating them from the rest of the pack.
Gartner, Inc. | G00295801 Page 3 of 35 Customer-Driven Partner Integration Gartner's supply chain research is centered on the concept of running a demand-driven value network (DDVN). While customer centricity is a natural extension and enabler of DDVN, in the past year, some companies and ecosystems have raised the bar in terms of what this means.
For instance, a popular trend in leading consumer product companies is to centralize customer service and other customer-facing functions in more cost-effective regional hubs. This allows for standardization of best practices and economies of scale, with the ability to stay relatively close to individual customers. One leading CP company has piloted having supplier representatives sit side- by-side with their supply chain support counterparts in these service centers to speed up collaboration cycles and, ultimately, the response to customer requests, issues and priorities. This is a deeper level of integration than we've seen to date and bodes well for the long-term satisfaction of customers in this industry.
Meanwhile in high tech, there are dynamic federations of hardware, software and service providers coming together for the sole purpose of bringing solutions to customer's requirements. This collaboration is sometimes for extended periods of time and, in other cases, it is a one-time project to deliver a tailored response to customer needs. We're particularly seeing this type of arrangement in the delivery of Internet of Things (IoT)-based solutions. Consider a solution that allows for the remote monitoring and management of refrigerated cases holding beverages in a large number of distributed locations. The solution is comprised of sensor chips, gateway devices, embedded software and an analytics platform for tracking inventory replenishment requirements, case temperature failures and other performance parameters. There is also a service component for maintenance of the solution hardware and software. The orchestrator of the group is situation- specific. It could be an equipment OEM, a chipmaker, an electronics distributor, a contract manufacturer, an integration partner or otherwise. The rules surrounding who owns the intellectual property (IP) and who bears the risks for the broader integrated solution are still unclear in some of these arrangements. Despite the uncertainty in this brave new world, the end result is that customer's underlying challenges are being solved.
More broadly, digital business has emerged as a key enabler of tighter integration across value chains. Leading companies in the process and industrial discrete manufacturing industries are not only getting better visibility into their own manufacturing and outbound transportation networks, but also integrating that visibility with similar data from upstream partners to provide a holistic view of supply to their customers and to sense and respond to potential disrupters earlier than they have in the past.
Adoption of Advanced Analytics Another trend we see at leading supply chains is the use of advanced analytics to aid in running multiple parts of their operations, spanning the entire end-to-end supply chain. Consider an equipment manufacturer mining historical CRM and sales data and using machine learning algorithms to predict which deals in the pipeline have the highest probability of converting into real demand and which are at risk, requiring intervention. Some CP companies have enabled permission-based auto-replenishment of their products based on signals from internet-connected smart sensors embedded in the products at consumers' homes. The usage data captured as part of
Page 4 of 35 Gartner, Inc. | G00295801 this process is used to generate better demand forecasts based on usage personas and to inform the design of new products entering the pipeline.
On the product side, leaders in various discrete manufacturing industries are using artificial intelligence to analyze digital photographs of their products from source through manufacturing and delivery. They are matching this information up with customer complaint data to spot negative patterns and identify quality problems sooner. A high-tech company is piloting real-time use of big data analytics to tailor test scripts executed based on the most current risk-profile of individual circuit boards. Component-test performance data from suppliers and customer product performance data from the field provide a holistic view of product quality that is factored into which scripts are executed on products as they progress through the testing line.
One process manufacturer is consolidating near-real-time information from customers, internal manufacturing and distribution nodes, suppliers, logistics partners, and complementary third-party sources. It then applies data analytics combined with business rules to generate prescriptive recommendations and support daily decision making, business optimization, and long-term planning of network capacity and capabilities.
In each case, the value for these companies is in the algorithms that convert disparate data points into operational insights. In most cases, the output is predictive of a future outcome or prescriptive of what the supply chain planner or operator should do about it. In some domains, this capability will be an interim step in a longer journey toward running autonomous supply chain functions.
Increasing Emphasis on Corporate Social Responsibility Running socially responsible supply chains aligns with what investors, customers, employees and the general public expect from companies today. Our research shows that mainstream institutional investors are paying greater attention to a company's nonfinancial performance indicators, including its handling of environmental, social and governance (ESG) factors. Supply chain executives should expect their organizations to become a bigger part of their company's investor relations story as these stakeholders expand their awareness of ESG issues.
Large corporate supply chains have enormous impact on people and the planet. As Gartner analysts, we're increasingly hearing from companies about their efforts to increase transparency and performance in running socially responsible supply chains. A very high-profile example of this was Unilever's recent announcement that it sends zero waste to landfills from its global manufacturing facilities and is well on its way to being an overall zero waste to landfill company. Earlier this year, chipmaker Intel announced that its entire supply chain will be certified as conflict- free to ensure that profits from metals sourced for its chips are not funding human rights atrocities in the Democratic Republic of the Congo (DRC). These are just two of many milestones accomplished by those committed to running ethical, sustainable supply chains.
The companies we see as further along in developing mature corporate social responsibility (CSR) practices have moved beyond mere regulatory compliance and have figured out how to link these efforts back to support for their underlying corporate strategies. That may be part of a brand promise attracting more customers or identifying and mitigating ESG risks that could cost their
Gartner, Inc. | G00295801 Page 5 of 35 company dearly. In one stark case highlighting the stakes, it is less than a year since the announcement that Volkswagen knowingly evaded U.S. auto emissions testing standards, but the reputational damage, tallying in the billions, has been done.
Customer-driven partner integration, further adoption of advanced analytics and strong focus on CSR are this year's most common trends among supply chain leaders.
Inside the Numbers
Return of the Supply Chain "Masters" Last year we introduced a new category to highlight the accomplishments and capabilities of long- term leaders. We refer to these companies as supply chain "masters" and define them as having attained top-five composite scores for at least seven out of the last 10 years. To be clear, this category is separate from the overall Supply Chain Top 25 list, but it is not a retirement from being evaluated as part of our annual research study. To the contrary, if a "master" company were to fall out of having a top-five composite score for long enough, they would lose this designation and be considered as part of the Supply Chain Top 25 ranking in the same way as any other company in our study. All of that said, both of last year's inaugural masters, Apple and P&G, qualified for this category again (see Figure 1).
Figure 1. Gartner Supply Chain Masters for 2016
Source: Gartner (May 2016)
Apple recently announced that it would post a year-over-year revenue decline for the first quarter of 2016. This is not unusual for any company, given we are three calendar quarters into a corporate earnings recession. What was remarkable about the announcement, however, was that it was the first decline since 2003!
Page 6 of 35 Gartner, Inc. | G00295801 The iPhone has been a large part of Apple's remarkable performance. And while tens of millions are sold each year, the coordination required with suppliers and partners to deliver new models each year has developed into a reliable cadence. Apple has also improved the degree of transparency into its extended supply chain in recent years. In the area of conflict minerals, its 2015 Supplier Responsibility Progress Report states that all of its 242 smelters and refiners of tin, tantalum, tungsten and gold are subject to third-party audits to ensure they are not funding violence in the Democratic Republic of Congo (DRC).
Apple continues to succeed by offering platforms that ecosystems of partners build upon to meet customers' needs, whether that relates to core product features such as access through touch- based security, media content and applications or third-party accessories that convert its products into smart diagnostic devices or payment terminals. The big forward-facing question for Apple and its supply chain is whether it can deliver on the next big innovations to continue the revenue and earnings parade of the last decade. A big X-factor will be Apple's ability to launch an automobile in the future — a completely different proposition than its continued innovation within the consumer electronics market, such as the Apple Watch.
Relative to the Supply Chain Top 25 ranking, Apple continued to dominate in both its historical financial performance and the opinion of the peer and analyst communities. In 2016, Apple notched its tenth straight year with a top-five composite score.
CP giant P&G is our other returning master. P&G received a top-five composite score in 2016, marking an impressive nine out of the past 10 years for this accomplishment.
For the majority of its products, P&G is running an end-to-end synchronization program. Every part of the supply chain operates based on the daily cadence of consumption, in some cases triggered by demand at the shelf. Supply chain is also playing an active role in P&G's move toward common product and packaging platforms, where standards are set globally and a more limited menu of options is selected regionally, as required. The supply chain team brings data and analysis skills to the process, with the ultimate goal of increasing the value that each active SKU contributes to the company.
In the domain of big data analytics, P&G's supply chain team is using advanced techniques to drive elimination of truck residence time at mixing centers. The company has also embedded sensors in some of its products, such as toothbrushes and air fresheners. The data transmitted from these products aids the company in understanding consumer usage patterns to support replenishment of supplies for existing products and design features for future offerings.
Both Apple and P&G continue to offer advanced lessons for the supply chain community.
Along with the Masters category, the Supply Chain Top 25 continues to offer a platform for insights, learning, debate and contribution to the rising influence of supply chain practices on the global economy (see Table 1).
Gartner, Inc. | G00295801 Page 7 of 35 Table 1. The Gartner Supply Chain Top 25 for 2016
Gartner Three- Peer Opin- Three- Opinion1 Inventory Year Weighted CSR Compo- ion1 Year Weighted Composite Rank Company (38 Turns3 Revenue nent Score5 (185 Voters) ROA2 Score6 Voters) (10%) Growth4 (10%) (25%) (20%) (25%) (10%)
1 Unilever 1,841 632 10.8% 6.9 3.6% 10.00 5.84
2 McDonald's 1,754 493 13.2% 156.0 -4.0% 3.00 5.54
3 Amazon 3,356 582 0.5% 8.4 20.4% 0.00 5.34
4 Intel 1,112 496 11.4% 4.3 1.1% 9.00 4.62
5 H&M 833 189 25.3% 3.5 16.3% 9.00 4.50
6 Inditex 1,212 283 16.7% 3.9 11.2% 9.00 4.42
7 Cisco Systems 1,158 510 8.2% 11.2 2.3% 5.00 4.21
Samsung Elec- 1,313 303 8.6% 14.8 -2.4% 9.00 3.95 8 tronics
The Coca Cola 1,459 253 8.3% 5.7 -2.9% 9.00 3.69 9 Co.
10 Nestlé 1,251 257 8.9% 5.2 -1.1% 10.00 3.68
11 Nike 1,393 205 14.7% 3.9 9.7% 4.00 3.58
12 Starbucks 1,069 188 16.9% 6.8 13.8% 4.00 3.55
13 Colgate-Palmolive 880 323 15.1% 5.2 -3.5% 3.00 3.43
Page 8 of 35 Gartner, Inc. | G00295801 Gartner Three- Peer Opin- Three- Opinion1 Inventory Year Weighted CSR Compo- ion1 Year Weighted Composite Rank Company (38 Turns3 Revenue nent Score5 (185 Voters) ROA2 Score6 Voters) (10%) Growth4 (10%) (25%) (20%) (25%) (10%)
14 3M 784 163 15.0% 4.2 -0.9% 9.00 3.30
15 PepsiCo 931 347 8.5% 8.6 -2.3% 4.00 3.23
16 Walmart 1,512 232 7.9% 7.7 0.6% 3.00 3.06
17 HP 390 266 4.6% 12.1 -5.2% 10.00 2.87
18 Schneider Electric 392 259 4.3% 5.1 4.9% 10.00 2.80
19 L'Oréal 888 159 11.4% 3.0 7.0% 4.00 2.70
20 BASF 492 199 6.5% 5.0 -2.0% 10.00 2.70
Johnson & John- 950 165 11.6% 2.6 -0.4% 4.00 2.65 21 son
22 BMW 778 128 3.8% 6.0 8.8% 10.00 2.61
23 GlaxoSmithKline 361 98 12.6% 1.9 -1.9% 9.00 2.51
24 Kimberly-Clark 634 240 9.0% 6.3 -2.5% 3.00 2.48
25 Lenovo 508 217 3.6% 13.3 17.0% 4.00 2.43
Notes: 1. Gartner Opinion and Peer Opinion: Based on each panel's forced-rank ordering against the definition of "DDVN orchestrator." 2. ROA: ((2015 net income / 2015 total assets) * 50%) + ((2014 net income / 2014 total assets) * 30%) + ((2013 net income / 2013 total assets) * 20%). 3. Inventory Turns: 2015 cost of goods sold / 2015 quarterly average inventory. 4. Revenue Growth: ((change in revenue 2015-2014) * 50%) + ((change in revenue 2014-2013) * 30%) + ((change in revenue 2013-2012) * 20%). 5. CSR Component Score: Index of third-party corporate social responsibility measures of commitment, transparency and performance. 6. Composite Score: (Peer Opinion * 25%) + (Gartner Research Opinion * 25%) + (ROA * 20%) + (Inventory Turns * 10%) + (Revenue Growth * 10%) + (CSR Component Score * 10%).
Gartner, Inc. | G00295801 Page 9 of 35 Gartner Three- Peer Opin- Three- Opinion1 Inventory Year Weighted CSR Compo- ion1 Year Weighted Composite Rank Company (38 Turns3 Revenue nent Score5 (185 Voters) ROA2 Score6 Voters) (10%) Growth4 (10%) (25%) (20%) (25%) (10%)
2015 data used where available. Where unavailable, latest available full-year data used. All raw data normalized to a 10-point scale prior to composite calculation. "Ranks" for tied composite scores are determined using next decimal point comparison.
Source: Gartner (May 2016)
Page 10 of 35 Gartner, Inc. | G00295801 The Top Five We have a new No. 1 this year. Unilever, the Anglo-Dutch CP giant, has steadily moved up the rankings over the past several years and is very well regarded by both the peer and analyst voting panels due, in part, to its willingness to share best practices with the broader supply chain community. The company is a role model when it comes to CSR and scored a perfect 10 out of 10 on our new CSR component. Unilever says that it is achieving zero waste through its "four R approach" — reducing, reusing, recovering or recycling — and treating waste as a resource with alternate uses, such as converting factory waste to building materials or composting food waste from staff cafeterias. Longer term, it aspires to be "carbon-positive" by 2030.
Unilever has made significant investments in regional operational centers that support all facets of the customer order-to-cash process. This work is yielding cost savings through economies of scale and common processes, as well as the ability to better support customer needs by applying analytics to a common CRM system.
The company has also improved its product life cycle management (PLM). Recent efforts in that area include global reuse initiatives, product platform thinking for scalable global growth and a segmentation-based approach. In 2015, it launched a Foundry Ideas platform to crowdsource innovations for sustainable products as part of its "sustainable living" plan.
Returning at No. 2 is McDonald's. The well-known restaurant chain staged a comeback in 2015, paring unprofitable locations and menu items and introducing its popular all-day breakfast offering. The latter entailed a broad-scale effort to retool restaurants previously configured for a more traditional daily menu schedule. This program successfully moved from pilot in April 2015 to full deployment three months later across 14,000 restaurants in the U.S. McDonald's supply chain actively participates on both product and menu category teams to help shape the portfolio and better plan for new initiatives.
Overall, the McDonald's corporate supply chain team excels at orchestrating the upstream supply network. It promotes and acts as the conduit between outsourced vendors, suppliers, corporate stores and franchise partners. It uses council meetings to collaborate with suppliers on new product innovation and technology, as well as on plant safety. Base expectations with suppliers are managed through a standard supplier performance index, but the differentiator is more cultural and behavioral, as partners tend to put the McDonald's system first when sharing product and process innovations and staffing support teams with top talent. It is this type of close, collaborative relationship that enabled McDonald's to escape any impact to its broader restaurant network when a bird flu outbreak impacted about 40 million egg-laying hens last year (12% of U.S. supply). Working closely with the egg suppliers, the restaurant locked in adequate supply at a higher quality rating than the overall industry and was able to smooth pricing so that end restaurants saw no impact during the general disruption.
Amazon dropped to No. 3 after its first ever appearance at No. 1 last year. This was not due to flagging financial performance nor opinion polls. The main driver was Amazon scoring zero out of 10 on our new CSR measure. The company is known for having a secretive culture that has historically extended to a lack of transparency on supply chain sustainability and governance performance
Gartner, Inc. | G00295801 Page 11 of 35 measures. In the past two years, Amazon has brought in a high-powered team of sustainability experts, so we hope to see changes in the years to come.
Amazon, of course, continues to be a leader when it comes to innovation in its products and supply chain. It has sold several million Echo voice-controlled home speakers that allow users to search the internet for information, play music, complete online tasks and control other home devices. It is not hard to see where this could become a popular means of reordering common everyday products. Amazon's Prime Now same-day delivery service has expanded to more than two dozen U.S. cities and London, and includes delivery from local restaurants and stores in addition to company-owned warehouses. In order to reduce dependency on third-party freighter services, Amazon is building its own logistics network to keep up with customer demand. The online retailer recently leased 20 Boeing 767 freight aircraft to set up its own fleet and will deploy thousands of branded tractor trailer trucks in North America to move packages between fulfillment centers. It has recently been reported that Amazon is in discussions to buy a German airport.2 And yes, it is still testing drone aircraft, with the ultimate goal of creating a 30-minute order-to-delivery service.
Intel remained in the top tier of the ranking this year at No. 4, based on a relatively high return on assets (ROA) and strong opinion poll scores. Intel continues to be the largest chipmaker in the world and dominates the markets for PC and server-based microprocessors. The company is actively pursuing growth opportunities, as evidenced by its largest ever acquisition of chipmaker Altera in 2015. Intel's next challenge is to drive organic growth in new markets. Its supply chain group has proven to be a worthy partner for growth in the past. Over the course of 2014, the team enabled an entirely new ecosystem of China-based technology providers to support the ramp up of new tablet products. The result exceeded the CEO's aggressive 40 million unit shipment goal by 15%. Intel's supply chain is also acting as a test bed for new products offered by its IoT group, using this technology to improve the visibility and coordination of complex inbound capital equipment deliveries and outbound product shipments to customers.
Intel has had a longtime focus on running an ethical and sustainable supply chain and scored nine out of 10 on its CSR component score. It is the largest U.S. purchaser of renewable energy certificates and when combined with in-house sources, gets 100% of the 3.1 billion kilowatt-hours of electricity its operations consumes annually from green sources.
Rounding out the top-five group this year is H&M at No. 5. The Swedish fast-fashion retailer climbed two spots on a combination of extremely strong three-year weighted average ROA (25.3%) and revenue growth (16.3%) and a nine out of 10 for CSR, reflecting its strong record in sustainability and workers' rights. H&M was part of a recent coalition of top clothing companies that called on governments to agree to a strong climate change deal based on concerns that long-term climate effects could harm production of one if its major inputs, cotton. In 2015, its founding family launched the H&M Conscious Foundation, which presents a Global Change Award as a fashion industry innovation accelerator for sustainable clothing.
H&M has been on a rapid multiyear expansion path with its brick-and-mortar stores and shows no signs of slowing down, with another 425 planned for 2016. Its digital efforts are moving less quickly, as it grapples with the added shipping, handling and price deterioration associated with online returns. H&M operates its supply chains tailored by product type, with 80% of volume built to plan
Page 12 of 35 Gartner, Inc. | G00295801 at standard, cost-efficient lead times and the remaining 20% that is agile and can respond to fashion trends by going from design to hanger in as little as 20 days.
Movers and Shakers: No. 6 Through No. 15 This section of the ranking offers an impressive array of blue chips, with notable contributions to the discipline of supply chain management (SCM).
At No. 6, is Inditex, Spain's leading fashion retail group best known for its Zara brand. Inditex posted similar strong performances in three-year weighted average ROA (16.7%) and revenue growth (11.2%) and scored nine of 10 for CSR. The Zara brand has been quite successful in its e- commerce business, particularly in the U.S. Inditex's culture is very team-oriented and focused on having talented practitioners run the business using best-in-class processes versus the personality- driven cultures often found at fashion houses. A couple of years ago, it set up a planning and analytics team that sorts through real-time sales trends to inform future design and production. Another team converts voice of the customer feedback gathered from the store and district network into prescriptive advice for the design teams. Inditex has set a goal to run 100% eco-efficient stores by 2020. The new Zara flagship store in Manhattan tracks sustainability measures across all of its processes and will consume 30% less energy and 50% less water compared to a conventional store.
Networking pioneer Cisco is No. 7. Concurrent with Cisco's changing of the guard at the CEO level last year, it created a new role managing both supply chain operations and the IT group, reflecting the high use of technology in managing supply chains. One area where Cisco has leveraged technology along with process improvement is in supplier collaboration. The team deployed a cloud-based partnering platform with suppliers that serves as a single source of truth for data, eliminating the bullwhip effect between Cisco, contract manufacturers and suppliers. There is full demand visibility, and suppliers can address shortages through alerts in a more automated way, removing Cisco as the potential bottleneck to the resolution process. Another focus area for the team is in digitizing the logistics function. This includes connecting logistics to the broader supply chain with data, standards, automated event management and machine agents. Cisco is also bringing new technologies to bear in its warehouses, including augmented reality, telematics and video analytics. This is part of a broader effort to digitize its supply chain. It is leveraging in-house Internet of Everything (IoE) technology to improve product quality, gain energy efficiency in operations and reach universal order visibility.
Samsung Electronics, at No. 8, has been a familiar face on our ranking for many years. Its growth slowed in recent periods due to competition from Apple and others in the maturing mobile phone market, but early 2016 results look good, as component businesses such as semiconductors offer a solid performance counterbalance. Its supply chain has enabled a move into business-based products and solutions tailored for industry-specific uses across retail, education, hospitality, healthcare, finance and transportation. Meanwhile, Samsung has continued to innovate its products, with the most recent push being in virtual reality (VR), by offering a lower-cost device that converts its latest Galaxy smartphones into a full-on mobile VR headset. The supply chain team continues to focus on improving customer collaboration and gaining insight into consumer behaviors through connected devices. Samsung Electronics received high marks (nine of 10) on the
Gartner, Inc. | G00295801 Page 13 of 35 new CSR component. It recently received two awards for sustainability from the U.S. Environmental Protection Agency (EPA) for its use of sustainable materials in the Samsung Galaxy S6 and its long- term commitment to the proper disposal and recycling of e-waste in the United States.
The Coca Cola Co. ranks at No. 9. The food and beverage leader is driving growth through product innovations and entering new markets and products, particularly in juices and waters. Supply chain, in partnership with the business, is taking a value-based approach to product and packaging portfolio management. The company continues to use its Freestyle smart delivery systems to tailor supply chain solutions by market and segment. In the U.S., it is a full-service dispensing machine that can offer a myriad of choices by combining 100+ different sodas and juices, while in the U.K., it is a tabletop format focused more on juices. In emerging markets, it might be a three-bottle, two- liter dispensing machine set up for a village. Late in 2015, The Coca Cola Co. announced that it was selling some production plants and creating a new supply system in the U.S. that will leverage the strengths and capabilities of its four largest producing bottlers to operate as an aligned and competitive national product supply system. The company scored nine out of 10 for CSR and has set out ambitious sustainability goals for 2020 that include improving water and emissions efficiency by more than 20%, empowering five million women across its value chain and several programs to improve nutritional content and reporting.
One of the biggest gainers at the top of this year's ranking is Nestlé, up seven to No. 10. The world's largest consumer food supply chain scored a perfect 10 out of 10 for CSR, including a 99 out of 100 in the environmental dimension of the Dow Jones Sustainability Index for its use of "zero- water" factories and conversion of biowaste into renewable energy. Nestlé's supply chain has consistent priorities around fresh product availability, customer collaboration, capital efficiency, data-driven decision making, complexity management and people development. It is now focused on optimizing end-to-end process flows and rethinking quality across its broader value chain. Recalling half a billion Maggi noodles units in India in 2015 was a reminder that "one up and one down" traceability is no longer sufficient. This is no small task in an organization staffed by tens of thousands, spanning more than a hundred countries. Nestlé is also investing in predictive analytics for demand planning and enabling growth in its e-commerce business, which includes packaging tailored more for delivery than display in a store.
At No. 11 is footwear and apparel leader, Nike, which continues to post strong financial performance, with a three-year weighted average ROA of 14.7% and growth rate of 9.7%. Nike continues to lead in product innovation, and its supply chain plays a big role in enabling and ramping new technologies. For those who remember Marty McFly's self-tying shoes in the movie "Back to the Future II," the company recently announced that it is actually releasing a version. The self-tying sneakers with power-operated laces, which tighten with the press of a button, will launch later this year. Last fall, Nike entered into an innovation and manufacturing partnership with outsource provider Flex that is expected to add value in terms of new manufacturing technologies and shorter cycle times. Nike has invested significantly in supply network design and PLM capabilities. Its supply chain also has extended visibility to outsourced factory production and compliance, as well as to how stores are executing on merchandising, inventory and operations plans.
After jumping five slots last year, Starbucks held steady at No. 12. The world's largest coffee retailer is on a roll and posted stellar results heading into 2016, with a three-year weighted average ROA of
Page 14 of 35 Gartner, Inc. | G00295801 16.9% and growth rate of 13.8%. Starbucks' prominent CEO, Howard Schultz, recently spoke about the need for supply chain to have a seat at the boardroom table. He emphasized the criticality of strong supply chain capability to achieving the level of scale required to support its more than 20,000 locations and the consumer trend toward speedy delivery. Starbucks has further rolled out a click-and-collect feature through its online app that allows consumers to place and pay for orders that are routed to the nearest store for fast-lane pick up. Starbucks has been a socially conscious company as evidenced by its program to reimburse employee college costs and the use of marketing to promote harmony in the community. It recently announced that it plans to donate all its leftover food at U.S. stores to charity, starting with 5 million meals provided to nationwide food banks this year and expanding to approximately 50 million meals annually, in five years.
CP leader Colgate-Palmolive lands at No. 13. Even in the face of unprecedented currency headwinds, the company pulled off an impressive 15.1% three-year weighted average ROA. The engine behind these results is extensive programs, comprised of more than 10,000 projects, focused on finding cost savings and reinvesting them back into growing the business. Continuous improvement and the concept of economic value-add are embedded in the supply chain and broader company's DNA. For several years running, supply chain, in partnership with the business, has managed significant improvements in SKU productivity through a disciplined governance process. The Colgate-Palmolive team has partnered with its enterprise software provider to co- develop supply chain control tower capabilities, including better demand sensing, inventory optimization and supply network planning. The pilot implementation of this capability has enabled daily responsiveness and reduced inventory levels, while minimizing out of stock impacts.
Industrial innovator 3M retained its No. 14 position. For a diverse manufacturer, it boasts a very high three-year weighted average ROA of 15%. 3M has also demonstrated a strong commitment to, and performance in, running a sustainable supply chain, scoring nine out of 10 points for CSR. It has set aggressive 10-year sustainability goals that include reducing global water usage by 10%, improving energy efficiency by 30%, achieving "zero landfill" status for more than 30% of manufacturing sites and helping customers reduce CO2 emissions by 250 million tons. 3M supply chain's take on running a bimodal supply chain is embodied by its use of the term "Efficient Growth." For decades, the company has grown its top line, mostly through more creative use of resources. Supply chain's role in this growth is centered on three elements. The first is regionalizing supply chains to reduce complexity, enhance operational impact and improve customer service. Next is accelerating disruptive technology to leverage innovation and deliver higher-quality, lower-cost and even-more- innovative products. The third is harmonizing global processes in alignment with a global ERP platform to deliver world-class productivity, inventory management and capital efficiency.
Forward-thinking food and beverage purveyor, PepsiCo is last in this middle group at No. 15. PepsiCo is leveraging its near-real-time direct store delivery network visibility to support hyperlocal marketing, including tailored assortments and perimeter displays at the right store and time to drive sales. Another focus area is a global rollout of a standardized demand and supply planning platform that delivers base capabilities to emerging markets and a larger menu of capabilities for complex, mature markets. PepsiCo's supply chain is partnering with commercial teams to deploy a total portfolio optimization governance process and tool that allows for data-driven assessment of portfolio health, detailed analysis relative to evaluation criteria and targets, and a process for final
Gartner, Inc. | G00295801 Page 15 of 35 portfolio decisions. Pilots of the new portfolio optimization platform are yielding double-digit percentage improvements in profit per volume measures. PepsiCo is also using tools and models to perform advanced inventory analysis and decision making. This includes self-service dashboards that allow users to drill into root causes for problem areas and to simulate the quantitative impact of corrective actions.
Rounding Out the List: No. 16 Through No. 25 Megaretailer Walmart, at No. 16, continued its push into e-commerce channels in 2015 with more than $1 billion in new investments. Global revenue in that channel increased 22% to $12.2 billion. The company set up large, dedicated online fulfillment centers to support this volume in the U.S. By stocking product centrally, it has been able to simultaneously increase assortment by 60% to over 10 million items. About 75% of Walmart's online sales come from nonstore inventory, providing a source of growth outside of brick and mortar. Its U.K.-based Asda stores offer the "click and connect" service, which has been very popular with local shoppers. One of Walmart's community investments has been a Global Women's Economic Empowerment Initiative, which provides training, access to markets and career opportunities to nearly 1 million women, many on farms and in factories. As part of that effort, the retailer is increasing its sourcing from women-owned businesses.
After several years away, the legendary Silicon Valley innovator, HP, rejoins the list at No. 17. In November 2015, HP split into two separate entities, HP Inc., which owns the PC and printer businesses, and Hewlett Packard Enterprise, which primarily owns the enterprise computing and services businesses. Starting in next year's ranking, we will evaluate them as separate entities. The teams performing the complex split managed to pull off the complete separation of two $50 billion- plus businesses without a hitch and in only a matter of months. While the split took dedicated focus, the two HPs were still able to simultaneously improve their individual businesses. The enterprise business delivered a visibility and data analytics platform that is now leveraged for improved demand forecasting, among other areas. It has also developed a quality cloud environment to better track the quality life cycle. Other enterprise priorities include speeding new product design processes and improved cybersecurity. Meanwhile, HP Inc. has focused on improving customer experience through perfect order fulfillment and other means. It is also enabling artificial intelligence (AI) software routines to identify problems in the order to fulfillment process and upstream supply chain. HP scored a perfect 10 on the CSR component and is a longtime leader in this area. HPE is focused on combatting human trafficking in its supply chains and HP Inc. is focused on improving sustainability and workers' rights across its entire value chain.
Schneider Electric, at No. 18, is a first-timer to the list, but frequently referenced as an honorable mention in previous years. The global specialist in energy management and automation jumped 16 slots from No. 34 last year, based on increasing opinion poll vote sentiment and scoring 10 of 10 for CSR. Schneider Electric has spent the last several years moving from decentralized supply chains supporting its extremely diverse customer base to one that is tailored to align with customer requirements, in a scalable way, through a small number of differentiated end-to-end flows through ordering, planning, sourcing, manufacturing and delivery. Other key initiatives include efforts to significantly reduce end-to-end customer lead times, improve time to market for new capabilities and improve customer satisfaction through special care units and focused on-time-deliver
Page 16 of 35 Gartner, Inc. | G00295801 improvements. Schneider Electric is also focused on maturing its sales and inventory operations planning process, deploying network optimization and leaning out warehousing and transportation functions. Finally, the team is driving continuous improvements in its engineer-to-order and field services supply chains.
France-based L'Oréal, the world's largest cosmetics company, ranks at No. 19, up three slots from last year. Its supply chain has focused on improving demand forecasting and supply and demand matching capabilities. The results have been impressive, as it has been able to improve service levels by more than 2%, while holding inventory constant. In the area of product innovation, the supply chain organization closely coordinates with R&D on new product introduction (NPI). Strategic sourcing team members are engaged in the early stages of the product life cycle to coordinate development and eventual launch with supplier partners. The company manages a considerable amount of item complexity in its portfolio — 30% to 50% of products refresh annually — through a mature governance process focused on product contribution. L'Oréal has a very strong finance organization and culture that pervades management of its portfolio, internal operations and supply base. The supply chain team is also continuing to develop and deploy its supplier management program on a best-of-breed platform.
Another newcomer to the Supply Chain Top 25 is BASF at No. 20, the world's largest chemical company, leaping 16 slots from last year's ranking. BASF has a long history of focusing on safety and sustainability and scored 10 out of 10 on the CSR component. There are a few major focus areas for its supply chain team. One is referred to as lighthouse projects to digitize supply chain management, in line with Industrie 4.0 standards. This includes digitization of its logistics function and horizontal digital integration from its customers, through its internal operations and upstream to suppliers. Prescriptive analytics are being built to aid in daily decision making and strategy planning. Another key initiative is differentiation in supply chain services, which moves the group from proportionally spreading costs to business units to charging for services rendered. This shift has put better visibility on the true cost-to-serve of each business and presented opportunities to reduce expensive, complex offers where they are not needed. Through its focus, this effort has also improved service delivery for customers and identified value-based pricing opportunities for special services. The last major focus area for supply chain is on delivery reliability excellence.
Healthcare leader Johnson & Johnson, at No. 21, has been on the Supply Chain Top 25 list every year since its inception. This year, the supply chain group defined an end-to-end operating system that defines a standard way of working across all internal functions with external partners and between segments. J&J's customer experience program, launched four years ago, is targeted at improving customer experience and creating joint value delivered through customer focus teams staffed by dedicated supply chain professionals. Its supply chain team has improved supplier collaboration through tighter integration, created digital visibility through serialization and track and trace, and deployed control towers for supply chain planning (SCP) and analytics to sense and respond to issues. Factory 4.0 is another priority for its advanced manufacturing group, which is experimenting and implementing disruptive technologies such as robotics, 3D printing and data analytics. Finally, J&J has adopted new product design-to-value principles and governance and a structured product portfolio optimization approach to maximize ROI.
Gartner, Inc. | G00295801 Page 17 of 35 Also new to the list this year is BMW at No. 22. The German luxury automobile company received high marks from the opinion panels and a top score of 10 on the CSR component. BMW has implemented a risk filter for suppliers that takes into account location-specific and product-specific risks. Its sourcing group uses this filter to consider ESG risk potential for new and existing suppliers and follow up with supplier self-assessments and audits, as needed. BMW has also made significant investments in supply network visibility and digital manufacturing in line with Industrie 4.0 objectives. In a pilot project, its Munich and Leipzig plants tested smartwatches that alert workers when a car with special requirements is approaching. To reduce the strain on workers, physically demanding and nonergonomic tasks can now be carried out by innovative robot systems. The company is also using self-driving robots equipped with radio transmitters and a digital map to transport up to a ton of car parts independently to their destination. BMW has long been recognized as a leader in automotive sustainability. It has reduced the volume of resources utilized and the emissions per vehicle produced by an average of 45% since 2006 through a variety of projects.
GlaxoSmithKline, at No. 23, returns to the ranking after a nine-year hiatus. It had a strong three-year weighted average ROA of 12.6% and scored nine out of 10 on the CSR component. The British pharmaceutical company has set up a new information exchange for its suppliers to share best practices on energy efficiency and reducing environmental impacts. More than 500 suppliers have been asked to join the network, which GSK expects to cut value chain emissions by 25% by 2020. GSK's end-to-end supply chain program, started in 2013, is designed to reform and simplify the company's supply chain. In 2014, the business introduced processes to improve coordination across each stage of production from sourcing and manufacturing to more efficient delivery of its products to patients and consumers. At the same time, the business introduced the GSK Production System (GPS) across its pharmaceutical manufacturing sites. The GPS is a standard way of working that identifies and eliminates the root causes of accidents, defects and waste. More recent initiatives and capabilities include product portfolio complexity analysis and end-to-end logistics coordination and visibility.
Leading personal care and paper product company Kimberly-Clark, at No. 24, continued its steady rise up the supply chain maturity curve over the last year. As part of this evolution, it created a new chief supply chain officer (CSCO) position with global responsibilities for procurement, transportation, continuous improvement, sustainability, quality, safety and regulatory operations. Three of the top initiatives for Kimberly-Clark's supply chain are improvements in on-shelf availability, e-commerce fulfillment capabilities and continued refinement of its world class Supply Chain Efficiency Fund (SCEF) program. Its on-shelf availability work involves further improvements in demand forecasts based on point-of-sale data, near-term customer demand signals and promotional forecasting tools. Other considerations include product portfolio and packaging decisions. Kimberly-Clark seeks to be a supercompetitor in e-commerce to enable growth. It is innovating packaging to make it more direct-ship friendly and realigning its network to ensure wide coverage for quick delivery windows. Its SCEF program centers on a cost-to-serve model that identifies a range of logistics services from most to least efficient and provides incentives through trade promotion fund transfers for customers to choose more efficient models, where it is a net positive for the company.
Lenovo rounds out the list at No. 25, this year. The Chinese high-tech company made significant acquisitions over the past two years and its supply chain took a disciplined approach to integrate
Page 18 of 35 Gartner, Inc. | G00295801 and return the IBM System X server and Motorola mobility businesses to profitability in 18 months. A large part of this success story was a detailed network design analysis that led to a decision to merge acquired product production into Lenovo's existing in-house manufacturing network. Overall, the company runs a hybrid ownership model for all of its manufacturing. At the same time, the supply chain team ran programs to enhance customer experience and operational excellence. One program that has improved customer satisfaction is the creation of a customer social/digital platform for key global accounts with content that is tailored to each customer's preference in terms of order status, new product information and technical support information. A supply chain staff member is assigned as an executive sponsor for each major account.
Honorable Mentions Every year, there are companies that demonstrate strong leadership in demand-driven principles, but do not make the list. This year, we recognize Caterpillar, Seagate Technology, Nokia and Cummins.
Caterpillar held at No. 26 this year, though its composite score was within a hundredth of a point of No. 25 Lenovo. The industrial manufacturer is seeing improved demand visibility from channel partners after training them in best practices. Most of its supply chain functions now roll under one owner. Caterpillar is also taking a conscious end-to-end segmentation approach. The supply chain group has developed a second-generation lane strategy, with value chains that are more closely engineered based upon customer value propositions.
Seagate Technology is No. 27 and, similar to Caterpillar, its composite score is just a tenth of a point behind the last spot on the global list. Seagate is pursuing three major initiatives this year: increasing supply chain agility, optimizing the cost of quality and developing big data analytics to spot product trends, provide operational alerts and glean insights from supply chain sensor data.
Telecommunications equipment provider Nokia, at No. 28, has a management team that is a couple years into its turnaround effort. It stabilized and improved performance of the business while integrating its supply chain functions to operate end to end. This all happened just in time for the company to digest its next major merger partner, Alcatel-Lucent. Nokia jumped an astonishing 73 slots year over year, based on a confluence of factors, including stronger financial performance, a higher analyst opinion score and a perfect 10 score for CSR.
Cummins, at No. 39, dropped out of the global ranking after making the list for four years running. It has faced some macroeconomic headwinds from slower overseas sales, though it has the capability of quickly adjusting its cost structure and has used the downturn to improve its business. The engine and power generation company matured its integrated business planning process over the past few years. It has also developed innovative techniques to automate custom product settings in its factories to increase supply agility and capacity.
All of these companies exhibit leadership characteristics and have compelling lessons for the broader supply chain community. We look forward to sharing lessons from them and many others in the year ahead.
Gartner, Inc. | G00295801 Page 19 of 35 What Is Demand-Driven Excellence? The concept of being demand-driven is at the heart of the Supply Chain Top 25 ranking. We have published hundreds of documents on the topic for more than a decade, including a maturity model to help companies move along the transformation curve (see "Introducing the Five-Stage Demand- Driven Maturity Model for Supply Chain Leaders").
Because it's so critical to the Supply Chain Top 25 analysis, here's a brief synopsis of what it means to have a demand-driven value chain. The DDVN model is 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. They also design supply networks to be more closely aligned with the development of product platforms that enable innovation, agility and responsiveness.
We find that companies that continually secure spots on the Supply Chain Top 25 have successfully shifted from the traditional disconnected approach to managing supply, demand and product to an integrated approach to coordinating plan, source, make and deliver functions across the end-to-end supply chain. Companies typically make this shift as they advance along the DDVN maturity journey, which represents a long-term commitment to doing business in a customer-value-centric way (see Figure 2).
Page 20 of 35 Gartner, Inc. | G00295801 Figure 2. The DDVN Maturity Journey
Source: Gartner (May 2016)
Gartner, Inc. | G00295801 Page 21 of 35 The seven dimensions of the Gartner DDVN maturity model (see "Assess Your Supply Chain Maturity Using the Seven Dimensions of DDVN Excellence") establish a clear definition for each aspect of the supply chain, as it matures and integrates with focus on customer value.
Operational Excellence and Innovation Excellence Two basic dimensions of measurement capture the totality of the best-in-class, demand-driven, global supply chain: operational excellence and innovation excellence. To measure operations, including delivering as promised to customers and keeping costs under control, we recommend a hierarchy of metrics, with perfect order performance and total supply chain costs at the top (see "The Hierarchy of Supply Chain Metrics: Diagnosing Your Supply Chain Health").
Of course, operational excellence has value only if customers want what's being made and shipped. To address this, we look at innovation excellence. Although far harder to measure reliably, this dimension can also be managed with a hierarchy of metrics, in this case, topped by time to value and return on new product development and launch (NPDL). The key is to find the right balance on both these dimensions. Too much emphasis on one at the expense of the other either squashes innovation or hampers growth.
It's important to recognize the business life cycle aspect to this balance that our methodology also attempts to reflect. Each year, we see examples of previously successful businesses struggling with the competitiveness of their products, while still possessing very advanced supply chain capabilities. This condition can exist for a period of time before both resynchronize and either return to high performance or spiral into decline. Since the opinion poll portion of our methodology is based on the relative capability and leadership of a supply chain at a given point in time, it is possible for a company's supply chain to score well on the polls, while also posting a less- competitive financial performance in the near term.
Measuring Demand-Driven Excellence
The Metrics We Wish We Had For the Supply Chain Top 25 ranking, our ideal would be to have metrics that perfectly describe the two basic dimensions of performance: operational and innovation excellence. These are the dimensions that point meaningfully to the better value chain, identifying which business is faster, stronger and smarter. Betting on next year or next quarter is a matter of knowing who the better "athlete" is, not merely who won last time. Our premise is that the better athlete is more likely to win markets and profits in the future. Therefore, the companies that can demonstrate superior performance against these dimensions merit a higher share price multiple on a dollar of current earnings.
In our ongoing supply chain research, we've identified the metrics that map to these dimensions, which, if we had them, would clearly convey the organizations that have the healthiest value chains (see Table 2).
Page 22 of 35 Gartner, Inc. | G00295801 Table 2. Metrics for Operational Excellence and Innovation Excellence
Performance Dimension Key Metrics
Operational Excellence Perfect order rates Total supply chain costs
Innovation Excellence Time to value Return on new product launch
Source: Gartner (May 2016)
For each of these performance dimensions, we've published a full hierarchy of metrics that allows management to assess overall performance at the highest level, diagnose problems via process decomposition and make corrections at the tactical work level (see Figure 3 and Figure 4). We have also published hierarchies for each of the functions that make up the supply chain: a hierarchy of supply management metrics (see "Use the Hierarchy of Supply Management Metrics for Strategic Alignment and Enhanced Performance — Part 1" and "Use the Hierarchy of Supply Management Metrics for Strategic Alignment and Enhanced Performance — Part 2"), a hierarchy of manufacturing metrics (see "Use the Hierarchy of Manufacturing Metrics to Connect Manufacturing and Supply Chain Performance") and a hierarchy of logistics metrics (see "Align Supply Chain and Logistics Performance With the Hierarchy of Logistics Metrics").
Gartner, Inc. | G00295801 Page 23 of 35 Figure 3. The Hierarchy of Supply Chain Metrics: Operational Excellence
AP = accounts payable; AR = accounts receivable; FG = finished goods; SCM = supply chain management; WIP = work in process
Source: Gartner (May 2016)
Page 24 of 35 Gartner, Inc. | G00295801 Figure 4. The Hierarchy of Product Metrics: Innovation Excellence
Source: Gartner (May 2016)
However, from our work with companies and our benchmarking studies, we're all too aware of how inaccessible this data is in most companies, particularly within a realistic time frame. Moreover, although some companies may have some of the data we seek, there are vast inconsistencies in how these metrics are calculated from company to company.
Therefore, for the Supply Chain Top 25 ranking, we look to publicly available, audited financial data to find the closest possible proxies. We know the limitations inherent in these metrics. Existing financial accounting principles were developed in the hard-asset, factory-intensive economy of the early 1900s. For example, the balance sheet treatment of inventory as a valuable asset rings false for the many short-cycle businesses today that see inventory as more of a liability. Similarly, soft assets like brands and IP, which are essential to demand creation, are difficult for standard accounting practices to handle. Even income statements can obscure real costs with sneaky capitalization rules.
Because of these issues, our methodology isn't limited to financial metrics. Instead, we see the financials as one important component that provides a baseline, an anchor and an objective foundation on top of which we place the group intelligence of a vote, precisely because no combination of income statement or balance sheet financial metrics will tell us which companies are furthest along toward the demand-driven ideal of supply chain excellence. For this reason, we look
Gartner, Inc. | G00295801 Page 25 of 35 to craft a methodology that combines enough, but not too many, of the right metrics — both quantitative and qualitative — to achieve our goals.
Supply Chain Top 25 Methodology The Supply Chain Top 25 ranking comprises two main components: business performance and opinion. Business performance in the form of public financial and CSR data provides a view into how companies have performed in the past, while the opinion component offers an eye to future potential and reflects leadership in the supply chain community. These two components are combined into a total composite score.
We derive a master list of companies from a combination of the Fortune Global 500 and the Forbes Global 2000. In an effort to maintain the list of companies evaluated at a manageable level and in recognition of the inflation and growth these larger companies have experienced, we increased the general revenue threshold to $12 billion last year, up from $10 billion.
We then pare the combined list down to the manufacturing, retail and distribution sectors, thus eliminating certain industries, such as financial services and insurance (see Table 3 for a full list of excluded industries).
Table 3. Industries Not Included in the Supply Chain Top 25
Airlines Insurance Services
Banks Mail, Package and Freight Delivery Shipbuilding
Crude Oil Production Metals Software Development
Diversified Financials Mining Telecommunications
Energy Petroleum Refining Temporary Help
Engineering/Construction Pipelines Trading
Entertainment Railroads Utilities
Healthcare: Insurance, Managed Care, Real Estate Services, Providers
Information Technology/Computer Services Shipping
Source: Gartner (May 2016)
Each year, we examine the methodology used to develop the ranking, with two sometimes- conflicting goals in mind: consistency and improvement. We want to improve the methods and procedures we use, but, for the sake of consistency, in a way that builds on what we've done in previous years.
Page 26 of 35 Gartner, Inc. | G00295801 We are open to feedback from the broader supply chain community on the methodology we use and have a new metric related to CSR, based in part on this feedback. Indeed, the Supply Chain Top 25 is intended to be a lightning rod and foundation for vigorous debate about what constitutes leadership and supply chain excellence.
At the same time, we continually look for ways to enhance the explanatory power, applicability and extensibility of the overall ranking. The impact of brand recognition on the vote, industry variations in inventory and inequalities between more versus less asset-intensive industries are all challenges with which we grapple. These issues are multifaceted. By analyzing them, we've been able to make incremental changes that have allowed us to painstakingly chip away at some of the problems, while maintaining consistency from year to year at the same time.
In 2016, we added a CSR scoring component to the Supply Chain Top 25 program (see "Introducing a Score for CSR and Sustainability Performance to the Gartner Supply Chain Top 25").
We believe that adding a quantitative scoring method to the ranking program gives CSR the prominence it deserves in our definition of supply chain excellence. We also want to recognize supply chain organizations that effectively manage opportunity and risk, with a focus on the long- term view, so that profitability does not come at the expense of people or the planet. This addition aligns with what investors, customers, employees and the general public expect from companies today.
The current quantitative components of the Supply Chain Top 25 scoring system use publicly available data to calculate financial performance scores. The new CSR component also uses third- party data as a proxy for assessing each company's commitment to, and proficiency in, running socially and environmentally responsible supply chains.
Similar to last year, we used a 50/50 overall weighting for this year's ranking: 50% for the business performance component and 50% for the opinion component.
Business Data Three financial metrics and the new corporate social responsibility metric are used in the ranking:
1. ROA — Net income/total assets
2. Inventory turns — Cost of goods sold/inventory
3. Revenue growth — Change in revenue from prior year
4. CSR — Index of third-party CSR measures
We designed a scoring system for CSR based on our research and input from third-party experts in CSR, a cross-section of supply chain community members and our broader research organization (see "Introducing a Score for CSR and Sustainability Performance to the Gartner Supply Chain Top 25" for details of the scoring index).
Gartner, Inc. | G00295801 Page 27 of 35 Each company has the opportunity to achieve up to 10 points for evidence of its CSR commitment, transparency and performance. The revised category is now called "Business Data" to reflect the inclusion of the nonfinancial data we capture in the CSR score.
We accommodate the CSR score by subtracting 5% of the weighting from each of two metrics: ROA shifts from 25% of the overall score to 20%; and inventory turns shifts from 15% of the overall score to 10%. Revenue growth remains at 10%.
Inventory offers some indication of cost, and ROA provides a general proxy for overall operational efficiency and productivity. Revenue growth, while clearly reflecting myriad market and organizational factors, offers clues to innovation. Financial data is taken from each company's individual, publicly available financial statements.
We use a three-year weighted average for the ROA and revenue growth metrics and a one-year quarterly average for inventory. The yearly weightings are as follows: 50% for 2015, 30% for 2014 and 20% for 2013.
The use of three-year averages is in place to accomplish two goals. The first is to smooth the spikes and valleys in annual metrics, which often aren't truly reflective of supply chain health, that result from events such as acquisitions or divestitures. It also accomplishes a second, equally important goal: to better capture the lag between when a supply chain initiative is put in place (a network redesign or a new demand planning and forecasting system, for example) and when the impact can be expected to show up in financial statement metrics, such as ROA and growth.
Inventory, on the other hand, is a metric that's much closer to supply chain activity, and we expect it to reflect initiatives within the same year. The reason we use a quarterly average is to get a better picture of actual inventory holdings throughout the year, rather than the snapshot, end-of-year view provided on the balance sheet in a company's annual report.
Opinion Component The opinion component of the ranking is designed to provide a forward-looking view that reflects the progress companies are making, and the extent to which they demonstrate leadership through visibility in the supply chain community. It's made up of two components, each of which is equally weighted: a Gartner analyst expert panel and a peer panel.
The goal of the peer panel is to draw on the extensive knowledge of the professionals that, as customers and/or suppliers, interact and have direct experience with the companies being ranked. Any supply chain professional is eligible to be on the panel, and only one panelist per company is accepted. Excluded from the panel are consultants, technology vendors and people who don't work in supply chain roles (such as public relations, marketing or finance).
We accepted 240 applicants for the peer panel this year, with 185 completing the voting process. Participants came from the most senior levels of the supply chain organization across a broad range of industries. There were 38 Gartner panelists across industry and functional specialties, each of whom drew on their primary field research and continuous study of companies in their coverage area.
Page 28 of 35 Gartner, Inc. | G00295801 Organizations must surpass a base threshold of votes from both panels to be included in the ranking. Therefore, a company that had a composite score fall within the Supply Chain Top 25 solely based on the financial metrics would not be included in the ranking.
The figures below provide a breakdown of the peer vote on the dimensions of region, industry, role and revenue. The regional breakdown of voters continued to be a particular emphasis for us, and we continued to make progress this year. Until 2010, North American voters made up 80% of the total. Since that time, we have made progress in achieving better balance regionally to provide a more balanced global view of supply chain leadership (see Figure 5).
Figure 5. 2016 Peer Opinion Panel Composition: Region
Source: Gartner (May 2016)
Gartner, Inc. | G00295801 Page 29 of 35 Figure 6. 2016 Peer Opinion Panel Composition: Industry
Source: Gartner (May 2016)
Figure 7. 2016 Peer Opinion Panel Composition: Function
Source: Gartner (May 2016)
Page 30 of 35 Gartner, Inc. | G00295801 Figure 8. 2016 Peer Opinion Panel Composition: Role
Source: Gartner (May 2016)
Figure 9. 2016 Peer Opinion Panel Composition: Revenue
Source: Gartner (May 2016)
Gartner, Inc. | G00295801 Page 31 of 35 Polling Procedure Peer panel polling was conducted in April 2016 via a web-based, structured voting process identical to previous years. Panelists are taken through a four-page system to get to their final selection of leaders that come closest to the demand-driven ideal, which is provided in the instructions on the voting website for the convenience of the voters.
We continued including consideration of CSR practices in this year's opinion poll voting criteria. We specify that peer voters consider each company's commitment to running a supply chain that addresses social, environmental, ethical human rights and consumer concerns in its operations and core strategy. Many companies are proud of their CSR initiatives, and have observed that supply chain leadership includes running a responsible, sustainable business, and that our ranking should explicitly reflect this dimension. We have always recognized and often written that CSR is an important aspect of leadership, and wholeheartedly agree that it should be a consideration for how high or low they rate on the annual ranking.
Here's a breakdown of the voting system:
1. The first page provides instructions and a description of the demand-driven ideal.
2. The second page asks for demographic information.
3. The third page provides panelists with a complete list of the companies to be considered. We ask them to choose 25 to 50 that, in their opinion, most closely fit the demand-driven ideal.
4. After the subset of leaders is chosen, the form refreshes, bringing just the chosen companies to a list. Panelists are then asked to force-rank the companies from No. 1 to No. 25, with No. 1 being the company most closely fitting the ideal.
Individual votes are tallied across the entire panel, with 25 points earned for a No. 1 ranking, 24 points for a No. 2 ranking and so on. The Gartner analyst panel and the peer panel use the exact same polling procedure.
By definition, each peer voter's expertise is deep in some areas and limited in others. Despite that, peer voters aren't expected to conduct external research to place their votes. The polling system is designed to accommodate differences in knowledge, relying on what author James Surowiecki calls the "wisdom of crowds" to provide the mechanism that taps into each person's core kernel of knowledge and aggregates it into a larger whole.
Composite Score All this information — the four business data points and two opinion votes — is normalized onto a 10-point scale and then aggregated, using the aforementioned weighting, into a total composite score. The composite scores are then sorted in descending order to arrive at the final Supply Chain Top 25 ranking.
For the second year, we tested the concept of a "social vote" as a complement to the Supply Chain Top 25 global ranking. The purpose of this social vote is to get a perspective for comparison from a broader portion of the supply chain community. The results from the social vote were not used in
Page 32 of 35 Gartner, Inc. | G00295801 the scoring of the Supply Chain Top 25 ranking this year, rather we plan on using the results as complementary to the Supply Chain Top 25 ranking, which will still be determined using our traditional methodology. The social vote is very similar in appearance to the survey the peer voters complete; however, we asked that the social voters only pick their top 10 supply chain leaders. The intent is to see if different patterns emerge out of this more open, public vote versus our current invitation-only peer panel vote.
The Supply Chain Top 25 social vote is open to all supply chain professionals. Unlike the peer vote, there is not a limit of only one voter per company. We used a variety of social media channels and supply chain publications to inform the community of this new approach. The level of response was positive and we look forward to growing the social voter base next year.
Looking Ahead As we look forward to the future of the Supply Chain Top 25, we are excited to share the latest lessons from leaders with the supply chain community and to foster a discussion with you all on the definition of leadership.
The Healthcare Supply Chain Top 25 lies ahead for the rest of 2016, as well as a steady cadence of publications that offer various analytical lenses on the full 2016 global ranking. These include industry cuts that examine how the companies in a particular industry stack up against each other and what the industry can learn from them, as well as regional cuts for Asia/Pacific and Europe, which do the same for companies headquartered in each region. These cuts will be published throughout the remainder of the year and we will pull them all together in a special report toward the end of the year for ease of reference. For the first time, we will also publish a toolkit shortly after this report that contains tables listing the top ranked supply chains from each industry. Also see "Gartner Webinar: Lessons From Leaders: The 2016 Gartner Supply Chain Top 25" for more insight.
As always, we'll continue to field feedback and investigate new approaches for measuring supply chain leadership. In particular, we'll be synthesizing the feedback we receive from the broader supply chain community on the new CSR component, and build refinements into the 2017 methodology where it makes the most sense to do so.
In our engagement with supply chain leaders over the past year, it is evident that the bar of performance has risen considerably for the top of the group. As Gartner's supply chain research organization, we remain committed to providing a platform for informed and provocative debate about supply chain leadership. We look forward to leveraging this research to share the lessons, best practices and characteristics of leaders to inspire and challenge the entire supply chain community to new levels of performance and contribution.
Gartner Recommended Reading Some documents may not be available as part of your current Gartner subscription.
"The Gartner Supply Chain Top 25 for 2015"
Gartner, Inc. | G00295801 Page 33 of 35 "2015 Gartner Supply Chain Top 25: A&D"
"2015 Gartner Supply Chain Top 25: Automotive"
"2015 Gartner Supply Chain Top 25: Chemical"
"2015 Gartner Supply Chain Top 25: Consumer Products"
"2015 Gartner Supply Chain Top 25: High Tech"
"2015 Gartner Supply Chain Top 25: Industrial"
"2015 Gartner Supply Chain Top 25: Retail"
"2015 Gartner Supply Chain Top 25: Asia/Pacific"
"2015 Gartner Supply Chain Top 25: Europe Top 15"
"2015 Gartner Supply Chain Top 25: Europe's Next Top 10"
"The Healthcare Supply Chain Top 25 for 2015"
"Introducing the Five-Stage Demand-Driven Maturity Model for Supply Chain Leaders"
"Assess Your Supply Chain Maturity Using the Seven Dimensions of DDVN Excellence"
"The Hierarchy of Supply Chain Metrics: Diagnosing Your Supply Chain Health"
"Product Launch Dashboards, Part 1: The Hierarchy of Product Metrics"
"Use the Hierarchy of Supply Management Metrics for Strategic Alignment and Enhanced Performance — Part 1"
"Use the Hierarchy of Supply Management Metrics for Strategic Alignment and Enhanced Performance — Part 2"
"Use the Hierarchy of Manufacturing Metrics to Connect Manufacturing and Supply Chain Performance"
"Align Supply Chain and Logistics Performance With the Hierarchy of Logistics Metrics"
"The Hierarchy of Healthcare Supply Chain Metrics for IDNs"
"Aligning Retail and Supply Chain Performance: The Retail Supply Chain Hierarchy of Metrics"
Evidence 1 "2016 CEO Survey: The Year of Digital Tenacity."
2 "Amazon Might Buy an Airport in Germany," Business Insider, 16 April 2016.
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