Recommended Research

• Supply Chain Transformation Leadership: Intel’s Low-Cost Supply Chain Model
• A Whole New Mind, A Whole New Supply Chain
• Recovery Strategies: Seven Ways To Sense Demand and Predict the Upturn
• Sustainability in CP: Coca-Cola Embraces Four Moments of Truth
• The AMR Research Supply Chain Top 25 Companies: How Do They Stack Up on Efficient Growth?
• Coca-Cola's Supply Chain Venture: Make Should Not Stand Alone
• Building a Demand-Driven Supply Chain Organization: Key Design Considerations
• Industrial Supply Chains: A Cash-to-Cash Lens
• Top 25: HP Results Shine Through the Dark Economic Clouds
• Changes to the Supply Chain Top 25 Methodology: Our Ideas
• How the Top 25 Supply Chains Stay on Top in Good Times and Bad
• Sony Ericsson on the Right Path to Design-for-Supply Excellence
• Meet the Chemical Company Top Dogs of the Supply Chain Top 25
• The Top Industrial-Driven Supply Chains for 2008
• AMR Research Supply Chain Top 25 Beats the Indices in Bear as Well as Bull Markets
• GM Plugs Into Content Economy
• Seven Lessons From the AMR Research 2008 Supply Chain Top 25 for Consumer Products
• Top Supply Chains in Retail: Working on the Right Initiatives Right Now
• Intellectual Property at P&G and the Role of Supply Chain
• The AMR Research Top 25: A Cash-to-Cash Lens
• Supply Chain Leadership: Four New Top 25 Awards
• The Supply Chain Top 25 Ranking: The Next 25
• The AMR Research Supply Chain Top 25 for 2008
• Supply Chain Talent: State of the Discipline

Questions, Comments, and Feedback

Lessons from Leaders: Corporate Social Responsibility

Back in 2006, when AMR Research hosted the audaciously named Supply Chain Saves the World conference at the Phoenician Resort and Hotel, with former president Bill Clinton as the keynote to juice up the atmosphere, some people thought we were crazy. Well, three years later, it doesn’t really look so crazy after all. Leaders like PepsiCo’s CEO Indra Nooyi, who preaches “Performance with Purpose,” or Coca-Cola’s Chairman Neville Isdell, who sat along side Bono and Al Gore in New York last fall and convincingly pitched development as core to Coke’s future, look like the new model CEO.

The subsequent popularity of our Sustainability Strategies Service, our work with the Clinton Global Initiative, and our ongoing research on industry leaders like PepsiCo, Coca-Cola, IBM , Dell , and HP have already shown us that one of the things that sets leaders in the Supply Chain Top 25 apart is that doing good is embedded in their corporate DNA. That’s why we weren’t surprised to see many of the Supply Chain Top 25 represented in Corporate Responsibility Officer’s Top 100 Corporate Citizens list for 2009. Coke, Pepsi, IBM, Dell, and HP, as well as Supply Chain Top 25 names like Nike, Procter & Gamble , Intel , Motorola, Johnson Controls, are all well represented on both lists.

AMR Research has long found corporate social responsibility (CSR) to be a cornerstone of what makes for a successful company and industry leader. That’s why it’s included among the four awards we hand out each year at the Supply Chain Top 25 event every spring. We are currently accepting nominations, so if you have thoughts on who should be recognized this year, let us know.

In the meantime, here are some additional lessons from the leaders about corporate social responsibility:

• Corporate Social Responsibility and Sourcing
• Supply Management and Social Responsibility: It Can Be an Asset
• Deriving Reward From Supply Chain Risk

• Methodology Changes and Peer Voting: Updates

  Updates on Proposed Methodology Changes

  Thanks to everyone who gave us feedback on our proposed changes to the Top 25 methodology this year. The insights were great and useful, and we’re just winding down on testing the ideas to see whether they’ll work as we expect. We’ll keep you posted as we come to a conclusion. We’re always open to more ideas for future years, so keep them coming.

  Just a word about the feedback: we’re very excited about the reaction we got – there was lots of constructive debate, challenging ideas, and enthusiasm to think these things through. One company had even tested their own idea, found that it didn’t have the impact they thought it would, and came up with an alternative we could pursue. We love it!

  Peer Voting

  We’ve had a lot of people register to vote in the peer panel already, thanks to those of you who have done so.

  For everyone else, now’s the time to sign up! We’re going to be voting in mid-April this year, and we want to increase the size of the panel substantially. Become a Voter Here

  For those of you who have never voted before, it’s painless and even fun. Besides the fact that you can have a say in a ranking that gets huge visibility, the process itself requires minimal time and uses a website that we’ve gotten great feedback on. There’s a page of instructions, then a page with all the companies from which you choose 30-50, then a page where you force rank the ones you’ve chosen. Don’t worry that you don’t know enough about all the companies on the list – no one does. We’re looking for what you do know, and the aggregation of those kernels of knowledge across all the voters is what gives us results that make sense.

  Keep the ideas coming, continue the debate, we love to hear from you at dhofman@amrresearch.com or komarah@amrresearch.com.

  Cisco's Innovation Award

  Congratulations to one of our Top 25 companies, Cisco, on a recent win: the 2008 Supply Chain Innovation Award. This award, hosted by the Council of Supply Chain Management Professionals (CSCMP) and Global Logistics & Supply Chain Strategies magazine, is given for the “best and most innovative solutions and ideas in the supply chain profession.” The case study Cisco submitted involved its Reverse Logistics organization, which it turned from a cost center to a profit center within three years.
  
  According to AMR Research analyst Mike Burkett, Cisco has been working collaboratively with partners to eliminate waste from the reverse logistics process. With its Lean Forward program, Cisco reduced capital investment in inventory and eliminated waste by sharing forecasts and streamlining business processes to the mutual benefit of Cisco and its partners. Improving the reverse logistics process increases availability of repaired equipment, which frees up new equipment for additional sales.
  
  Ongoing sustained improvements in supply processes are the hallmark of a great supply chain, and we applaud Cisco’s achievements in this area.

  How about using independent customer ratings?

  We recently received an e-mail from a large consumer products (CP) manufacturer, suggesting we consider including industry-specific, third-party assessments of supply chain performance from customers in our Top 25 ranking.

  We think it’s a great idea. The writer of this e-mail was referring specifically to Cannondale Associates’ PowerRanking survey of CP manufacturers and retailers. The survey asks retailers to rate their suppliers on a range of factors, including brands, growth and profitability, consumer/shopper insights, and sales teams.

  It’s an effective way to get industry-specific customer assessments of supply chain performance and could be an excellent addition to the Top 25 analysis, especially if we can find rankings in other industries comparable to what Cannondale does for consumer packaged goods. We have long looked to Cannondale as a valid input, but have not seen many in other industries.

  Do you have any suggestions for comparable third-party surveys outside of consumer products? We’d love to hear from you at dhofman@amrresearch.com or komarah@amrresearch.com .

  Nokia’s New Offering: Transformational Initiatives in Action

  Nokia’srecent product announcement is an interesting follow-up to our recent discussion of Apple’s strategy. In our previous note on Apple (see below), we mentioned one of its strengths is in having content wrapped around its physical product. We see this happening in other industries as well, beyond the digital arena (for example, chemical companies offering technical advice with their products).
  
  Nokia’s recent product returns us to the digital world, but offers some universal takeaways. To compete head-on with Apple, Nokia introduced a new product called Comes With Music. Buyers of its new handset will receive one year’s unlimited access to the Nokia music store without having to pay extra. They can also legally share songs with other subscribers in online communities.
  
  With this move, Nokia is touching on four transformational strategies:

  • Segmenting the channel and launching the phone through a British retailer (Carphone Warehouse) rather than conventional operators
  • Experimenting with social networking capabilities to increase loyalty and bolster marketing
  • Shaping demand through its price management strategy of charging one price for both the device and the service
  • By creating joint value with its carriers, Nokia can pass along a portion of the higher margins it enjoys from the combined product and give incentives to carriers to sell more of its phones in return.

  What do you think? How does this apply in your industry? E-mail us at dhofman@amrresearch.com or cwehlage@amrresearch.com or visit our blog at chainreactionblog.com.

  Cash-to-Cash and Asset-Intensive Industries

  In our recent article on the cash-to-cash cycles of the Supply Chain Top 25 (see The AMR Research Top 25: A Cash-to-Cash Lens), we plotted the companies on a graphic that compared their levels of inventory and how well balanced they are between their accounts payables and accounts receivables cycles, all of which are components of cash-to-cash. We talked about the need for balance in this metric and concluded that the healthiest cash-to-cash performance is the one with a combination of right-sized inventories and a reasonable level of accounts payable that is well balanced with accounts receivable.

  In response to the piece, one reader wrote:

  Comment: Very good article. As always, the devil is in the detail. It is interesting to see how some of the process manufacturing-oriented segments fare on this chart especially when they try to balance asset utilization (under capital-intense structure) and WIP management. Curious to know your comments.

  Response: We definitely agree that the devil is in the detail! The asset-intensive process segments do tend to hold more inventory which places them in the upper half of the chart. But a quick look at a few of them shows they are just as dispersed in terms of their accounts receivable (AR) versus accounts payable (AP) balance. (see Figure 1) For example, Dow Chemical is relatively balanced, while DuPont and BASF have longer receivables and Alcoa has longer payables. Rio Tinto, on the other hand, is pretty balanced in its AR versus AP but holds a whopping 95 days of inventory, which is fairly typical in its industry. The upshot is that, with the exception of retail, the balance part of the equation—how well balanced a company is in the time it takes to pay suppliers and the time customers take to pay it—seems to be more company-specific than industry- or sector-specific.

  As always, we welcome your questions and comments. Please e-mail dhofman@amrresearch.com or visit our blog at chainreactionblog.com.

  What Can Industrial Companies Learn From Apple’s Digital Supply Chain?

  AMR Research’s C.J. Wehlage explores Apple’s rise to the No. 1 slot in the Top 25 through its digital supply chain (see “How the Digital Supply Chain made Apple No. 1 on the Supply Chain Top 25”).

  That’s great, but our industrial companies are wondering: how does it apply to those of us with stubbornly physical supply chains?

  We talked with C.J. further to get his views on what findings industrial companies can apply from Apple’s strategies. What Apple has done really well is what any company wants to do well, whether they sell a digital or physical product: 1) understand demand and 2) manage supply to respond to demand. Fundamentally, Apple’s story is about really understanding its customer—how customers are using its product and how they want to use it in the future. It’s also about the flexibility to then change their organizational structure, processes, technology, and all the ingrained models that go along with them. This is the ultimate demand-driven supply chain. The product flow here is different than for industrials, but the other three flows—demand, cash, and information—remain.

  Apple’s story is, at its core, about change and flexibility. It didn’t start off knowing exactly where this was all going. What it did do was a great job of demand shaping and sensing, and then ruthlessly changed its supply chain in response.

  The move to digital product is bleeding out of high tech into other industries. Think automobiles: GM’s OnStar product, in-car GPSs, music, phone, etc. Beyond digital, there are plenty of examples of non-physical, content-related products. Chemical companies routinely offer technical advice to their business customers about the behavior and characteristics of the chemicals they sell to help them figure out how to best adapt it and use it: essentially IP, or content, wrapped around a physical product.

  Those two fundamental abilities that Apple is getting very good at, sensing demand and changing the supply chain to respond to it, will continue to be critical.

  What are your thoughts? E-mail us at dhofman@amrresearch.com or cwehlage@amrresearch.com, or visit our blog at chainreactionblog.com.

  Can we use cash-to-cash in the Top 25 ranking?

  One suggestion AMR Research has had for a metric to use in the Top 25 ranking is working capital. As a measure of funds tied up in the operations of the business that goes beyond inventories (which we currently use in the ranking), it would theoretically give us a more complete view into underlying operational efficiency.

  First, a definition: working capital is defined as current assets minus current liabilities. It’s one of those metrics that can have different interpretations, depending on how you look at it and what your lens is. That is, presumably you want enough assets to be able to pay off your liabilities if you have to, but you don’t want too much money tied up in operations that could be put to better use elsewhere, such as funding growth and contributing to shareholder value.

  What generally makes up current assets and current liabilities? The major asset categories are cash and short-term investments, receivables, and inventories. The major liability categories are payables and short-term debt, the current portion of long-term debt, accrued expenses, and “other,” which is typically a big bucket for items such as deferred taxes, income tax reserves, executive compensation accruals, and the like.

  For our purposes, we are most interested in the cash-to-cash portion of working capital, since its components are the ones most closely tied to supply chain operations: inventories plus receivables minus payables. Overall, cash to cash gives us a good view into supply chain throughput, or how quickly raw materials can get through supply chain operations and be converted into cash.

  The best thing to do when considering a metric is to test it out with some real numbers. For that, we chose a sampling of companies in different industries from the Global Fortune 500 and pulled the necessary data from their latest balance sheets (See Table 1). The first thing we found that stopped us short was, in hindsight, predictable: certain industries have a significant advantage over others. Receivables are dependent on payment terms, and payment terms vary dramatically by industry, company, and geography. Companies that make complex equipment that requires installation tend to have much longer payment terms than companies that make consumer goods, and payment terms in Asia are longer than in the United States. In particular, retailers have extremely low cash to cash because they have minimal receivables, as can be seen in Table 1 from Best Buy’s, Wal-Mart’s, and Publix’s numbers. So, in essence, the issue we have with cash to cash is the same issue we had with days sales outstanding (DSO), which makes sense because DSO is a component of cash to cash (see What about customer satisfaction? below).

  As with any metric, the interpretation of cash to cash should be nuanced. While shorter (or smaller) is generally better, there are tradeoffs that must be made. A company that holds too little inventory may negatively affect its perfect order to its customers, and payment terms that are too short might negatively impact sales.

  For our purposes, cash to cash doesn’t look like an option for our Top 25 ranking, but we haven’t given up on it yet. Is there some other way to use it in the ranking, perhaps in combination with something else? Any thoughts on this are welcome at dhofman@amrresearch.com or komarah@amrresearch.com

  Top 25: The Debate Goes On

  At AMR Research, we’ve just concluded our annual supply chain conference in Phoenix, with the theme Globalization Comes Home and a stellar roster of speakers. On Wednesday night at the opening dinner we announced the new 2008 Supply Chain Top 25, honoring the winners and recognizing their achievements.

  On day two of the conference we held a special session on the Top 25. The purpose was to provide a deeper dive into the ranking than was possible at the award dinner, in a more intimate setting that would allow the discussion, debate, questions, and feedback we hope to engender.

  Here’s a synopsis of the some of the questions, thoughts, and comments we heard from the attendees:

  Metrics: This was an area of much discussion. Suggestions included a look at working capital, inventory versus revenue change, something to do with customer satisfaction, and EBITDA, to name a few. They’re all good suggestions, and we’ve investigated some of them already. We will absolutely be looking at working capital as the next possibility of a metric to use. It’s publicly available, sourced from audited data, and supply chain-related. It also includes but is not limited to inventory, which we currently use as a metric.

  There was a lot of discussion about the pros and cons of inventory. On one hand, it’s easily accessible in audited financial statements and is a widely used supply chain metric that everyone both in and out of the supply chain arena recognizes. On the other hand, there are some issues with it, including ever-widening discrepancies by industry and the fact that financial statements only measure it at one point in time, rendering it supremely gameable. (For additional discussions of metrics, see the links below.)

  Related to this, we are actively looking for a way to address the issue that some industries are inherently more asset-intensive than others, which makes it hard for them to rise to the top of the list given the metrics that are currently used (ROA, inventory turns, and growth). All ideas are welcome.

  Weighting: Currently the AMR Research’s opinion portion of the ranking is weighted equally with the Peer opinion portion at 20% each. One person who was a voter in this year’s Peer Panel suggested it might make more sense to weight the AMR Research’s opinion more heavily. His logic: AMR Research knows more about a larger number of companies. On the other hand, someone asked if there is an unfair advantage to companies who are AMR Research clients. The truth is, 1) a very large portion of the Global 500 are already AMR Research clients, and 2) there are a number of companies in the Top 25 that are not AMR Research clients, which fact has not prevented them from making the list, in some cases numerous times.

  Deeper access to the list: A few people asked if we would provide deeper access to the list, e.g., down to number 50. Given the interest, we will publish the 26 to 50 sometime in the next few months. And similar to last year, we will publish various industry cuts, including consumer products, retail, and life sciences.

  Vision of the future: The last question was very fitting—what is our vision of the future for this ranking, and what will it look like in five years? We picture thousands of voters from all over the globe participating, and a general business press that waits for and actively seeks out the latest results every year and talks about the acknowledged impact of supply chain operations on shareholder value.

  We plan to expand our research in the Top 25 this year, focusing on three areas we believe are critical: leadership, metrics, and shareholder value. We’re also planning to revamp this website and facilitate access to Top 25-related material and best practices. Look for changes in the next few months.

  If you didn’t have a chance to attend the session, do you have any questions you’d like to ask or suggestions you’d like to make? We’d love to hear from you. E-mail us at dhofman@amrresearch.com or komarah@amrresearch.com

  The Relationship Between Inventory and Revenue Change

  With the turn of the calendar page to a new year, we are launching our fourth season of the Top 25, to be published at the end of May. Similar to last year, we are actively looking for peer voters to take part in the ranking. Anyone in a supply chain-related role at a manufacturer or retailer (size of company doesn’t matter) can apply. This is your chance to affect a ranking that is becoming increasingly noted in the industry, and we encourage representation from as wide a body of voters as possible. Just click on the “register here” button at the top of this page.

  As we’ve noted before, each year we review the methodology used to develop the rankings. We are always looking to improve it, keeping in mind that we have to do so in a way that builds on what we’ve done in previous years and therefore maintains consistency. In particular, we are continually considering new metrics that might give us better insight for the financial portion of each company’s score, which makes up 60% of the total.

  We get a lot of comments and ideas about the metrics, and we look at each one seriously. For example, we looked at days sales outstanding (DSO) last year (see What About Customer Satisfaction? below). One possible metric, which came to our attention this year, is the relationship between inventory change and revenue change: the change in inventory from year one to year two versus the change in revenue from year one to year two.

  This has all the earmarks of a great metric. The relationship between the change in each over time infers something about how well and how efficiently a company manages its growth, combining a look at growth with a look at efficiency. In addition, one of the major constraints we face is that any metric we use must be publicly available in an audited fashion for each and every company in the total population of the Fortune Global 500. Both inventory and revenue, of course, satisfy this requirement. And finally, it’s a ratio based on a percent change that measures how a company performs relative to itself over time, which makes it very promising from a cross-industry perspective.

  So we tested the metric by running the necessary data for the first 15 manufacturers and retailers in the Fortune Global 500. Running the numbers is always revealing, uncovering insights that are impossible to predict in the abstract, and this case was no exception (see Table 1).

  What we found was interesting. As we anticipated, it is a good metric, but it has some serious drawbacks for our purposes. The biggest drawback we found is that the number is not consistent in meaning; for example, a larger number is not always better and a smaller number worse (or vice versa). In other words, when the number goes negative, you can’t tell just from looking at it whether that’s a good thing or a bad thing. If the number is negative, it means that one of the underlying numbers is negative—either inventory went down, which is good, or revenue went down, which is bad. But you don’t know which one just from the number. The financial portion of the Top 25 ranking is a straight quantitative analysis; there’s no qualitative, case-by-case exception handling applied to it. Therefore, a number whose meaning has to be qualitatively assessed doesn’t work.

  There were a couple of other issues we found:

  • The general concept behind this metric is that it’s good if revenue grows more than inventory. So, if the revenue change is larger than the inventory change, that’s a good thing. But could there be a case where the revenue change is too much larger than the inventory change? If revenue grows by 3% and inventory only grows by 1%, that’s good, but if revenue grows by 25% and inventory only grows by 1%, is it still good? Is there a band or a cap within which companies should reside, a cap over which a company would not have enough inventory to support its revenue growth?
  • In addition, the magnitude of the numbers is not always intuitive. Consider this example:

  

  Company A and Company B have the same revenue change, but small differences in their inventory change. Their resulting ratios are substantially different. From a mathematical perspective this makes perfect sense, but from a business perspective, it’s hard to swallow that a half a percent difference in the inventory change would warrant such a big difference in the result.

  We weren’t quite ready to give up, so we did try one other possibility: the relationship between inventory and revenue in year one versus the ratio between inventory and revenue in year two. This would examine a company’s trend in how efficiently it uses its inventory. The relationship between inventory and revenue is one way to calculate inventory turns, so in essence what we’re looking at here is the change in inventory turns from one year to another. In running the numbers for this (see Table 3), we found that the issues outlined above were taken care of: the number is more stable, the magnitudes make sense, and a higher number is always better.

  However, another issue became clear. The metric rewards companies that make big improvements in their inventory-to-revenue ratio, and therefore by definition penalizes companies that make only small or no improvements. But what if the company that makes big improvements does so because its previous performance was abysmal? And, by the same token, what if the company with little or no improvement has performance in this area that is so good they don’t need to improve it?

  In the end, then, we have come back to inventory turns. It’s a widely-used, available number that everyone understands. While we don’t think it makes sense to include the inventory-versus-revenue-change metric in the financial component of our standard ranking, we do believe it’s a good metric for individual companies to track and analyze for themselves using multiple analytical lenses. And we have every intention of using it in the subsequent analyses we’ll be publishing throughout 2008 once the ranking is published.

  What do you think? Any comments, thoughts, feedback on this analysis are welcome, as are any suggestions of additional metrics to consider. E-mail us at dhofman@amrresearch.com or komarah@amrresearch.com

  What about customer satisfaction?

  Recently we received an email with the following point:

  Q: “I found the list very interesting, but I note that you do not directly measure customer satisfaction. ROA and Inventory Turns can both be “managed” at the expense of on-time delivery to true customer need dates, and sales growth doesn’t go far enough since, in industries like high tech where product availability is a problem, growth can sometimes be achieved at the expense of customer satisfaction.”

  A: Our first reaction is, amen! We completely agree. In fact, we’ve had extensive discussions and debate on this internally, and attempted this year to use DSO (days sales outstanding) as a proxy for customer satisfaction. While we realized that, like all metrics, there are certainly other things that affect DSO besides customer sat, there is at least some connection in that, presumably, happy customers pay on-time and unhappy customers take longer to pay. And, it has the added benefit of being a publicly available number.

  The biggest issue we had with it is that the cross industry comparisons are just too severe and systemic to accommodate. Payment terms vary dramatically by industry, company, and geography – companies that make complex equipment that requires installation tend to have much longer payment terms than companies that make consumer goods, and the retailers of course have extremely short payment cycles and shoot right to the top of the list. Moreover, terms tend to be longer in Europe and Asia than they are in the US. And while one might argue a similar case for some of the other metrics – for example, inventories are thought to differ significantly by industry – we have found in our research that those differences are a) not as severe as people typically think and b) the differences are not due so much to inherent industry characteristics as they are to the individual choices companies make.

  The full Top 25 report for 2007 includes a section called “metrics we wish we had”. One of these is the perfect order fulfillment rate, which would be a far better metric to measure customer responsiveness or satisfaction. Even a metric like fill rate or on-time delivery itself would be great to have. The problem, as we know all too well from years of extensive benchmarking experience with over 70 companies, is that, even with enough time and good access, these metrics are very tough to pin down and are certainly not consistently available across the universe of companies we’d need them for. And while we are actively working with companies to start tracking these metrics, we unfortunately have to deal with the realities that exist today.

  What do you think? Any other ideas of proxy metrics we could use for customer sat? The sender of this email notes at the end of the email: “I could not resist sharing my thoughts.” We encourage others to feel the same way and email us comments, thoughts, ideas, questions and feedback!

  How acquisitions are handled in the Supply Chain Top 25

  We recently had a question from a leading life sciences manufacturer about the way we handle acquisitions in the Top 25. This question comes up a lot, as public companies are constantly moving the chess pieces around the board. Here’s the question:

  In the past year, we acquired a division of a competitor ($8B) and divested one of our divisions. In this sense, we’re essentially "a moving target." Can you please provide commentary as to how AMR Research handles acquisitions and mergers that haven’t been fully integrated yet for the Top 25 Supply Chain evaluation?

  Here’s our answer: we do not correct for acquisitions. If the consolidated financials show a higher than normal growth rate for companies that have recently acquired, this is considered to be a reality-based reflection of their business for that year, and it is balanced, to some degree, by other components of the total scoring. Equally, any operational differences between the parent and acquisition are accepted as part of the overall performance of the new parent.

  The reason for this is that, while it might be possible to exclude them, acquisitions are a slippery slope analytically. Given the base of companies we’re ranking (i.e., the Global 500), there are always numerous companies at any one point in time that are at varying stages of acquisitions and/or mergers. For some small percentage, there might be a clear argument for or against inclusion, but for most it’s not easily determined.

  Consider, for instance, the acquisition of a small firm with a special strategic technology or a unique channel. In such a case, the acquisition may be an explicit part of the overall value chain or supply chain strategy of the parent, and should clearly be part of the assessment of its overall supply chain leadership. In cases where the acquisition is larger and more easily isolated financially—Gillette from Procter & Gamble, for example—it is tempting to exclude, but this too fails since the merged entity represents a strategic gain based in part on supply chain strategy. And should we forever after exclude Gillette even when the operations are comprehensively merged? The answer is no.

  As to the opinion component, AMR Research’s voters and/or the peer voters may view the acquisition as a statement of supply chain leadership if, for instance, the perception is the acquirer was able to complete the deal as part of an operational edge that translates into corporate power and share price strength. In any case, the voting mechanics provide no means for detailed operational benchmarking. The opinion polls can only reflect the handicap or advantage of the newly acquired group to the overall supply chain performance as a matter of opinion, using AMR Research’s DDSN model as the standard for excellence in leadership.

  As always, we welcome your questions and comments as the dialog on supply chain leadership evolves. Please email me at komarah@amrresearch.com and we may post your note!

Peer Opinion Panelist Overview

AMR Research’s Supply Chain Top 25 includes a Peer Opinion component in its ranking methodology. This component comprises 20% of the total point score upon which the final rank is based. The other components are an AMR Research Opinion score (20%) and financial metrics (e.g., return on assets, inventory turns, and growth), which collectively account for 60% of the score.

Q. Who is eligible for the Peer Opinion Panel?
A. Any supply chain professional working for a manufacturer or retailer. This excludes consultants, technology vendors, and people working in non-supply chain roles, including PR, marketing, and finance. AMR Research reserves the right to accept or reject any volunteer. AMR Research also monitors total representation, with an eye to reasonably balance the Panel across companies, industries, and functions. Only one panelist per company is accepted.

Q. What does the Panel do?
A. The polling procedure is designed explicitly to take no more than 60 minutes, and is administered as a web form on the AMR Research website. As with any online web form, explicit instructions are readily visible. There are no other absolute responsibilities for the Panel.

Q. When does the polling take place?
A. Polling is held in early April. Eligible panelists are notified of their acceptance during the week prior.

Q. Are there any preparatory materials available?
A. Yes. AMR Research has a number of published articles and Reports that provide background on definitions, terminology, and reference models that panelists may find useful. These are clearly identified on this page. This site is actively maintained as a venue for Panelists and others to comment on and debate intent, methodology, and other topics relating to supply chain leadership.

Q. How does the polling web form work?
A. Panelists are given a limited universe of public companies (the Fortune Global 500 manufacturers and retailers) and asked to select those they regard as “leaders,” meaning companies coming closest to an ideal that AMR Research has defined as Demand-Driven Supply Network. After this subset of leaders is chose, the form refreshes, bringing just those chosen companies (must be more than 25 in the first pass) to a list. Panelists are then asked to force-rank from 1 through 25 the companies, with 1 being the company most closely fitting the Demand-Driven Supply Network ideal, 2 being next closest, and so on. 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. This procedure is identical to the polling procedure that is used for the AMR Research Opinion component.

Q. How many Peer Panelists are there?
A. For the 2009 voting process, the peer panel included 170 supply chain executives from a wide range of industries.

Our Methodology

The master list of companies is derived using Fortune’s Global 500 ranking, published each year. Certain industries and companies are eliminated from the master list, as some do not have supply chains per se or their supply chains have unique characteristics that unfairly distort the metrics used in the ranking. Some of these industries include financial services, healthcare, and insurance. In addition, some individual companies are eliminated because of the unavailability of up-to-date financial data.

The Global 500 includes Revenue and Net Income from the most recently completed (and published) fiscal year. This data is then compared to Hoover’s online financials. When the revenue and income data do not match, the annual report for the company is used to determine appropriate financial numbers for calculation of the metrics. Hoover’s and the annual reports for respective companies are used to obtain the data for Total Assets, Cost of Goods Sold, and Inventory that are not included in the Global 500 report.

There are three components that make up the composite score for the company and determine its ranking. The first component of the ranking is publicly available financial data, which is weighted at 60% of the total score. The second component of the ranking is an AMR Research Opinion, which is weighted at 20% of the total score. The AMR Research voting panel consists of both industry and functional analysts. The third component is a Peer Opinion Panel, which is weighted at 20% of the total score and comprises supply chain professionals across manufacturing and retail businesses.

These three components are combined to create a weighted average score for overall supply chain leadership. Below is the list of financial metrics used and how they are calculated.

Return on Assets—Net income / total assets
Inventory turns—Cost of goods sold / inventory
Revenue growth—Change in revenue from prior year

This year for the first time we used a three-year weighted average for the ROA and revenue growth metrics. The yearly weightings were as follows: 50% for 2008, 30% for 2007 and 20% for 2006. For inventory, we shifted to a quarterly average calculation versus the end-of-year snapshot balance sheet number we’ve used in the past. For all the metrics, where 2008 data was unavailable, the latest available full-year data was used.

Additional computational details may require adjustment once voting data and financial data are assembled. Any such adjustments will be clearly identified and published by AMR Research.

Voting instructions for AMR Research’s Opinion Panel and Peer Opinion Panel

The intent of the Supply Chain Top 25 is to identify demand-driven leaders. We define this as companies that, in your expert opinion and based on your knowledge of the industry and the practices of supply chain, come closest to the Demand-Driven Supply Network (DDSN) Level 4 (Orchestrator) description (see below). The web form contains a master list that includes all companies considered in the universe based on the Fortune Global 500.

Each voter goes through a four-page system to get to their final selection of leaders that come closest to the DDSN ideal as defined in AMR Research Reports. Average time to complete the vote is 15 minutes, and no voter should take more than 60 minutes.

• The first page provides instructions and the demand-driven value chain model against which voters are asked to rank.
• The second page asks for some demographic information.
• The third page provides the complete list of the companies to be considered. Voters are asked to choose 30 to 50 that, in their opinion, most closely fit the ideal. This is done by checking off the boxes next to those companies.
• The fourth page automatically brings up just those chosen companies. Panelists are asked to rank the companies from 1 through 25, with 1 being the company most closely fitting the ideal in their opinion.

  AMR Research then tallies all the individual votes across the entire panel, with 25 points earned for a No. 1 ranking, 24 points for a No. 2 ranking, and so on.

  Panelists are not expected, nor are they encouraged, to conduct external research to place their votes. By definition, each person’s expertise is deep in some areas and limited in others. 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.

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  AMR Research® is a registered trademark of AMR Research, Inc.

The AMR Research Supply Chain Top 25 for 2009 Results

Winners, new arrivals, returners, and who may be missing in 2010. Kevin O'Marah talks with Bruce Richardson about the AMR Research Supply Chain Top 25 for 2009.

Apple Reigns, Dell Returns: The 2008 Supply Chain Top 25

In this podcast, AMR Research CEO Tony Friscia and Chief Strategy Officer Kevin O’Marah discuss the standouts from The AMR Research Supply Chain Top 25 for 2008.