May 2009

The AMR Research Supply Chain Top 25 for 2009

by Tony Friscia, Kevin OMarah, Debra Hofman, and Joe Souza Since 1986 AMR Research has studied and fostered the revolution in supply chain as a professional discipline and as a competitive weapon for companies in the post-industrial economy. The governing principle of this emerging discipline is something we call demand driven, which means global supply chains built to serve customers with both operational and innovation excellence. Our annual Supply Chain Top 25 identifies those Fortune Global 500 companies that have best demonstrated leadership in applying this principle to drive business results.

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AMR ReseARch content

May 2009

The AMR Research Supply Chain Top 25 for 2009

by Tony Friscia, Kevin OMarah, Debra Hofman, and Joe Souza

The Bottom Line: Apple again tops the Supply Chain Top 25, heading a list of iconic leaders in a recession-driven flight to quality.

Since 1986 AMR Research has studied and fostered the revolution in supply chain as a professional discipline and as a competitive weapon for companies in the post-industrial economy. The governing principle of this emerging discipline is something we call demand driven, which means global supply chains built to serve customers with both operational and innovation excellence. Our annual Supply Chain Top 25 identifies those Fortune Global 500 companies that have best demonstrated leadership in applying this principle to drive business results.

should come as little surprise that our 2009 list comprises companies of deeply established reputations and long histories. Investors, facing uncertain times, tend to shun risky bets and look for security in safe stocks. Sometimes called a flight to quality, this trend reflects a belief that the strong will survive. Our list this year has fewer new names than ever before (only three), each of which contributes to this sense of stability. Intel is back on the list at No. 25, along with consumer staples Unilever (No. 22) and ColgatePalmolive (No. 20). Not only do these three also qualify as companies of established reputations and long histories, they are also clearly leaders in huge markets. Despite the fragile world economy, many of the companies on this years list remain convinced that winners will be those able to position for a return to growth. Privately, these companies will say that they expect to gain market share from their weaker competitors. Most saw the signs of trouble early and secured their cash positions well enough to maintain momentum on vital initiatives. 2010-11 will show where such foresight pays dividends, with greater supply chain agility enabling survivors to knock off competitors for good and deliver huge earnings in the climb out.

Flight to quality
2009 marks our fifth year publishing the Supply Chain Top 25. Since 2004 we have chronicled the emergence of new ideas, like the build-to-order model pioneered by Dell and the emergence of content-based value chains exemplified by Apple and Disney. Today we are experiencing a global recession of such depth that no company, however blue chip, can feel certain of its future. The collapse of credit and subsequent steep decline in demand have combined to kill off many, if not most, plans for expansion and investment throughout the global supply chain. In such an environment, it

May 2009

2009 AMR Research, Inc.

the AMR Research supply chain top 25 for 2009

Peer opinion (20%) AMR Research opinion (20%) 3-Year Weighted RoA (25%) Inventory turns (25%) 3-Year Weighted Revenue Growth (10%)

company 1 Apple

composite score

comments
Apple stays on top with an unbeatable combination of killer financials and stellar opinion scores. Continuing its move up the list, Dell remains highly regarded by its peers, with best-in-class inventory turns even as it undergoes a massive redesign of its business model. Retaining its position in the top five for five years, P&G remains a leader in demand-driven concepts, now using this advantage to vault into emerging markets. Back in the No. 4 slot, the technology giant delivers holistic value to its corporate clients, with the added benefit of leading the way in sustainability. Cisco combines a far-reaching supply chain vision, strong execution, and deep collaboration with customers and suppliers. Nokia continues to stay ahead of the curve on everything from regional sourcing and deep supplier collaboration to an organizational design based on true value chain principles. Perennial leader Wal-Mart is making a concerted effort to establish a major position in sustainability, potentially yielding substantial supply chain benefits. With laser-like execution and a focus on channel demand sensing, Samsung keeps growing in a down market. PepsiCo continues moving up the list, backed by its best-in-class DSD, leadership in sustainability, and a cultural DNA that is wired for excellence. As the No. 1 carmaker in the world, Toyota still stands as the leader of lean, possessing an enviable execution engine and strong supplier relationships. Schlumberger leads the way in supply chain talent development and sophisticated logistics management capability. J&J jumped seven slots this year, propelled by high regard from its peers and an outstanding ROA.

2887

336

12.6%

45.5

32.7%

7.97

Dell

2606

123

9.9%

46.2

2.5%

5.86

Procter & Gamble

2668

439

7.7%

5.1

12.3%

5.31

IBM

1798

329

10.1%

20.0

4.9%

5.08

Cisco Systems Nokia

1560

293

13.6%

11.0

16.4%

5.02

1989

202

14.6%

11.8

11.0%

4.97

Wal-Mart Stores

2822

311

7.9%

8.4

8.5%

4.94

Samsung Electronics PepsiCo

1299

344

10.0%

14.3

10.4%

4.63

1293

243

15.8%

7.6

10.1%

4.62

10

Toyota Motor

2319

298

5.1%

11.2

11.7%

4.36

11

Schlumberger

309

150

17.3%

10.3

21.5%

4.08

12

Johnson & Johnson

1181

196

14.7%

3.4

7.7%

3.93

notes: 1. Peer opinion and AMR Research opinion: Based on each panels forced-rank ordering against the definition of DDSN Orchestrator 2. RoA: ((2008 net income / 2008 total assets)*50%) + ((2007 net income / 2007 total assets)*30%) + ((2006 net income / 2006 total assets)*20%) 3. Inventory turns: 2008 cost of goods sold / 2008 quarterly average inventory 4. Revenue Growth: ((Change in revenue 2008-2007)*50%) + ((Change in revenue 20072006)*30%) + ((Change in revenue 2006-2005)*20%) 5. composite score: (Peer Opinion*20%) + (AMR Research Opinion*20%) + (ROA*25%) + (Inventory Turns*25%) + (Revenue Growth*10%)

Source: AMR Research, 2009

2008 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. 2 2009 AMR Research, Inc. May 2009

the AMR Research supply chain top 25 for 2009

Peer opinion (20%) AMR Research opinion (20%) 3-Year Weighted RoA (25%) Inventory turns (25%) 3-Year Weighted Revenue Growth (10%)

company 13 The Coca-Cola Company Nike

composite score

comments
In the ranking for the fifth time, Coke has a formula that continues to create financial value with superior growth and ROA. Nike drives demand with fashion, a classic example of brand and design embedded in physical product. High turns and enviable growth reflect Tescos emphasis on smart standardization and loyalty management expertise. Disney combines demand-driven replenishment with new collaborative models for pure content distribution. HPs acute operational focus provides the foundation for its large and complex yet effective global supply network. TI has long led in the use of advanced software tools for factory and supply chain planning as well as for design collaboration. Lean strategies, masterful orchestration of its extensive partner network, and a focus on PBL underlie Lockheeds movement up the ranking. New to the ranking this year, Colgate has stellar ROA and growth rates and has been increasingly visible in demonstrating leadership. Best Buy continues to hone its celebrated total consumer experience expertise, introducing new services to attract and retain customers. New to the ranking this year, Unilevers impressive ROA and opinion ratings sit on top of its flexible supplier segmentation strategies and a strong CSR record. Maintaining superior ROA and turns and solid revenue growth despite a tough retail market, Publix joins the ranking for the fourth time. Back on the list for the second time, Sony Ericsson has invested in an impressive system of measurement and visibility across its global supply chain. Returning to the ranking, Intel is a leader in innovation, low-cost supply chain design, and talent development.

1505

100

14.7%

4.8

12.1%

3.88

14

1430

119

14.6%

4.4

11.6%

3.87

15

Tesco

1125

227

6.0%

19.0

12.3%

3.71

16

Walt Disney

743

77

7.0%

33.0

6.4%

3.43

17

HewlettPackard Texas Instruments

1381

146

7.6%

11.3

12.0%

3.37

18

499

72

20.5%

4.0

-2.6%

3.31

19

Lockheed Martin

307

135

9.7%

22.1

4.0%

3.20

20

ColgatePalmolive

428

17

17.9%

5.2

10.9%

3.18

21

Best Buy

1275

144

8.5%

5.7

12.9%

3.15

22

Unilever

635

96

13.3%

5.0

1.5%

2.87

23

Publix Super Markets Sony Ericsson

275

20

14.1%

13.7

4.9%

2.86

24

716

38

9.3%

15.4

9.0%

2.76

25

Intel

500

124

11.1%

4.9

-0.2%

2.56

notes: 1. Peer opinion and AMR Research opinion: Based on each panels forced-rank ordering against the definition of DDSN Orchestrator 2. RoA: ((2008 net income / 2008 total assets)*50%) + ((2007 net income / 2007 total assets)*30%) + ((2006 net income / 2006 total assets)*20%) 3. Inventory turns: 2008 cost of goods sold / 2008 quarterly average inventory 4. Revenue Growth: ((Change in revenue 2008-2007)*50%) + ((Change in revenue 20072006)*30%) + ((Change in revenue 2006-2005)*20%) 5. composite score: (Peer Opinion*20%) + (AMR Research Opinion*20%) + (ROA*25%) + (Inventory Turns*25%) + (Revenue Growth*10%)
May 2009

Source: AMR Research, 2009

2008 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. 2009 AMR Research, Inc. 3

Inside the numbers

For all the anxiety surrounding business this year, one positive trend that remains from last year is the growing importance of content or intellectual property as a key factor in supply chain strategy. Apple again tops our list, and still by a wide margin. The composite score tallied by Apple shows dominance not only in peer and AMR Research opinion votes but also in financial metrics. The success of Apples iPhone continues to change the playing field for mobile devices. Even more importantly, it is changing the rules for software and consumer information services. The App Store adds to Apples ability to deliver massive sales growth with extraordinarily low levels of inventory.

Another mobile devices maker, Samsung (No. 8), managed to climb one notch in the rankings this year, helped by strong and balanced financials. The Korean electronics giant not only makes cutting-edge mobile devices that are competitive with the best of Apple and Nokia, it also has huge businesses in flat-panel televisions and other consumer electronics as well as a big semiconductor business selling components to its rivals. The precision Samsung brings to its sales and operations planning process is among the best in the world. This is one reason Samsungs CEO is able to drive supply chain strategy actively from the top down. Few companies in any industry place a higher value on supply chain as vital to corporate strategy.

A number of others on this years list continue to beneMuch discussion in 2008 surrounded Apple founder fit from the shift in consumer demand toward informaSteve Jobs illness and the question of how well the tion products. Among these are computer makers Dell company would fare in his absence. Halfway through (No. 2) and Hewlett-Packard (No. 17). Both benefit 2009, this worry seems largely for naught as supply from still-surging growth in online media2003-08 chain veteran Tim Cook took the lead maintaincompound annual growth rate for online advertising not only smooth operational ing was a blistering 32%. HP has performance, but a continued flow grown its scale and breadth beyond of innovation. The ripple effect One positive trend that any other technology company in of Apples leadership has pushed remains from last year is the world, simultaneously encourothers in consumer electronics and the growing importance aging and benefitting from the mobile devices to rethink their explosion of media offerings. The of content or intellectual place in the value chain. effect of CEO Mark Hurds operaproperty as a key factor in The Apple effect also drove down tional focus has been acute on what supply chain strategy. rankings for mobile devices makers is now one of the largest and most Nokia (No. 6) and Sony Ericsson complex, yet effective global supply (No. 24). Both companies again networks in the world. Looking demonstrated the intensity of ahead, HP will need to capitalize on this scale without competition in this industry, but each seems to have compromising its hard-won agility. lost something as Apples redefinition of the mobile Dell remains heavily focused on computer products, phone has undercut their perceived leadership. Nokia but in the aftermath of a strategic shakeup, it has has invested for years in businesses based on content, radically redefined its value chain. As its breakthrough going all the way back to the N-Gage in 2003 and more direct-to-consumer supply chain model faced new recently with its lead position on Symbian, the software challenges, the company expanded its channels and consortium that provides the operating systems for milinvested in product design and innovation. Although lions of smart phones. The Finnish company has also its three-year growth rate is a relatively low 2.5%, the continued to stay ahead of the curve on everything from inventory turns figure remains extremely high (46.2), regional sourcing and deep supplier collaboration to an pulling up its composite score dramatically. Questions organizational design based on true value chain princimay persist as to whether Dell can return to its position ples. Sony Ericsson, meanwhile, has invested in a system of dominance in the computer business, but there can of measurement and visibility across its global supply be little doubt that the company knows supply chain. chain that offers best-in-class demand/supply balancing One interesting point in this years list is the posiinformation flows. It has not yet, however, tapped into tion of two big chipmakers, Intel (No. 25) and Texas parent Sonys entertainment assets effectively enough to Instruments (No. 18), both of which gained a few make a strategic difference in the content value chain.

2009 AMR Research, Inc.

May 2009

spots in the ranking from last year despite negative three-year growth rates. Part of the explanation is very high three-year return on assets (ROA) figures for both (20.5% for TI, 11.1% for Intel). The more interesting fact is the increased degree of focus each has made on supply chain collaboration as a competitive differentiator. TI has long led among all manufacturers in the use of advanced software tools for factory and supply chain planning. It also has established a reputation for collaboration on design that adds value downstream in the manufacturing operations of its customers. Intel, in contrast, is relatively new to the notion of demand driving the design of its manufacturing and supply chain operations. Coming as it does from a strong and successful tradition of technology push, one might expect Intel to resist such a dramatic philosophical shift. Quite the opposite. With its efforts to develop a completely new supply chain strategy for the low-cost Atom chip, Intel is attempting to use supply chain design as the center of a wider business strategy. Recession pains were a prominent fact of 2008, and our list disproportionately reflects the shift toward established, broad-based consumer staple companies. This flight to quality was evident in the rising rankings of five big-name consumer products companies. Procter & Gamble (No. 3), for the fifth time among our top five, managed to jump one notch while traditional rivals Unilever and Colgate-Palmolive each made the list for the first time. Also jumping up the list were PepsiCo (No. 9) and Johnson & Johnson (No. 12). All five of these organizations have invested heavily in demanddriven technologies and processes. Their ability to sense and respond to shifting levels of demand is especially critical during a downturn and one of the reasons each was able to record excellent three-year ROA figures. Each has also been increasingly visible in terms of demonstrating leadership, with Unilever and Colgate both receiving leadership awards from AMR Researchs analysts in 2008: Unilever was recognized for leadership in corporate social responsibility in the supply chain, and Colgate was cited for excellence in technology leverage in the supply chain. PepsiCo continues to experiment with and exploit its unique direct store delivery (DSD) capability and has developed some truly advanced analytical capabilities to deeply mine supply chain data. Johnson & Johnson, now in our Top 25 for the fifth year running, manages to establish and govern a global supply chain strategy with process councils while still allowing regional or local execution through a highly decentralized organization.
May 2009

Retailers again constitute a significant slice of the Top 25, with perennial leader Wal-Mart (No. 7) at the top and Tesco (No. 15), Best Buy (No. 21), and Publix (No. 23) all following. Wal-Mart is among a small set of companies for which the recession has a silver lining, with consumers driven to look for low prices. Easily lost in the discussion is Wal-Marts concerted effort to establish a leading position in sustainability. While this effort has branding benefits, it stands in the longer run to deliver substantial supply chain cost savings, especially given Wal-Marts huge scale. Tesco again makes the list with a convincing combination of scaleone of every eight pounds spent by British shoppers goes to Tescoand innovation. Having pioneered the first truly successful home delivery supply chain for groceries, the company is now experimenting through the downturn with consumer financial services. Consistently unwilling to live by traditional rules, Tescos approach to value encompasses more than just operating efficiency. Publix again makes our list largely on the back of extremely strong return on assets (14.1% three-year average) and high inventory turns (13.7). As a regional grocer, Florida-based Publix has taken an active role in its local communities, including extensive emergency preparedness for this hurricane-plagued area. Best Buy remains a leading supply chain by all accounts, both in terms of its solid financial scores and its demonstrated leadership in supply chain innovation. Chief among these is the understanding Best Buy appears to have of the increasing complexity and business opportunity afforded by the content economy. Not only does the company sell products catering to this trend, it also extends the value proposition with home services provided by its Geek Squad and with privatelabel manufacturing of consumer electronics products. Walt Disney (No. 16) again makes the list. Last year we saw this as part of the move toward intellectual property as embedded in a value chain. The same points hold this year as Disney continues to employ traditional supply chain practices like demand-driven replenishment for its DVD business and strategic sourcing in its theme parks, with new collaborative models for pure content distribution via the digital supply chain. Pricing challenges, coupled with serious piracy problems for entertainment products, persist in cutting into media companies ability to grow earnings, and Disney is not immune. By combining a physical products universe with a digital products universe,
2009 AMR Research, Inc. 5

however, Disney is learning valuable lessons about how best to control and monetize its IP. Nike (No. 14) is another returning blue-chip supply chain leader that benefits from the explosion in content business opportunities. Having established itself as one of the worlds dominant brands, Nike has been able to drive demand with fashion, offering a classic example of content (brand and design) embedded in physical product. Next steps include finding more ways to leverage the digital supply chain to accelerate value creation on the content dimension while learning how to respond faster to demand for those products that lack Nikes high-end fashion value. Operating on some of the same principles is The Coca-Cola Company (No. 13), owner of the worlds most valuable brand. Working as it does through its bottlers to deliver a total supply chain capability, the Atlanta-based company is wrestling with how best to unify brand and marketing innovation with retailerfriendly execution to the shelf. One of its most important efforts is a regular dialog with the heads of its worldwide independent bottlers to better coordinate demand creation with supply replenishment. Both in terms of ROA (14.7% three-year average) and growth (12.1% three-year average) the Coke formula continues to create financial value. How much better it gets will depend on tightening links to bottlers. Among industrial companies, several leaders are again back on the list. Toyota (No. 10) secured very strong peer voter points again this year, reinforcing the flightto-quality mood that seemed to hold. The lean pioneer, weathering historically dismal times in the automotive industry, reported a fiscal year (2008) loss for the first time since its founding in 1937. Despite these challenges, it is clear that the systems and processes Toyota has built around the world position it well to continue to pick up market share worldwide. Lockheed Martin (No. 19) is back this year, and while its excellent inventory turns (22.1) are largely a product of its role as a prime contractor, few if any complex industrial companies have been as innovative around supply chain strategies. Its organizational structure is explicitly built to extend lean principles from the shop floor to the total enterprise and beyond into its value chain. It has managed to build and deliver the first common platform designs across international military

customers and continues to use integrated process teams across partners to orchestrate the total supply chain. Complex supply network coordination is the core competence of another industrial giant, Schlumberger (No. 11), which has developed sophisticated logistics management skills around big engineering projects that are highly capital intensive, and therefore very time sensitive. One of Schlumbergers most notable contributions to supply chain leadership has been in the area of talent development, where extensive training and best practice sharing is sponsored across the organization. Requiring, as Schlumberger does, a set of skills somewhere between traditional best-in-class sourcing and engineering-intensive program management knowhow, it is perhaps understandable that their recruiting and training requirements have forced some innovative approaches to be taken. IBM (No. 4) again makes our list, now five years straight. Much of what has been said of industrial leaders like Lockheed Martin and Schlumberger applies equally well to IBM, whose business has become primarily one of multi-year program management. The companys innovation around the people supply chain is breakthrough, and although many years of development certainly lie ahead, principles borrowed from traditional supply chain promise huge gains in the profitability and reliability of its burgeoning services business. Last, but certainly not least, is Cisco Systems. When we first published the list in 2004, memories of Ciscos $2B inventory write-down were still fresh, and the company was nowhere near making any Top 25. Since that time, new leadership in the supply chain organization coupled with an ambitious yet believable vision for Ciscos place in the post-industrial economy has led to a steady climb up the rankings. From No. 18, to No. 11, to No. 8, to cracking the top five, Cisco is a story of success. Some of what works is basic technology leverage for better operational performance, including a three-layer system for demand planning. Some is organizational, including a Customer Value Chain Management structure that combines quality, customer fulfillment, and traditional supply chain to give corporate customers efficiency with high levels of service. Above all, Cisco excels at making supply chain strategic by understanding at all levels, up to and including CEO John Chambers, how this discipline will govern competition in the future.

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May 2009

What is demand-driven excellence?

Figure 1 captures the organizational ideal of demanddriven principles as applied to the global supply chain. This model has three overlapping areas of responsibility: Supply managementManufacturing, logistics, and sourcing Demand managementMarketing, sales, and service Product managementR&D, engineering, and product development Excellence is a matter of visibility, communication, and reliable processes that link all three of these functional areas together. When these processes work together, the business can respond quickly and efficiently to opportunities arising from market or customer demand. Defining characteristics of supply chains built to this design include the ability to manage demand rather than just respond to it, a networked rather than linear approach to global supply, and the ability to embed innovation in operations rather than keep it isolated in the laboratory. The demand-driven model is inherently circular and self-renewing, unlike the push supply chains of our factory-centric industrial past. Two basic dimensions of measurement capture the totality of the best-in-class demand-driven global supply chain: operational excellence and innovation excellence. Operations, including delivering as promised to customers and keeping costs under control, are relatively easy to measure and unambiguous as business value metrics. We recommend a hierarchy of metrics, at the top of which are perfect order rate and total supply chain costs, to monitor this dimension. Of course, operational excellence has value only if customers want what is being made and shipped. To address this dimension, we look at innovation excellence. Although far harder to measure reliably, this dimension also can be managed with a hierarchy of metrics, in this case topped by time to value and return on new product development and launch (NPDL) see Appendix A for details. Companies that manage to balance leadership on both these dimensions over time not only satisfy their customers but also earn better returns on capital invested, whether in assets or research and development.

Figure 1: Demand-driven principles in supply chain

A system of technologies and processes that senses and reacts to real-time demand signals across a supply network of customers, suppliers and employees.

supply

demand

product

Source: AMR Research, 2009

May 2009

2009 AMR Research, Inc.

Figure 2: Operational and innovation excellence are key

Winners
Leader

(Higher price/earnings multiples)

supply

demand

product

Operational Excellence (Perfect order, total SCM cost)

supply

product Laggard

demand

Losers
Laggard Innovation Excellence (Time to value, return on R&D) Leader
Source: AMR Research, 2009

2009 AMR Research, Inc.

May 2009

Appendices

Appendix A: supply chain top 25 methodology

The Supply Chain Top 25 ranking comprises two main components: financial and opinion. Public financial data gives us a view into how companies have performed in the past, while the opinion component provides an eye to future potential and reflects future expected leadership, a crucial characteristic. These two components are combined into a total composite score, with the financials accounting for 60% of the total score and the opinion piece 40%. We start with a master list of companies derived from the latest publication of Fortunes Global 500 ranking. We pare the list down to the manufacturing and retail sectors, thus eliminating certain industries, such as financial services and insurance (see Table 2 for a full list of industries that are excluded). Some individual

companies are eliminated because of unavailable financial data. 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, do so in a way that builds on what weve done in previous years. We are continually considering new metrics that might give us additional or better insights into supply chain performance and reassessing the weightings used to ensure a fair reflection of market and business realities. In 2008, we published an article detailing the changes we were considering in order to get input from the wider supply chain community (see Changes to the Supply Chain Top 25 Methodology: Our Ideas). We received extensive and extremely helpful feedback, which was incorporated into the changes we implemented, as detailed below.

table 2: Industries not included in the Supply Chain Top 25

Airlines Banks Computer Services/ Software Diversified Financials Energy Engineering/ Construction Food Services Healthcare: Insurance and managed care Homebuilders Insurance Mail, Package and Freight Delivery Crude Oil Production Petroleum Refining Railroads Source: AMR Research, 2009 Securities Shipping Telecommunications Temporary Help Trading Utilities

May 2009

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Financial component
Similar to previous years, three financial metrics were used in the ranking: ROANet income / total assets Inventory turnsCost of goods sold / inventory Revenue growthChange 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 weve used in the past. For all the metrics, where 2008 data was unavailable, the latest available full-year data was used. Inventory gives us 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 some clues to innovation. ROA and inventory turns were weighted at 25% each, while growth was weighted at 10%. Financial data is taken primarily from a companys individual annual reports, with Hoovers online financials as a secondary source. The shift to three-year averages accomplishes our goal of smoothing the spikes and valleys in annual metrics often not truly reflective of supply chain healththat result from events such as acquisitions/divestitures, or the discrepant impact of market cycles on the highly asset-intensive industries. It also accomplishes a second, equally important, goal: it better captures the lag between when a supply chain initiative is put in placee.g., a network redesign or a new demand planning and forecasting systemand when the impact can be expected to show up in financial statement metrics like ROA and growth. Inventory, on the other hand, is a metric that is much closer to supply chain activity, and we expect it to reflect initiatives within the same year. The reason we moved to a quarterly average was to get a better picture of actual inventory holdings throughout the year, rather than the snapshot end-ofyear view provided on the balance sheet in a companys annual report.

Opinion component
The opinion component of the ranking, which constitutes 40% of the total score, is designed to provide a forward-looking view that reflects the progress companies are making as they move toward the idealized demand-driven supply network (DDSN) blueprint. It is made up of two components, each equally weighted at 20%: a panel of AMR Research experts 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 working for a manufacturer or retailer 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 not working in supply chain roles (e.g., PR, marketing, finance, and the like). We had 400 applications to participate in the peer vote in 2009, up 70% over 2008. Of those, 230 were accepted, 170 of which completed the voting process. Participants came from the most senior levels of the supply chain organization across a broad range of industries (see Appendix B for a complete demographic breakdown of peer panelists). There were also 20 AMR Research panelists across industry and functional specialties, each of whom drew on his or her primary field research and continuous work with companies. The 40% opinion weighting is equally divided between the Peer Panel and the AMR Research panel at 20% each. Companies must receive votes from both panels to be included in the ranking. Therefore, a company that had a composite score fall within the Top 25 solely based on the financial metrics would not be included in the ranking. One of the changes we strongly considered this year was to implement the concept of affinity groups into the opinion component of the score in order to offset the advantage that companies with strong brand recognition have in the voting. The idea of the affinity groups is straightforward: tag each company being voted on as either an industrial or consumer company, and weight the votes of its affinity group more heavily than the non-affinity group.

10

2009 AMR Research, Inc.

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The reality is less straightforward. After extensive testing and evaluation of numerous options for implementing this concept within the ranking engine, the bottom line was that the resultthat is, the degree to which it actually balanced out the brand recognition issuewas not significant enough to warrant the increased complexity that would result. A potential increase in complexity is not a minor point: One of our requirements is that the methodology be intuitive, transparent, and understandable, particularly to the supply chain community the ranking is intended to serve. While this approach did not work, we will continue to investigate alternatives for dealing with the brand recognition issue.

No. 2 ranking, and so on. The AMR Research panel and the peer panel used the exact same polling procedure. By definition, each persons expertise is deep in some areas and limited in others. Despite that, panelists were not 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 persons core kernel of knowledge and aggregates it into a larger whole.

Composite score
All the information previously discussedthe three financials and two opinion votesis 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 Top 25 ranking.

Polling procedure
Peer panel polling was conducted in mid-April via a web-based, structured voting process. The process was identical to previous years: Panelists were taken through a four-page system to get to their final selection of leaders that came closest to the DDSN ideal as defined in AMR Research Reports and repeated in the instructions on the voting website for the convenience of the voters. The first page provides instructions and a description of the DDSN ideal. The second page asks for demographic information. The third page provides panelists with a complete list of the companies to be considered. We asked them to choose 30 to 50 that, in their opinion, most closely fit the ideal. After this subset of leaders was chosen, the form refreshes, bringing just those chosen companies to a list. Panelists are then asked to force-rank the companies from 1 through 25, with 1 being the company most closely fitting the ideal. Individual votes were tallied across the entire panel, with 25 points earned for a No. 1 ranking, 24 points for a

Metrics: The ones we use and why, and the ones we wish we had
One of the primary lessons learned in publishing the Supply Chain Top 25 is that existing public financial metrics are bad at identifying the businesses that have the best potential to make money with a demanddriven approach to the value chain. Perhaps this is not surprising since 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 intellectual property, which are so essential to demand creation, are impossible for standard accounting to handle, and are thus usually under-counted. Even income statements can obscure real costs with sneaky capitalization rules.

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We prefer metrics that better describe two basic dimensions of performance: operational excellence and innovation excellence (again see Figure 1). 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 quarter is a matter of knowing who is the better athlete, not merely who won last year. Our premise is the better athlete is more likely to win markets and profits in the future. Therefore, the companies able to demonstrate superior performance against these dimensions merit a higher share price multiple on a dollar of current earnings. Through our ongoing, deep supply chain research, including detailed supply chain benchmarking studies of 70 companies, AMR Research has identified the metrics that map to these dimensions which, if we had them, would clearly convey which companies had the healthiest value chains:
Performance Dimension Operational Excellence Key Metrics Perfect order rate Total supply chain costs Innovation Excellence Time to value Return on new product launch

For each of these performance dimensions, we have 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. However, from our work with companies and our benchmarking studies in the past, we are all too aware of how inaccessible this data is in most companies, particularly within a realistic time frame. Moreover, while some companies may have the data we seek, we are limited in that whatever metrics we choose must be available in an audited fashion for each and every company in the total population of the Fortune Global 500. Therefore, we look to publicly available financial data to find the closest possible proxies, as detailed above. As noted above, we are continually examining additional metrics to incorporate into the methodology, balanced by the need for consistency. Our Supply Chain Top 25 webpage features a number of write-ups concerning these efforts. For example, we have investigated the possibility of using days sales outstanding (DSO) as a proxy for customer satisfaction, independent customer ratings for input on customer views, cash-to-cash for supply chain throughput rates, and the ratio of inventory versus revenue change as a measure of how efficiently a company manages growth. While our investigations revealed it was not feasible to apply these metrics within the quantitative methodology used for the Top 25, we did use them in additional analyses that we published throughout the year, and we will continue to do so this coming year.

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Figure 3: The Hierarchy of Supply Chain Metricsoperational excellence

Demand Forecast Perfect Order SCM Cost

Assess

Cash-to-Cash AP Inventory Total AR

Diagnose

Supplier Quality

Supplier On Time

Raw Purchasing Material Costs Inventory

Direct Material Costs

Correct

Cost Detail

Production Schedule Variable

Plant Utilization

WIP & FG Inventory

Order Cycle Time

Perfect Order Detail

Source: AMR Research, 2009

Figure 4: The Hierarchy of Product Metricsinnovation excellence

New Product Forecast NPDL investment NPDL Cost

Time to Value Time to Market Time to Breakeven

Customer Needs Met

Budget Performance

Pipeline

Part/ Process Reuse

First Pass Yield

New Product Detail

Planned versus Actual Engineering Manufacturing Changes Cycle Time

First Year Field Returns

Cost Detail

Source: AMR Research, 2009

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Appendix B: Peer opinion panel composition

Figure 5: Peer panel compositionindustry
Retail 9% Life Sciences 11% Industrial 15% High Tech/ Semiconductor 19% CPG 18% Source: AMR Research, 2009 Misc 3% Academic 14%

Chemical/Energy 11%

Figure 6: Peer panel compositionrole

VP 21% Academic 14%

SVP, EVP, or C-level 12% Senior Director, Director, or Manager 53% Source: AMR Research, 2009

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Figure 7: Peer opinion panel compositionregion

Asia-Pacific 6%

EMEA 13%

Americas 81% Source: AMR Research, 2009

Figure 8: Peer opinion panel composition revenue

Less than $1B 20%

$10B or more 47% $1.0B to $4.9B 18%

$5.0B to $9.9B 15% Source: AMR Research, 2009

Figure 9: Peer opinion panel composition function

Strategy/Planning 8% Sourcing/Supply Management 6% Manufacturing 5% Transportation/Logistics 6% Other 4%

Supply Chain 71%

Source: AMR Research, 2009

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Notes

Notes

Research and Advice Peer opinion panel composition Appendix B:that Matter AMR Research is the No. 1 independent advisory firm serving supply chain, operations, and technology executives. Founded in 1986, AMR Research focuses on the intersection of business processes with value chain and enterprise technologies. We provide our clients in the consumer products, life sciences, manufacturing, retail, and technology sectors with subscription advisory services and expert-led Peer Forums. To learn more about our research and services, please visit www.amrresearch.com.

More information is available at www.amrresearch.com. Your comments are welcome. Reprints are available. Send any comments or questions to: AMR Research, Inc. 125 Summer Street Boston, MA 02110 Tel: +1 (617) 542-6600 Fax: +1 (617) 542-5670