Executive Briefings

AMR Lists the 25 Best-Run Supply Chains in the World

The list recognizes those companies that have done the most to bring IT together with what AMR Research calls the demand-driven supply network. This year's ranking sees past leaders toppled and the entry of some new companies.

There are many ways to define what makes an outstanding supply chain, but AMR Research has it down to a formula-literally. The Boston-based technology research firm precisely calculates various financial and operating measures for Fortune Global 500 companies including return on assets (ROA), inventory turns and revenue growth. It then mixes in a score for its own subjective opinions and those of high-level supply chain professionals. The result is a list of the world's best-run supply chains ranked from one to 25 based on a weighted total score (click here to view the table).

According to AMR senior vice president Kevin O'Marah, who co-authored this year's Supply Chain Top 25, the purpose of the list is to recognize public companies that have done the most to lead the way in bringing IT together with a model AMR calls the demand-driven supply network (DDSN).

"This model is based on a strategic transformation from a factory-oriented push set of activities for companies to an innovation and supply capability that is driven by the demands of customers," says O'Marah. "Value chain is a better term to describe what companies are actually building."

Financial and operating success follows in the path of this demand-driven approach.

"Companies employing DDSN perform better financially in terms of ROA, profit margins, and earnings per share," says O'Marah. "AMR Research has benchmarked business processes in detail for several years, finding a clear correlation between leadership in the use of demand-driven principles and tools and higher level financial metrics. It's not simply a matter of cutting costs."

A new element in the ranking this year is peer opinion, which accounts for 20 percent of the total scores. According to O'Marah, this subjective component was added for two reasons. Top industry executives know better than anyone which companies-and competitors-are managing their supply chains well. AMR has arranged with a key executive at each of 78 global companies to rank the companies they most respect for their supply chain success. The opinions of these leaders are especially important because they visualize a time horizon that evens out the short-term trends that can influence financial and operational performance.

"For the peer review, it is far more important to be consistently good than to have one sudden hot streak," says O'Marah. "Long-term leadership is also more important to the industry than any current problems. For example, companies such as Wal-Mart and Motorola have received a lot of bad press in recent months, but they continue to rank high in the peer opinion component. Certain iconic companies are justifiably viewed as supply chain pioneers deserving of great respect."

And the Winners Are...

The highest-ranked company on AMR's 2007 Supply Chain Top 25 is Finnish mobile phone manufacturer Nokia, which has climbed up the list every year. Because it led the industry in supplier development, S&OP, and collaborative product development, Nokia is now viewed as having the best-run supply chain. Another big story in this year's Top 25 is the emergence of Apple, which is eligible for the first time with revenue that placed it in the Fortune Global 500 for 2006. Apple jumped to the No. 2 ranking despite its decidedly mixed reputation for customer service, in-stock performance, and forecasting. The opinion polls gave Apple solid support, but strong financials, including spectacular inventory turns (50.8) and stellar growth (38.6 percent), shot the computer and iPod maker near the top of the rankings.

"The lesson for supply chain professionals is that product design and innovation matter a lot," says O'Marah. "By delivering almost $2bn in sales of a zero-inventory product (iTunes) and creating huge demand with brilliant marketing and industrial design, Apple has consumers spending heavily on a supply chain with very little physical product in stock."

Another important story is the pitched battle for supremacy in the mobile telephone industry. Three of the top 12 companies, including No. 1 Nokia, No. 10 Samsung and No. 12 Motorola, are cell phone makers. The short product lifecycles, huge global consumer demand, and complex value chain that comprises chip designers, hardware manufacturers, and telecom service providers may be the ultimate crucible of supply chain innovation in the world today.

"Supply chain leadership driven by this group includes massive inter-enterprise collaboration, highly sophisticated demand modeling, and product platform strategies built deeply into the supply chain ecosystem," says O'Marah. "What's next for the companies in this group? Better integration with their internal product innovation groups."

Three life sciences companies are ranked in the Supply Chain Top 25, including Johnson & Johnson at No. 14, GlaxoSmithKline at No. 20, and AstraZeneca at No. 25. Johnson & Johnson appears for the third year in a row, again combining solid numbers with strong opinion scores. The common thread among these companies is very high ROA, with two of the three-highest ROA figures recorded by Top 25 companies delivered in life sciences (GSK with 21.1 percent and AstraZeneca with 20.2 percent). Like Apple or Nike, these companies make money more on their intellectual property than on efficiency in the physical supply chain.

"Very low inventory turns, however, suggest that this sector may have rested on its scientific laurels for a little too long," warns O'Marah.

Consumers Rule

Consumer products companies, whether they make food and beverage products or complex products such as cell phones or cars, do well on the AMR list. Eleven of the companies on the list are manufacturers that market directly to consumers.

"This high ranking reflects the reality that these companies are very concerned with the consumer experience," says O'Marah. "Consumer demand is the defining characteristic of our DDSN model. It starts at the customer and works its way back to the manufacturer. The consumer branded companies focus so intently on the customer that they are well suited to our model."

Similarly, retailers are well represented on the list because they are so customer sensitive. Five of the Top 25 are retailers. In fact, the very large retailers have become captains in their own supply chains. Wal-Mart has defined supply chain for years, but more recently Tesco has come in very high among its peers. More and more leading retailers are becoming engaged in the whole global supply chain process. They are no longer just running shops. They are involved in product development and product design. They are involved in the global supply chain, not just to keep costs down, but also to accelerate innovation in the ultimate shopping experience and the whole product process.

"Best Buy, Tesco, Lowes and, of course, Wal-Mart have all redefined the role of retailers in the supply chain, and that innovation has been recognized by their peers," says O'Marah. "Their merchandise strategy is not just a matter of buying from suppliers, but it is dictating an entire merchandise mix that includes calling upon their own supply chain to produce private-label branded products."

O'Marah admits that capital goods manufacturers and materials companies are at a disadvantage in the AMR program, mainly because of the return-on-assets and inventory-turns calculations that make up half of the entire ranking score. Capital-intensive businesses simply will not have the same ability as fast-moving consumer goods companies or retailers to turn assets into cash very rapidly. He points out that companies such as Caterpillar, Boeing and Dow Chemical ranked in the top 25 for the peer component and the AMR evaluation, but because they have a harder time with asset-related metrics, they did not make the list.

"It is a fact of life with manufacturers," says O'Marah. "Asset- and capital-intensive businesses can only do well in this type of ranking if their downstream markets are extremely strong."

Aerospace company Lockheed Martin and heavy truck manufacturer Paccar made the list this year in part because of their ability to capitalize on strength in their markets. A materials business such as Dow Chemical, for example, is often several layers too far from the end-user market to be as demand-driven as a pure consumer products company.

"A materials company that can reach down the chain for end-user demand is rare," he says. "Johnson Controls has made the list every year. As a major supplier to the auto industry, they know enough about the consumer market to manage their demand and show excellent financial performance. It can be done."

The Global Reality

The AMR list includes more foreign-based companies than ever. International markets are faring very well, which has helped the financial performance of such companies as Nokia, Samsung and Tesco, the highest-ranked food retailer on the list.

"The foreign companies are not as well known by their peers as the U.S.-based companies, so that ranking is not as high," says O'Marah, "but their financial and supply chain performance is so strong that they rank high on our list."

Companies that can take the DDSN model globally are held in special regard. Toyota has extremely high peer opinion response, in part because that company treats the entire world as its market.

"Toyota is more than a Japanese company producing huge amounts of finished goods in the U.S. and elsewhere in the world," says O'Marah. "It operates as a global entity with deep connections to its customers and suppliers in each market."

Likewise, IBM has done well in the AMR survey in part because it operates globally, both from a sourcing standpoint and from a selling standpoint. Hewlett-Packard is again on the list after missing it in 2006 because of temporary financial problems. This year, HP is back with strong financials and revenue growth that allowed them to surpass Dell as the leading PC company.  HP's success is especially impressive because it has more asset-intensive operations than its competitors. It has a complex set of supply chains, ranging from consumer packaged goods sold in convenience stores to configured corporate data centers installed and managed by specialists.

"Just as important, HP has gained great respect for their global footprint and for their customer-responsive supply chain strategy," says O'Marah. "They have embraced globalization as a real opportunity on both the sourcing and sales end of the supply chain."

Cisco, another global technology titan, is similarly positioned to make money not just through hardware, but through the software that powers its hardware while relying on contract manufacturing to keep asset burdens low.

"All three of these global technology companies have learned what solution selling really means: that supply chain processes need to serve the customer, not the technology itself," says O'Marah.

It is noteworthy to point out that in the three years that AMR has been ranking supply chains, the companies listed have not changed dramatically from year to year. This year, six companies dropped off for a variety of reasons. In some cases it was financial data. For example, Dell could not be considered because it is in the process of restating its financials even though it was ranked No. 1 in 2006 and has long been held up as the model for supply chain efficiency. Home Depot, one of the iconic big-box stores, has recently seen problems from the boardroom on down. Also, because the AMR process now includes a peer review component, these industry experts have their own views of supply chain excellence that have ranked different companies higher on the list. Thus, other companies that appeared on the 2006 list that are not on the 2007 report include high-tech giant Intel, British retailer Woolworth's, cosmetics leader L'Oreal and the ubiquitous food service company Sysco. Companies that were added to the list this year include Apple, Hewlett-Packard, GlaxoSmithKline, AstraZeneca, Lockheed Martin and Paccar.

The IT Difference

Companies on the AMR list exhibit definite IT patterns. They do not spare the IT investment, but they are very careful about how they spend it. None depends entirely on packaged suite applications. A great company very likely will run SAP or Oracle, but it will not run it wall-to-wall, according to O'Marah.

"Supply chain leaders invest in IT to meet specific operational requirements of the business," he says.

They ask themselves if they want to accomplish a specific operational goal, what tools do I use, can I buy them off the shelf or do I need to build  them myself? They do not hesitate to build what they need, either from scratch or through major adaptations of existing solutions.

"For example, i2 is the most widely used supply chain bolt-on package among the Top 25, but no implementations are exactly the same," he says. "We also see unique tools built from scratch to deal with proprietary processes and workflows.  What we don't see among leaders is waiting around for the next release of Oracle or SAP to see if the functionality they need is there."

The areas where supply chain leaders are making the greatest IT investment right now are execution systems.

"Manufacturers need tighter controls on the shop floor to allow for better demand responsiveness with the right mix, quality and waste minimization," says O'Marah, adding that shop floor controls and sensor-based systems are especially strong.

Across all industries, O'Marah sees increased spending on demand visibility to include forecasting systems on the one hand and demand signal repositories on the other.

"Data warehouses full of demand statements, such as NCR Teradata, are getting a lot of this business," he says.

He also sees a revival of interest in systems for supply chain visibility, track and trace and event management reporting.

"That class of applications is again getting support from the top companies because of the fragmented and extended global supply chains and the need for better control over the whole system," he says.

Recommended Improvements

So what can any company learn from the AMR Supply Chain Top 25, especially since few companies have the resources available to Fortune Global 500 businesses?

According to O'Marah, there are two key takeaways. First, every company needs to understand that DDSN is the 21st Century business model. Depending on sales forecasts that are not tightly linked with actual customer demand is an outmoded approach and a recipe for mediocrity or worse.  Companies need to gradually and methodically build their organizational structure and target their IT investment to be more much more focused on the demand side of the business. He calls this approach "plumbing for DDSN." 

The second point is a corollary. No company can make the necessary changes unless it routinely measures supply chain performance.

"The metrics we recommend are widely understood intuitively, but they are rarely used by most companies," he says. These metrics include:

• Perfect order

• Total supply chain cost

• Forecast accuracy

• Innovation excellence (time to value and return on new product development and launch).

With these four metrics, a company can understand both its operational performance and its competitive position. 

"These metrics provide a picture of whether or not a company can do what it says, make money doing it, and can constantly renew the foundations of business with new products," says O'Marah.  "That is what a value chain consists of:  being good at operations and innovations."

These metrics also link back to the DDSN model. Good demand visibility allows operations excellence. It also allows better time to value and better return on new product development and launch by crystallizing what the market wants and being able to position the whole product cycle to take advantage of demand when it is there.

"Demand visibility is at the top of the pyramid, and these other metrics support it," says O'Marah.

According to him, capturing these metrics is becoming a boardroom issue, as well as a shop-floor matter. The investment community is beginning to ask about how well companies can perform on these supply chain metrics.  "Wall Street is no longer satisfied with the usual accounting metrics in the 10K or such claims as 'we are the low-cost producer,'" says O'Marah. "They want to see operational measurements that prove market leadership. Measure yourself before someone from the outside-whether a customer or an investor-wants data to see how good your supply chain really is.

There are many ways to define what makes an outstanding supply chain, but AMR Research has it down to a formula-literally. The Boston-based technology research firm precisely calculates various financial and operating measures for Fortune Global 500 companies including return on assets (ROA), inventory turns and revenue growth. It then mixes in a score for its own subjective opinions and those of high-level supply chain professionals. The result is a list of the world's best-run supply chains ranked from one to 25 based on a weighted total score (click here to view the table).

According to AMR senior vice president Kevin O'Marah, who co-authored this year's Supply Chain Top 25, the purpose of the list is to recognize public companies that have done the most to lead the way in bringing IT together with a model AMR calls the demand-driven supply network (DDSN).

"This model is based on a strategic transformation from a factory-oriented push set of activities for companies to an innovation and supply capability that is driven by the demands of customers," says O'Marah. "Value chain is a better term to describe what companies are actually building."

Financial and operating success follows in the path of this demand-driven approach.

"Companies employing DDSN perform better financially in terms of ROA, profit margins, and earnings per share," says O'Marah. "AMR Research has benchmarked business processes in detail for several years, finding a clear correlation between leadership in the use of demand-driven principles and tools and higher level financial metrics. It's not simply a matter of cutting costs."

A new element in the ranking this year is peer opinion, which accounts for 20 percent of the total scores. According to O'Marah, this subjective component was added for two reasons. Top industry executives know better than anyone which companies-and competitors-are managing their supply chains well. AMR has arranged with a key executive at each of 78 global companies to rank the companies they most respect for their supply chain success. The opinions of these leaders are especially important because they visualize a time horizon that evens out the short-term trends that can influence financial and operational performance.

"For the peer review, it is far more important to be consistently good than to have one sudden hot streak," says O'Marah. "Long-term leadership is also more important to the industry than any current problems. For example, companies such as Wal-Mart and Motorola have received a lot of bad press in recent months, but they continue to rank high in the peer opinion component. Certain iconic companies are justifiably viewed as supply chain pioneers deserving of great respect."

And the Winners Are...

The highest-ranked company on AMR's 2007 Supply Chain Top 25 is Finnish mobile phone manufacturer Nokia, which has climbed up the list every year. Because it led the industry in supplier development, S&OP, and collaborative product development, Nokia is now viewed as having the best-run supply chain. Another big story in this year's Top 25 is the emergence of Apple, which is eligible for the first time with revenue that placed it in the Fortune Global 500 for 2006. Apple jumped to the No. 2 ranking despite its decidedly mixed reputation for customer service, in-stock performance, and forecasting. The opinion polls gave Apple solid support, but strong financials, including spectacular inventory turns (50.8) and stellar growth (38.6 percent), shot the computer and iPod maker near the top of the rankings.

"The lesson for supply chain professionals is that product design and innovation matter a lot," says O'Marah. "By delivering almost $2bn in sales of a zero-inventory product (iTunes) and creating huge demand with brilliant marketing and industrial design, Apple has consumers spending heavily on a supply chain with very little physical product in stock."

Another important story is the pitched battle for supremacy in the mobile telephone industry. Three of the top 12 companies, including No. 1 Nokia, No. 10 Samsung and No. 12 Motorola, are cell phone makers. The short product lifecycles, huge global consumer demand, and complex value chain that comprises chip designers, hardware manufacturers, and telecom service providers may be the ultimate crucible of supply chain innovation in the world today.

"Supply chain leadership driven by this group includes massive inter-enterprise collaboration, highly sophisticated demand modeling, and product platform strategies built deeply into the supply chain ecosystem," says O'Marah. "What's next for the companies in this group? Better integration with their internal product innovation groups."

Three life sciences companies are ranked in the Supply Chain Top 25, including Johnson & Johnson at No. 14, GlaxoSmithKline at No. 20, and AstraZeneca at No. 25. Johnson & Johnson appears for the third year in a row, again combining solid numbers with strong opinion scores. The common thread among these companies is very high ROA, with two of the three-highest ROA figures recorded by Top 25 companies delivered in life sciences (GSK with 21.1 percent and AstraZeneca with 20.2 percent). Like Apple or Nike, these companies make money more on their intellectual property than on efficiency in the physical supply chain.

"Very low inventory turns, however, suggest that this sector may have rested on its scientific laurels for a little too long," warns O'Marah.

Consumers Rule

Consumer products companies, whether they make food and beverage products or complex products such as cell phones or cars, do well on the AMR list. Eleven of the companies on the list are manufacturers that market directly to consumers.

"This high ranking reflects the reality that these companies are very concerned with the consumer experience," says O'Marah. "Consumer demand is the defining characteristic of our DDSN model. It starts at the customer and works its way back to the manufacturer. The consumer branded companies focus so intently on the customer that they are well suited to our model."

Similarly, retailers are well represented on the list because they are so customer sensitive. Five of the Top 25 are retailers. In fact, the very large retailers have become captains in their own supply chains. Wal-Mart has defined supply chain for years, but more recently Tesco has come in very high among its peers. More and more leading retailers are becoming engaged in the whole global supply chain process. They are no longer just running shops. They are involved in product development and product design. They are involved in the global supply chain, not just to keep costs down, but also to accelerate innovation in the ultimate shopping experience and the whole product process.

"Best Buy, Tesco, Lowes and, of course, Wal-Mart have all redefined the role of retailers in the supply chain, and that innovation has been recognized by their peers," says O'Marah. "Their merchandise strategy is not just a matter of buying from suppliers, but it is dictating an entire merchandise mix that includes calling upon their own supply chain to produce private-label branded products."

O'Marah admits that capital goods manufacturers and materials companies are at a disadvantage in the AMR program, mainly because of the return-on-assets and inventory-turns calculations that make up half of the entire ranking score. Capital-intensive businesses simply will not have the same ability as fast-moving consumer goods companies or retailers to turn assets into cash very rapidly. He points out that companies such as Caterpillar, Boeing and Dow Chemical ranked in the top 25 for the peer component and the AMR evaluation, but because they have a harder time with asset-related metrics, they did not make the list.

"It is a fact of life with manufacturers," says O'Marah. "Asset- and capital-intensive businesses can only do well in this type of ranking if their downstream markets are extremely strong."

Aerospace company Lockheed Martin and heavy truck manufacturer Paccar made the list this year in part because of their ability to capitalize on strength in their markets. A materials business such as Dow Chemical, for example, is often several layers too far from the end-user market to be as demand-driven as a pure consumer products company.

"A materials company that can reach down the chain for end-user demand is rare," he says. "Johnson Controls has made the list every year. As a major supplier to the auto industry, they know enough about the consumer market to manage their demand and show excellent financial performance. It can be done."

The Global Reality

The AMR list includes more foreign-based companies than ever. International markets are faring very well, which has helped the financial performance of such companies as Nokia, Samsung and Tesco, the highest-ranked food retailer on the list.

"The foreign companies are not as well known by their peers as the U.S.-based companies, so that ranking is not as high," says O'Marah, "but their financial and supply chain performance is so strong that they rank high on our list."

Companies that can take the DDSN model globally are held in special regard. Toyota has extremely high peer opinion response, in part because that company treats the entire world as its market.

"Toyota is more than a Japanese company producing huge amounts of finished goods in the U.S. and elsewhere in the world," says O'Marah. "It operates as a global entity with deep connections to its customers and suppliers in each market."

Likewise, IBM has done well in the AMR survey in part because it operates globally, both from a sourcing standpoint and from a selling standpoint. Hewlett-Packard is again on the list after missing it in 2006 because of temporary financial problems. This year, HP is back with strong financials and revenue growth that allowed them to surpass Dell as the leading PC company.  HP's success is especially impressive because it has more asset-intensive operations than its competitors. It has a complex set of supply chains, ranging from consumer packaged goods sold in convenience stores to configured corporate data centers installed and managed by specialists.

"Just as important, HP has gained great respect for their global footprint and for their customer-responsive supply chain strategy," says O'Marah. "They have embraced globalization as a real opportunity on both the sourcing and sales end of the supply chain."

Cisco, another global technology titan, is similarly positioned to make money not just through hardware, but through the software that powers its hardware while relying on contract manufacturing to keep asset burdens low.

"All three of these global technology companies have learned what solution selling really means: that supply chain processes need to serve the customer, not the technology itself," says O'Marah.

It is noteworthy to point out that in the three years that AMR has been ranking supply chains, the companies listed have not changed dramatically from year to year. This year, six companies dropped off for a variety of reasons. In some cases it was financial data. For example, Dell could not be considered because it is in the process of restating its financials even though it was ranked No. 1 in 2006 and has long been held up as the model for supply chain efficiency. Home Depot, one of the iconic big-box stores, has recently seen problems from the boardroom on down. Also, because the AMR process now includes a peer review component, these industry experts have their own views of supply chain excellence that have ranked different companies higher on the list. Thus, other companies that appeared on the 2006 list that are not on the 2007 report include high-tech giant Intel, British retailer Woolworth's, cosmetics leader L'Oreal and the ubiquitous food service company Sysco. Companies that were added to the list this year include Apple, Hewlett-Packard, GlaxoSmithKline, AstraZeneca, Lockheed Martin and Paccar.

The IT Difference

Companies on the AMR list exhibit definite IT patterns. They do not spare the IT investment, but they are very careful about how they spend it. None depends entirely on packaged suite applications. A great company very likely will run SAP or Oracle, but it will not run it wall-to-wall, according to O'Marah.

"Supply chain leaders invest in IT to meet specific operational requirements of the business," he says.

They ask themselves if they want to accomplish a specific operational goal, what tools do I use, can I buy them off the shelf or do I need to build  them myself? They do not hesitate to build what they need, either from scratch or through major adaptations of existing solutions.

"For example, i2 is the most widely used supply chain bolt-on package among the Top 25, but no implementations are exactly the same," he says. "We also see unique tools built from scratch to deal with proprietary processes and workflows.  What we don't see among leaders is waiting around for the next release of Oracle or SAP to see if the functionality they need is there."

The areas where supply chain leaders are making the greatest IT investment right now are execution systems.

"Manufacturers need tighter controls on the shop floor to allow for better demand responsiveness with the right mix, quality and waste minimization," says O'Marah, adding that shop floor controls and sensor-based systems are especially strong.

Across all industries, O'Marah sees increased spending on demand visibility to include forecasting systems on the one hand and demand signal repositories on the other.

"Data warehouses full of demand statements, such as NCR Teradata, are getting a lot of this business," he says.

He also sees a revival of interest in systems for supply chain visibility, track and trace and event management reporting.

"That class of applications is again getting support from the top companies because of the fragmented and extended global supply chains and the need for better control over the whole system," he says.

Recommended Improvements

So what can any company learn from the AMR Supply Chain Top 25, especially since few companies have the resources available to Fortune Global 500 businesses?

According to O'Marah, there are two key takeaways. First, every company needs to understand that DDSN is the 21st Century business model. Depending on sales forecasts that are not tightly linked with actual customer demand is an outmoded approach and a recipe for mediocrity or worse.  Companies need to gradually and methodically build their organizational structure and target their IT investment to be more much more focused on the demand side of the business. He calls this approach "plumbing for DDSN." 

The second point is a corollary. No company can make the necessary changes unless it routinely measures supply chain performance.

"The metrics we recommend are widely understood intuitively, but they are rarely used by most companies," he says. These metrics include:

• Perfect order

• Total supply chain cost

• Forecast accuracy

• Innovation excellence (time to value and return on new product development and launch).

With these four metrics, a company can understand both its operational performance and its competitive position. 

"These metrics provide a picture of whether or not a company can do what it says, make money doing it, and can constantly renew the foundations of business with new products," says O'Marah.  "That is what a value chain consists of:  being good at operations and innovations."

These metrics also link back to the DDSN model. Good demand visibility allows operations excellence. It also allows better time to value and better return on new product development and launch by crystallizing what the market wants and being able to position the whole product cycle to take advantage of demand when it is there.

"Demand visibility is at the top of the pyramid, and these other metrics support it," says O'Marah.

According to him, capturing these metrics is becoming a boardroom issue, as well as a shop-floor matter. The investment community is beginning to ask about how well companies can perform on these supply chain metrics.  "Wall Street is no longer satisfied with the usual accounting metrics in the 10K or such claims as 'we are the low-cost producer,'" says O'Marah. "They want to see operational measurements that prove market leadership. Measure yourself before someone from the outside-whether a customer or an investor-wants data to see how good your supply chain really is.