Executive Briefings

Seven Lessons From the AMR Research 2008 Supply Chain Top 25 for Consumer Products

Two major messages come through clearly when looking at the Top 10 consumer products (CP) supply chains: leaders focus on strong brands with a less complex product mix and the gap between leaders and followers continues to widen.


For the past 20 years, AMR Research has focused on understanding how supply chain best practices translate into business results. This focus was the genesis of the AMR Research Supply Chain Top 25, a listing of top supply chains across industry. In this article, we share seven insights on the CP sector and its progress over the past four years on the Top 25.

The 2008 AMR Research Supply Chain Top 25 was published on May 31. The ranking highlights the Fortune Global 500 manufacturing and retail companies that have done the most to bring IT together with a principle we call the demand-driven value network (DDVN) to transform the shape of the extended global supply chain. The ranking has two main components: financial and opinion. Public financial data gives us insight 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% and opinion 40%. Here's a breakdown of each:

Financial component:
Three financial metrics are used in the ranking, as listed below. 2007 data was used where available. Where 2007 data was unavailable, latest available full-year data was used:


1. Return on assets (ROA)--2007 net income/2007 total assets
2. Inventory turns--2007 cost of goods sold/2007 year-end inventory
3. Revenue growth--Change in revenue from 2007 versus 2006

The weighting is 25% ROA, 25% inventory turns, and 10% growth. Financial data is taken primarily from each company's individual annual reports, with Hoover's online financials as a secondary source.

Opinion component:
The 40% opinion weighting is equally divided between a Peer Opinion Panel, made up of supply chain executives from manufacturers and retailers, and the AMR Research panel, which comprises supply chain industry analysts. This year, there were 122 peer panelists that voted on the Top 25.

The top five CP performers--Procter & Gamble, Anheuser-Busch, PepsiCo, The Coca-Cola Company, and Nike--are consistent year over year, even though their positions may change slightly. But the larger story is the growing gap between the rankings of the leaders versus those of other CP companies. To arrive on the CP Top 10, we skip from Nike, which is No. 15 in the overall Top 25, to Groupe Danone, which is No. 42. This gap is largely driven by a company's ability to introduce successful new products and grow market share in emerging economies. The Top 5 companies on the CP list average close to double the inventory turns and revenue growth as well as 20% higher return on assets than the others on the list.


For CP companies looking to rank next year, consider the following:

Focus on strong brands:
Successful companies focus on building and growing strong brands, which allows these supply chain leaders to achieve economies of scale with less complexity--that is, fewer items and more volume shipped per item--and drive sustainable supply chain advantage. Companies with $1B to $5B in revenue often have five times the number of items than companies with more than $5B in revenue. Leaders are better at managing their product portfolios, building brands through market presence, and knowing when to divest to improve the portfolio.

Pay attention to balance :
Supply chain leaders achieve excellence by focusing on balance and making conscious tradeoffs, realizing supply chain metrics are interrelated and that they must make thoughtful choices and tradeoffs to align operational and business strategy. By achieving supply chain metric balance, the results have greater value and are more sustainable.

We see this in their cash-to-cash performance. Supply chain leaders are good, but not the best at cash-to-cash cycle time. The Top 5 get paid by customers more quickly and hold less inventory, but because they pay suppliers faster, they still have longer cash-to-cash cycle times. The key is to be good but not great to reach the right tradeoffs between working capital and product-based decisions in go-to-market plans.

This is a challenge for most. A common tendency for companies is to try to be good at everything, which can unconsciously throw the supply chain out of balance. When inventory is viewed in isolation, a less-than-effective supply chain results, with companies constantly fighting fires instead of building operational and innovation excellence.

Use downstream data and direct store delivery (DSD): The Top 10 CP list includes leaders in the use of downstream data and early adopters of demand-driven initiatives. While none of the companies on the list are solely dependent on downstream demand signals, they are actively investing in downstream data usage as well as improving retail/CP demand translation and the prevention of out of stocks at the shelf.


Focus on building effective network relationships: For leaders, 41% of innovation stems from the use of suppliers in design networks, according to our research. As design and supply networks coalesce, these top supply chains, with their embedded global innovation, build strong development programs to reward suppliers not only for delivery against design initiatives, but also for contributing to sustainability and corporate social responsibility (CSR) initiatives.

Embed innovation: Innovation is the Achilles' heel of the CP industry, with few doing it right. While 2006 and 2007 were active years for product innovation, less than 5% of products reached $50M in first-year sales and less than two-thirds met internal goals. While getting product to market on time is seen as an important metric, only 45% of companies view themselves as successful in this measure.But the unquestioned leader in embedded innovation is the No. 4 company on our Top 25, Procter & Gamble. With its strategy of focusing on big brands, big companies, and big markets, the company currently has 23 brands valued at $1B.It's all about attitude.To quote Jim Collins from his book Good to Great, "Good is the enemy of great." Companies with top-performing supply chains are never satisfied with just good. For them, change is seen as an opportunity. They continuously learn from other industries and have a passion for excellence. They have also been some of the earliest adopters of principles-based leadership for sustainability and corporate social responsibility. While other companies are caught up in organizational blame games and groupthink, the Supply Chain Top 25 leaders are more likely to have a consistent, common vision for global supply chain excellence.
http://www.amrresearch.com

Two major messages come through clearly when looking at the Top 10 consumer products (CP) supply chains: leaders focus on strong brands with a less complex product mix and the gap between leaders and followers continues to widen.


For the past 20 years, AMR Research has focused on understanding how supply chain best practices translate into business results. This focus was the genesis of the AMR Research Supply Chain Top 25, a listing of top supply chains across industry. In this article, we share seven insights on the CP sector and its progress over the past four years on the Top 25.

The 2008 AMR Research Supply Chain Top 25 was published on May 31. The ranking highlights the Fortune Global 500 manufacturing and retail companies that have done the most to bring IT together with a principle we call the demand-driven value network (DDVN) to transform the shape of the extended global supply chain. The ranking has two main components: financial and opinion. Public financial data gives us insight 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% and opinion 40%. Here's a breakdown of each:

Financial component:
Three financial metrics are used in the ranking, as listed below. 2007 data was used where available. Where 2007 data was unavailable, latest available full-year data was used:


1. Return on assets (ROA)--2007 net income/2007 total assets
2. Inventory turns--2007 cost of goods sold/2007 year-end inventory
3. Revenue growth--Change in revenue from 2007 versus 2006

The weighting is 25% ROA, 25% inventory turns, and 10% growth. Financial data is taken primarily from each company's individual annual reports, with Hoover's online financials as a secondary source.

Opinion component:
The 40% opinion weighting is equally divided between a Peer Opinion Panel, made up of supply chain executives from manufacturers and retailers, and the AMR Research panel, which comprises supply chain industry analysts. This year, there were 122 peer panelists that voted on the Top 25.

The top five CP performers--Procter & Gamble, Anheuser-Busch, PepsiCo, The Coca-Cola Company, and Nike--are consistent year over year, even though their positions may change slightly. But the larger story is the growing gap between the rankings of the leaders versus those of other CP companies. To arrive on the CP Top 10, we skip from Nike, which is No. 15 in the overall Top 25, to Groupe Danone, which is No. 42. This gap is largely driven by a company's ability to introduce successful new products and grow market share in emerging economies. The Top 5 companies on the CP list average close to double the inventory turns and revenue growth as well as 20% higher return on assets than the others on the list.


For CP companies looking to rank next year, consider the following:

Focus on strong brands:
Successful companies focus on building and growing strong brands, which allows these supply chain leaders to achieve economies of scale with less complexity--that is, fewer items and more volume shipped per item--and drive sustainable supply chain advantage. Companies with $1B to $5B in revenue often have five times the number of items than companies with more than $5B in revenue. Leaders are better at managing their product portfolios, building brands through market presence, and knowing when to divest to improve the portfolio.

Pay attention to balance :
Supply chain leaders achieve excellence by focusing on balance and making conscious tradeoffs, realizing supply chain metrics are interrelated and that they must make thoughtful choices and tradeoffs to align operational and business strategy. By achieving supply chain metric balance, the results have greater value and are more sustainable.

We see this in their cash-to-cash performance. Supply chain leaders are good, but not the best at cash-to-cash cycle time. The Top 5 get paid by customers more quickly and hold less inventory, but because they pay suppliers faster, they still have longer cash-to-cash cycle times. The key is to be good but not great to reach the right tradeoffs between working capital and product-based decisions in go-to-market plans.

This is a challenge for most. A common tendency for companies is to try to be good at everything, which can unconsciously throw the supply chain out of balance. When inventory is viewed in isolation, a less-than-effective supply chain results, with companies constantly fighting fires instead of building operational and innovation excellence.

Use downstream data and direct store delivery (DSD): The Top 10 CP list includes leaders in the use of downstream data and early adopters of demand-driven initiatives. While none of the companies on the list are solely dependent on downstream demand signals, they are actively investing in downstream data usage as well as improving retail/CP demand translation and the prevention of out of stocks at the shelf.


Focus on building effective network relationships: For leaders, 41% of innovation stems from the use of suppliers in design networks, according to our research. As design and supply networks coalesce, these top supply chains, with their embedded global innovation, build strong development programs to reward suppliers not only for delivery against design initiatives, but also for contributing to sustainability and corporate social responsibility (CSR) initiatives.

Embed innovation: Innovation is the Achilles' heel of the CP industry, with few doing it right. While 2006 and 2007 were active years for product innovation, less than 5% of products reached $50M in first-year sales and less than two-thirds met internal goals. While getting product to market on time is seen as an important metric, only 45% of companies view themselves as successful in this measure.But the unquestioned leader in embedded innovation is the No. 4 company on our Top 25, Procter & Gamble. With its strategy of focusing on big brands, big companies, and big markets, the company currently has 23 brands valued at $1B.It's all about attitude.To quote Jim Collins from his book Good to Great, "Good is the enemy of great." Companies with top-performing supply chains are never satisfied with just good. For them, change is seen as an opportunity. They continuously learn from other industries and have a passion for excellence. They have also been some of the earliest adopters of principles-based leadership for sustainability and corporate social responsibility. While other companies are caught up in organizational blame games and groupthink, the Supply Chain Top 25 leaders are more likely to have a consistent, common vision for global supply chain excellence.
http://www.amrresearch.com