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.

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 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 Colgate-Palmolive (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 year's 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.

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 Apple's 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 Apple's ability to deliver massive sales growth with extraordinarily low levels of inventory.

Much discussion in 2008 surrounded Apple founder Steve Jobs' illness and the question of how well the company would fare in his absence. Halfway through 2009, this worry seems largely for naught as supply chain veteran Tim Cook took the lead maintaining not only smooth operational performance, but a continued flow of innovation. The ripple effect of Apple's leadership has pushed others in consumer electronics and mobile devices to rethink their place in the value chain.

The Apple effect also drove down rankings for mobile devices makers Nokia (No. 6) and Sony Ericsson (No. 24). Both companies again demonstrated the intensity of competition in this industry, but each seems to have lost something as Apple's redefinition of the mobile phone has undercut their perceived leadership. Nokia has invested for years in businesses based on content, going all the way back to the N-Gage in 2003 and more recently with its lead position on Symbian, the software consortium that provides the operating systems for millions of smart phones. The Finnish company has also continued 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. Sony Ericsson, meanwhile, has invested in a system of measurement and visibility across its global supply chain that offers best-in-class demand/supply balancing information flows. It has not yet, however, tapped into parent Sony's entertainment assets effectively enough to make a strategic difference in the content value chain.

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 Samsung's 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 year's list continue to benefit from the shift in consumer demand toward information products. Among these are computer makers Dell (No. 2) and Hewlett-Packard (No. 17). Both benefit from still-surging growth in online media--2003-08 compound annual growth rate for online advertising was a blistering 32%. HP has grown its scale and breadth beyond any other technology company in the world, simultaneously encouraging and benefiting from the explosion of media offerings. The effect of CEO Mark Hurd's operational focus has been acute on what is now one of the largest and most complex, yet effective global supply networks in the world. Looking ahead, HP will need to capitalize on this scale without compromising its hard-won agility.

Dell remains heavily focused on computer products, but in the aftermath of a strategic shakeup, it has radically redefined its value chain. As its breakthrough direct-to-consumer supply chain model faced new challenges, the company expanded its channels and invested in product design and innovation. Although its three-year growth rate is a relatively low 2.5%, the inventory turns figure remains extremely high (46.2), pulling up its composite score dramatically. Questions may persist as to whether Dell can return to its position of dominance in the computer business, but there can be little doubt that the company knows supply chain.

One interesting point in this year's list is the position of two big chipmakers, Intel (No. 25) and Texas Instruments (No. 18), both of which gained a few 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 demand-driven 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 Research's 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.

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-Mart's 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-Mart's huge scale.

Tesco again makes the list with a convincing combination of scale--one of every eight pounds spent by British shoppers goes to Tesco--and 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, Tesco's 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 private-label 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, 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 world's 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 Nike's high-end fashion value.

Operating on some of the same principles is The Coca-Cola Company (No. 13), owner of the world's 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 retailer-friendly 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 flight-to-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 Schlumberger's 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 know-how, 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 company's 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 Cisco's $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 Cisco's 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.

What is demand-driven excellence? The organizational ideal of demand-driven principles as applied to the global supply chain has three overlapping areas of responsibility:

Supply management--Manufacturing, logistics, and sourcingDemand management--Marketing, sales, and service
Product management--R&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. 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.
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