SCMR SepOct 2012 Raising the Bar B321

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FEATURES

10 The Supply Chain Top 25:Raising the BarBy Debra Hofman and Stan Aronow

20 Alliance Managment:Engaging Suppliers theRight Way By Bob Engel

28 How the Leaders Are TacklingGlobal Trade ManagementBy Bob Heaney

36 Bridging theSupply Chain DivideBy Ashutosh Dekhne, Xin Huang,

and Apratim Sarkar

43 Collaborating for a MoreSustainable Supply Chain

By Timothy M. Laseter and Nancy Gillis

COMMENTARY

Insights 4

Global Links 6

Talent Strategies 8

SUPPLY MANAGEMENT 50BENCHMARKS 62

S53 SPECIAL REPORT EUROPEAN LOGISTICS UPDATE

Quo vadis, Europe?European logistics industrylooks beyond the crisis

S E P T E M B E R / O C T O B E R 2 0 1 2

TheCollaborative

TOUCH

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10 S u p p l y C h a i n M a n a g e m e n t R e v i e w S e p t e m b e r / O c t o b e r 2 0 1 2 www.scmr.com

LEADErs coLLAborAtion ADvAntAgE synErgy community

the supply chain top 25Raising the Bar

B D br h fm d s ar wDebra Hofman is Managing Vice President and Stan

Aronow is a Research Director at Gartner Inc. Theycan be reached at [email protected] [email protected].

the 2012 ranking of supply chain leaders from Gar ner includesa broad mix of global companiesa few new o he lis , bu moshaving recorded mul iple appearances. these leaders share cer aincharac eris ics ha drive day- o-day performance while solidifying hefounda ion for fu ure grow h. their s andou performance is raising hesupply chain leadership bar for companies everywhere.
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www.scmr.com S u p p l y C h a i n M a n a g e m e n t R e v i e w S e p t e m b e r / O c t o b e r 2 0 1 2 11

Gartners Supply Chain Top 25, pub-lished since 2004, is an annualranking o leaders in the global sup-ply chain. At its core, the Supply Chain Top 25 is about demand-driv-en leadership. Every year, we iden-ti y the companies that push the

envelope o supply chain innovation. Our goal is to raiseawareness o the supply chain discipline, as well as howit impacts the business, and to catalyze the debate andthe cross- ertilization o ideas about what supply chainexcellence really means.

What Is the Definition of Excellence?

Our methodology, detailed below, is based on a compos-ite score or each company that is made up o a set o fnancials combined with an opinion component, provid-ing a balance between objective and subjective compo-nents. In completing their ballots, voters are asked toidenti y those companies they believe are urthest alongthe journey toward the demand-driven ideal, as defnedin Gartner research and on the voting website.

What does it mean to be demand-driven? Exhibit 1,on page 12 captures the organizational ideal o demand-driven principles as applied to the global supply chain.This model has three overlapping areas o responsibility:

Supply management Planning, sourcing, man-u acturing, logistics.

Demand management Marketing, sales, andservice. Product management R&D, engineering, and

product development.Excellence is a matter o visibility, communication, and

reliable processes that link all three o these unctionalareas together. Whenthese processes work together, the businesscan respond quickly ande fciently to opportuni-ties arising rom market

or customer demand.Defning characteristicso supply chains builtto this design includethe ability to managedemand rather than

just respond to it, a net-worked rather than lin-ear approach to globalsupply, and the ability to

embed innovation in operations rather than keep it isolatedin the laboratory. The demand-driven model is inherently circular and sel -renewing, unlike the push supply chains o our actory-centric industrial past.

Inside the NumbersIn the 2012 ranking, the top fve contenders includethree perennials and two relative newcomers. (See tableon page 14 or the complete rankings.) First is Apple,maintaining its No. 1 position despite some bumps this

year, using frst-to-market advantage, scale and brand towield supply chain as a competitive weapon. Already astellar per ormer on the fnancial metrics we use or theranking and well-respected in the voting portion o themethodology, Apple astoundingly raised the bar even ur-ther, getting to a near-per ect score.

Both Dell and Procter & Gamble have been in the top5 every year o the ranking. Dell, having paved the way withits confgure-to-order model, has trans ormed itsel anddeveloped a sophisticated go-to-market strategy that tailorssupply chains by segment. Procter & Gamble, an iconicsupply chain thought leader, has an unparalleled ability toorchestrate demand and connect the supply chain to theshel and its customers moments o truth. P&G continuesto push the envelope o innovation and per ormance.

Amazon and McDonalds were both new to the rank-ing in 2010 and have moved steadily up since then. With athree-year weighted average revenue growth approaching

40 percent, Amazon delivers consistently reliable prod-uct supply to its shoppersno small eat given the rangeo products it o ers, the complexity o its network, andits continued expansion into new channels and services.McDonalds, back to double digit growth this year, gets alot o respect rom peers or its ability to deliver growth insame-store proftability while managing a more complexproduct port olio driven by its McCa e line.

Movers and shakers in the middle o the rankinginclude Unilever (10), Intel (7), and Nike (14), threecompanies that have been steadily rising on the list andleading the way or others in their global supply chain

trans ormations with impressive results. Coca-Cola,known or its last mile distribution prowess, returnsat No. 6 with strong peer recognition and ROAevenwhile it navigates the integration o its bottlers in NorthAmerica. Cisco returns at No. 8, setting the pace witha robust risk management program and collaborationup and downstream in its value chain. Ranked ninth,

Walmart remains a mainstay. And despite some challeng-es in the past year in Mexico, the company continues toget a lot o respect rom peer voters or its contributions
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The Top 25

to supply chain best practices over the years.Colgate rises to No. 11 this year on consistently

industry-leading, double-digit return on assets and astrong governance model. Long a recognized leader indirect store delivery, PepsiCo (12) is collaborating withretail partners to reduce out-o -stocks at the shel andincrease the visibility and accuracy o its demand sig-nal. Samsung (13), well known or its advanced S&OPprocess, continues with strong growth and pro tability in a tough market. Inditex, the European-based retailerbest known or its Zara brand and the tight integrationbetween product design and supply chain, returns or

the third time to the ranking at No. 15.Rounding out the list in the 16-25 section we see acombination o newcomers, the newly-returning, andold-timers who continue to lead the way in supply chain.

Were excited to welcome two heavy industrials amongthe newcomers: Caterpillar (20), an early leader in theconcept o segmentation with its well-known lane strat-egy, and Cummins (23) a major player in the engine andpower generation markets recognized or its best-in-classparts and service network. Leading industrials are tradi-tionally strong in upstream supply management, includ-ing the agility required to pro tably balance their long

and complex supply chains against volatile demand. Welook orward to seeing them share best practices withthe supply chain community through the Top 25.

Two remaining newcomers come rom the consumerand retail sectors. H&M, the success ul Swedish retailapparel group, joins the list or the rst time this year atNo. 17, with a consistently high-fying ROA on top o aproprietary distribution network o centrally controlledstores. Kimberly Clark, joining at No. 25, has broughtan innovative approach to logistics partnerships to NorthAmerica and is now ocusing on continued improvementsin on-shel availability and predictive demand planning.

Johnson & Johnson (22), the only li e sciences com-pany on the list, returns with a compelling vision oran ambitious supply chain trans ormation program.Hewlett-Packard (24), another perennial, runs one o themost complex supply chains in high tech, and is reapingthe cost bene ts rom being the rst PC OEM to move

rom coastal to Western China. Research in Motion(RIM), the maker o BlackBerry mobile devices, ell toNo. 19 this year, a ter a di cult 2011. Given that ourmethodology relies on nancial metrics or 50 percent o each companys score, this all is not a surprise. Yet RIMalso took a hit in the voting portion o the score, despiteits impressive Value Chain Express strategy.

New to the ranking last year and coming back strong-ly this year are Starbucks (16), with a return to growthand a ocus on supply chain talent; Nestle (18), ocus-ing on supplier development and raw material sourcingstrategies; and 3M (21), best known or product innova-tion and returning to double-digit growth and ROA.

The companies populating our Supply Chain Top 25ranking this year are an impressive group and all havesome best practice aspect o their supply chain opera-tions that is applicable to the rest o the community o practice. In addition to each supply chains unique valueproposition, there are commonalities that we see acrossthem in terms o underlying characteristics and trendson where they are ocusing their trans ormation e orts.

Characteristics of Leaders

At Gartner, weve been researching and writing about theimportance o being demand-driven since 2003. Since thattime, weve published hundreds o pieces on the trans or-mation to a demand-driven value network. We continue toresearch these concepts and advise companies as they rec-ognize the value o becoming a demand-driven organization.

While every supply chain organization developsunique strategies and ocuses on di erentiated initia-tives, weve ound in our research that there are certainkey characteristics that de ne the leaders. We have talk-ed about some o these in past articles, and they remain

important oundational elements to being demand-driv-en. But they are not easy to attain, and what di erenti-ates the leaders in the Top 25 is that they are urtheralong the journey than others. Demand-driven leaders gobeyond best practices to build a oundation or growthand continual learning that constitutes an engine orsuperior competition.

These are among the key characteristics o the lead-ers weve observed:

Outside-in Focus. The concept o developing andmaintaining an outside-in ocus is almost synonymouswith the phrase demand driven. The galvanizing prin-

EXHIBIT 1

Demand-Driven Principles

Source: GartnerSource: Gartner

Demand Supply

Product


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The Top 25

The Gartner Supply Chain Top 25 for 2012

Rank Company

Peer Opinion 1 (173 voters)

(25%)

GartnerOpinion 1

(37 voters)(25%)

Three-YearWeighted ROA 2

(25%)Inventory Turns 3

(15%)

Three-YearWeightedRevenueGrowth 4 (10%)

CompositeScore 5

1 Apple 3241 651 20.2% 74.1 51.5% 9.69

2 Amazon 2713 435 4.4% 10.0 37.7% 5.40

3 McDonalds 1121 283 16.0% 142.4 7.2% 5.37

4 Dell 2131 546 6.8% 35.6 2.7% 5.30

5 P&G 1940 622 9.2% 5.5 2.5% 5.05

6 The Coca-Cola Company 1818 372 13.0% 5.8 19.7% 4.85

7 Intel 1006 406 16.2% 5.0 17.8% 4.63

8 Cisco Systems 1243 582 8.4% 11.0 5.5% 4.46

9 Wal-Mart Stores 1874 410 8.8% 8.3 4.2% 4.24

10 Unilever 1043 534 10.2% 6.0 5.5% 4.2111 Colgate-Palmolive 697 342 19.6% 5.3 4.2% 4.17

12 PepsiCo 917 427 10.2% 7.7 17.6% 4.05

13 Samsung 1014 291 9.4% 17.1 15.9% 3.67

14 Nike 1073 278 13.3% 4.6 5.2% 3.55

15 Inditex 397 225 17.3% 4.0 10.3% 3.37

16 Starbucks 940 191 14.3% 6.2 6.3% 3.28

17 H&M 385 24 28.6% 3.6 5.7% 3.09

18 Nestle 651 196 15.9% 4.9 -9.5% 3.06

19 Research In Motion (RIM) 254 104 17.0% 11.3 13.3% 3.00

20 Caterpillar 876 226 4.6% 3.4 22.7% 2.67

21 3M 856 70 13.2% 4.4 8.4% 2.65

22 Johnson & Johnson 798 176 10.7% 3.2 2.1% 2.55

23 Cummins 142 52 11.9% 6.0 20.0% 2.22

24 HP 598 192 6.2% 13.7 2.8% 2.22

25 Kimberly-Clark 463 182 8.9% 6.1 3.5% 2.21

1. Gartner Opinion and Peer Opinion: Based on each panels forced-rank ordering against the definition of DDVN orchestrator

2. ROA: ((2011 net income / 2011 total assets) * 50%) + ((2010 net income / 2010 total assets) * 30%) + ((2009 net income / 2009 total assets) * 20%)

3. Inventory Turns: 2011 cost of goods sold / 2011 quarterly average inventory

4. Revenue Growth: ((change in revenue 2011-2010) * 50%) + ((change in revenue 2010-2009) * 30%) + ((change in revenue 2009-2008) * 20%)

5. Composite Score: (Peer Opinion * 25%) + (Gartner Research Opinion * 25%) + (ROA * 25%) + (Inventory Turns * 15%) + (Revenue Growth * 10%)

2011 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.

Source: Gartner (May 2012)

ciple here is to design the supply chain starting with thecustomer experience, and work back upstream throughthe supply chain. While the concept is relatively simple,its implementation is anything but. It requires a un-damental re-orientation not only in mindset, but in theway groups are measured and in the way networks andbusiness processes are designed. An outside-in ocus isnot synonymous with a customer ocus: companies canbeand o ten are ocused on the customer rom theinside-out, as witnessed in service metrics such as on-time shipments or fll rates.

Embedded Innovation in Supply Chain. In ourDemand Driven Value Network model, frst published in2004, the inclusion o a product circle to accompany supply and demand carried an explicit message aboutthe importance o connecting traditional notions o sup-ply chain with the new product development and launchprocess. The point is to ensure that new products arebrought to market that satis y the total customer experi-ence proftably and e ectively. Leaders understand thebalance between operational excellence and innovationexcellence (see Exhibit 2). Supply chain considerations


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must be taken into account early on in the new productdevelopment and launch process. And the act that newproducts require di erent supply chain strategies thanexisting products must be taken into account in the sup-ply chain design process.

Extended Supply Chains as Networks. Leaderstake the notion o the organization as value chain onestep urther, designing and managing their supply chainsas the extended networks o trading partnerscustom-ers customers, suppliers suppliers, logistics providers,contract manu acturers, third-party warehouses, etc.that they really are. What theyre doing is orchestrat-ing a set o activities across the network, aligning goalsbased on each players value proposition that will resultin the desired outcome rom that networkthe pro t-able delivery o nal product to a customer.

Excellence Addicts. All companies measure. Whatmost still struggle with is how to ocus on the metrics thatmatterand even more importantly, how to interpret andthen act on those metrics to achieve a desired outcome,namely to improve operational results. From our years o research in this area, we nd that most organizations are,in act, awash in supply chain metrics. They nd them-selves so caught up in the tactical aspects o measuringde ning, collecting, sorting, translating, rationalizing di -

erencesthat it becomes an end in itsel , and suddenly they realize theyve lost sight o the bigger picture.

The best companiesthe ones we call excellence

addictshave a very di erent approach to metrics.First, they know what to measure. But they also under-stand that the whole is greater than the sum o the parts,that it is, in act, a system, and that the purpose o themetrics is to make the entire system work better. When

individuals in these companies get together to discussand interpret a set o numbers, the conversation isntabout whose ault something is; its about where thingsbroke down in the system, how to x them, and thenhow to take it to the next level. They are ruthless in con-stantly examining their own processes to push the enve-lope o per ormance.

Three Trends Evident

Each year, our analysts talk to and research the supply chains o hundreds o companies. Through these discus-sions, we note the trends: What are the leaders ocusing on,where are they investing time and e ort, and what can beapplied broadly? Overall, weve seen companies continuingto invest in resources and assets or growth, a trend thatstarted last year and is continuing. The global economicrecovery has been uneven and halting in some cases, but,companies outlooks are increasingly expansionary in termso the markets they serve and the products they o er.

There are three trends to note:1. Supply Chain Risk Management and

Resilience. Despite investing or growth, companiesalso know that the potential or disruption at any-time remains real. Many are looking to improve theresiliency o their supply chains to mitigate this risk.In turbulent times, and in the ace o growing com-plexity and risk, leading companies need sustainable,resilient supply chains that support pro tability and

drive industry leadership. This requires managers tore-evaluate the layout o their supply network designsto make them more resilient to uture catastrophes.It may also include designing products that allowmore fexibility in supply and manu acturing, increas-ing long-term alternative sources o raw materials andlogistics capabilities, and expanding outsourced man-u acturing capacity. Leading companies such as Intel,P&G and Unilever improved multitier supply chain

visibility and advanced network management capa-bilities to be agile in the ace o disruptions. Overall,leaders have remained ocused throughout the past

year on building resiliency into their global supply chains. We see this continuing to be a highly valuedsupply chain characteristic.

2. Simplifcation. Many companies tell us thatthey have exhausted easily gained e ciencies withintheir existing supply networks and product port olios.Further improvement will require structural changesto streamline the fow o supply, and eliminate lesspro table product and port olio complexity. Supply chain leaders are adopting complexity optimizationstrategies to eliminate in requently used product ea-tures, service o erings, suppliers and distribution

EXHIBIT 2

Operational Excellence and Innovation Excellence


OperationalExcellence

(Perfect Order,Total SupplyChain Cost)

OperationalExcellence

(Perfect Order,Total SupplyChain Cost)

LaggardLaggard

LaggardLaggard LeaderLeader

LosersLosers

WinnersWinners

Higher Cash Flow,Pro ts, P/E

Higher Cash Flow,Pro ts, P/E

LeaderLeader

Innovation Excellence(Time to Value, Return on R&D)

Innovation Excellence(Time to Value, Return on R&D)

D

Demand Supply

Product

S P


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www.scmr.com S C M R S / O 17

network capacity that does not add suf cient value tocustomers. Supply chain segmentation has emergedas a critical enabler of supply chain simpli cation,and while this is a concept that has been around fora few years, leaders are aggressively adopting it toreduce complexity.

3. A Shift Toward Multi-Local Operations.Manufacturers and retailers have long sought ways tobalance the trade-off in their supply network designsbetween global economies of scale and the demand forlocal responsiveness. Leading companies are reassessingtheir sourcing and manufacturing networks, and rebalanc-ing their supply network strategies in favor of multi-localdesign, supply and support. More speci cally, they areshifting from a centralized model, where these functionssupport global markets, to a regionalized approach, wherecapabilities are placed locally, but architected globally.

Supply Chain Top 25 Methodology One of the reasons this list has worked over the yearsis its transparent methodology. From the beginning wehave sought direct feedback from supply chain profes-sionals and incorporated suggested changes into themethodology where possible. As a result, the list re ectsnot only what Gartner analysts think about supply chain

leadership, but what the community as a whole respects.The Supply Chain Top 25 ranking comprises two main

components: nancial and opinion (see Exhibit 3). Publicnancial data provides a view into how companies have

performed in the past. The opinion component offers aneye to future potential and re ects future expected leader-ship, which is a crucial characteristic. These two compo-nents are combined into a total composite score.

We derive a master list of companies from a combi-

EXHIBIT 3

Supply Chain Top 25 Methodology


ROA 25%ROA 25%Peer Vote 25%Peer Vote 25%

AnalystVote 25%AnalystVote 25%

InventoryTurns 15%InventoryTurns 15%

RevenueGrowth 10%RevenueGrowth 10%

sFinancial

50%Opinion

Module One:Managing theSupply Chainas a System

This program takes place over thecourse o three 2-day modules:

October 9-10

Module Two:Managing Supply

and DemandNovember 6-7

Module Three:Supply Chain

AnalyticsDecember 4-5

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The Top 25

nation o the Fortune Global 500 and the Forbes Global2000, with a revenue cuto o $10 billion. We then parethe combined list down to the manu acturing, retail anddistribution sectors, thus eliminating certain industries,such as nancial services and insurance, which do nothave physical supply chains.

Financial ComponentROA is weighted at 25 percent, inventory turns 15 per-cent, and growth 10 percent. Inventory o ers someindication o cost, and ROA provides a general proxy oroverall operational e ciency and productivity. Revenuegrowth, while clearly refecting myriad market andorganizational actors, o ers some clues to innovation.Financial data is taken rom each companys individual,publicly available nancial statements.

The weighting within the nancials is the same aslast year. Prior to 2010, inventory was weighted at 25percent. We had considered dropping it altogether.As much as inventory is a time-honored supply chainmetricone o the ew real supply chain metrics ona companys balance sheetthere have always beenissues with it, not the least o which is that higherturns dont always point to the better supply chain. Atthe same time, its a metric thats widely known andunderstood, both inside and outside the supply chaincommunity. Despite the issues, its not entirely invalidas an indicator, particularly i combined with other

metrics. There ore, we decided to leave inventory in,but reduce its weighting.Since 2009, weve used a three-year weighted aver-

age or the ROA and revenue growth metrics (ratherthan the one-year numbers we had previously used), anda one-year quarterly average or inventory (rather thanthe end-o -year number we had previously used). The

yearly weightings are as ollows: 50 percent or 2011, 30percent or 2010, and 20 percent or 2009.

The shi t to three-year averages was put in place toaccomplish two goals. The rst was to smooth the spikes and

valleys in annual metrics, which o ten arent truly refective

o supply chain health, that result rom events such as acqui-sitions or divestitures. It also accomplishes a second, equally important goal: to better capture the lag between when asupply chain initiative is put in place (a network redesign or anew demand planning and orecasting system, or example)and when the impact can be expected to show up in nan-cial statement metrics, such as ROA and growth.

Inventory, on the other hand, is a metric thats muchcloser to supply chain activity, and we expect it to refectinitiatives within the same year. The reason we moved toa quarterly average was to get a better picture o actualinventory holdings throughout the year, rather than the

snapshot, end-o -year view provided on the balancesheet in a companys annual report.Opinion ComponentThe opinion component o the ranking is designed toprovide a orward-looking view that refects the progresscompanies are making as they move toward the ideal-ized demand-driven blueprint. Its made up o two com-ponents, each o which is equally weighted: a Gartneranalyst expert panel and a peer panel.

The goal o the peer panel is to draw on the extensiveknowledge o the pro essionals that, as customers and/orsuppliers, interact and have direct experience with thecompanies being ranked. Any supply chain pro essionalworking or a manu acturer or retailer is eligible to be onthe panel, and only one panelist per company is accept-ed. Excluded rom the panel are consultants, technol-ogy vendors, and people who dont work in supply chainroles (such as public relations, marketing, or nance).

We accepted 246 applicants or the peer panel this year, with 173 completing the voting process. Participantscame rom the most senior levels o the supply chain orga-nization across a broad range o industries. There were37 Gartner panelists across industry and unctional spe-cialties, each o whom drew on his or her primary eldresearch and continuous work with companies.

Organizations must receive votes rom both panels tobe included in the ranking. There ore, a company thathad a composite score all within the Supply Chain Top

25 solely based on the nancial metrics would not beincluded in the ranking.The regional breakdown o voters continued to be

a particular emphasis or us, and we made signi cantprogress this year. In the past, North American votersmade up 80 percent o the total, despite many e ortsto get a more even regional distribution. Last year, wemade some inroads toward increasing the percentageo voters rom Europe and Asia/Paci c. This year, theimprovement was even more robust, providing a morebalanced global view o supply chain leadership, with43 percent rom North America, 33 percent rom

Europe, and 24 percent rom Asia/Paci c. We expectthis trend to continue towards ully balanced regionalrepresentation.

Polling Procedure Peer panel polling was conducted in April 2012 via a Web-based, structured voting process identical to previous years.Panelists are taken through a our-page system to get to their

nal selection o leaders that come closest to the demand-driven ideal, which is provided in the instructions on the

voting website or the convenience o the voters.Heres a breakdown o the voting system:


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The rst page provides instruc -tions and a description of thedemand-driven ideal.

The second page asks fordemographic information.

The third page provides pan -elists with a complete list of thecompanies to be considered. Weask them to choose 30 to 50 that,in their opinion, most closely t thedemand-driven ideal.

After the subset of leaders ischosen, the form refreshes, bringing

just the chosen companies to a list.Panelists are then asked to force-rank the companies from No. 1 toNo. 25, with No. 1 being the com -pany most closely tting the ideal.

Individual votes are tallied acrossthe entire panel, with 25 points earnedfor a No. 1 ranking, 24 points for aNo. 2 ranking and so on. The Gartneranalyst panel and the peer panel usethe exact same polling procedure.

By de nition, each personsexpertise is deep in some areasand limited in others. Despitethat, panelists arent expected to

conduct external research to placetheir votes. The polling system isdesigned to accommodate differ -ences in knowledge, relying on whatauthor James Surowiecki calls thewisdom of crowds to provide themechanism that taps into each per -sons core kernel of knowledge andaggregates it into a larger whole.

Composite ScoreAll this informationthe three

nancials and two opinion votesisnormalized onto a 10-point scale andthen aggregated, using the afore -mentioned weighting, into a totalcomposite score. The compositescores are then sorted in descend -ing order to arrive at the nal Supply Chain Top 25 ranking.

Raising the Leadership Bar The goal of the Supply Chain Top25 is to help raise the bar for lead -

ership in the global supply chain.Companies that move fastest intoglobal markets with innovativeproductscoupled with supply chains that are customer-driven,adaptable to change and resilientto disruptionwill be the win -

ners. We look forward to continu -ing to share the lessons learned,providing a platform for informedand provocative debate, and help -ing the supply chain community provide vital contributions to theglobal economy. jjj

Common Sense, Uncommon Value

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