Gartner 2018 top 25 Supply Chain companies

Another year Gartner has announced the list with the top 25 supply chain companies.

If you have been following this blog, you already know that this is a recurrent topic every year for us. We already touched base on the criteria, you can find out more here, but in this post we will deep dive even more.

In 2018 Unilever came out on top for the third year in a row.

Once more Apple, Procter & Gamble, Amazon and now joining them McDonald’s were left off the formal top 25, as those four companies have been placed in a separate relatively new category called "supply chain masters," a sort of supply chain hall of fame. To get there, Gartner says a company needs to have attained top-five composite scores for at least seven out of the last 10 years.

Just three new companies made the Supply Chain Top 25 this year versus 2017, that being Novo Nordisk, Adidas and Home Depot.

Below is a chart of this year's Top 25, also with where each company placed in the last three years (NA means not in the top 25 that year).

So, you ask, how is the top 25 determined?

Gartner starts with the Fortune 500 list of top US companies by revenue and the Forbes global 2000 list that basically does the same thing on a worldwide basis. It then eliminates a lot of those companies because they do not much operate what most of us would think of as a real physical supply chain; companies in banking, insurance, software, and many more.

What's more, the minimum revenue to be included in the final evaluation list was again an amazing $12 billion.

From list, Gartner analyzes publicly available financial data, looking at three metrics:

Return on assets (ROA): Net income / total assets
Inventory turns: Cost of goods sold / inventory levels
Revenue growth: Change in revenue from prior year

ROA and revenue growth use a three-year weighted average, meaning the most recent year gets the most weight and the two prior years somewhat less. Inventory turns, smartly, uses the prior year's quarterly average (reducing impact of end of year games). These three metrics together are given a full 40% of the total score weight (20% to ROA, 10% to turns, and 10% to revenue growth).

Now keep in mind that this formula gives a tremendous advantage to some companies, such as Amazon given its huge revenue growth or McDonald's and its 175 or so inventory turns per year. It also penalizes companies like a Home Depot or a Lowes, for example, which are only going to have turns in the mid-single digits at best.

In general, this approach penalizes a company within a given sector that strategically decides on a higher service. It also gives an advantage to companies that are aggressive acquirers in terms of the revenue growth factor.

Companies that have heavily outsourced production and distribution also have an inherent advantage because they have chosen to shed assets, and that often drives their ROA metric higher. While outsourcing can be a very smart thing for many reasons, it does not inherently improve a supply chain.

For the third year in a row, a new corporate social responsibility factor was added, which now represents 10% of the total composite score. This factor, entered in the end as a number between 1 and 10, comes from a combination of publicly available 3rd party scores on this criteria.

Another 25% of the final rankings come from so-called "peer opinion." For 2017, this consisted of about 184 apparently very influential respondents who first select a group of 25 companies from the master list of about 300 that they believe are doing the best job

The final 25% of the composite score came from votes from 42 of Gartner's own supply chain analysts.

Is the process perfect? Certainly not. The unstated assumption is, for example, that stellar financial results equals supply chain excellence. Only very, very large companies are considered. Who really knows how good most other company supply chains are? And it seems clear to me that working with Gartner and even better speaking at the Executive Conference always has a beneficial effect on a company's placement.

The Gartner top 25 supply chains - it has many faults, but it is the best we've got!