Measuring Supply Chain Success

Traditional performance indices may not be as effective as we thought.

Comparing your company to industry leaders is a popular way to benchmark the organization’s performance, and there are plenty of industry indices out there that rank companies according to various measures of excellence.

In the supply chain domain the Gartner Supply Chain Top 25 index is one of the most closely followed indices. But do rankings such as the one published annually by Gartner really provide meaningful assessments of the world’s top supply chains?

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Some supply chain leaders may get undeserved kudos while others receive criticism.

The answer, in my opinion, is no, because the criteria on which rankings like these are based are flawed. As a result, there is a danger that enterprises get a false impression of what it takes to build and manage an excellent supply chain in their business sectors.

In addition, some supply chain leaders may get undeserved kudos while others receive criticism despite achieving strong performances.

Such misunderstandings matter because an efficient supply chain is essential to competitiveness. Investors should pay close attention to this area when evaluating investment portfolios.

Unfortunately, the role models for well-run supply chains are not necessarily the companies that gain the highest rankings in popular indices.

Take, for example, Apple, a company that is quite rightly held in high esteem.

Apple regularly occupies the top spot in the Gartner listing, and the company’s supply chain undoubtedly plays a critical role in its incredible success. However, much of that supply chain is developed and managed by other enterprises, notably key suppliers.

This is inherent in Apple’s business model where manufacturing operations are outsourced.

Why has a company that relies so heavily on outside organizations’ supply chains – in contrast to manufacturers in other sectors that build and operate their own – been ranked consistently by this index as the number one supply chain in the world?

And why are other high-tech companies with similar models, such as Cisco, ever-present in this elite group?

In addition, the high-tech supply chain is very different from the ones that can be found in, say, heavy manufacturing, where moving bulky product with relatively low obsolescence rates and longer lead times are common. It is simply unrealistic to directly compare supply chain performances across disparate industries.

Dig deeper into the way indices are constructed and the rankings become even more puzzling. Here are some of the criteria used by indices such as the Gartner listing that analysts should watch out for:

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It is simply unrealistic to directly compare supply chain performances across disparate industries.

Revenue growth. This is not a good indicator of supply chain performance. In a difficult business environment a well-run supply chain will continue to support the business even though there is negligible or no growth.

On the surface the company appears to be coasting, but beneath it is a supply chain is in overdrive mode to keep the organization moving forward. Also, a growth strategy might involve a period were revenues level off or even decline, but require an extremely innovative, efficient supply chain to execute.

Inventory turns and Return on Assets. Valid measures of supply chain excellence, but only in the context of the markets in which a company competes. Comparing, say, inventory turns in the consumer electronics and chemical sectors is meaningless because the business models are so different.

Furthermore, return on assets will always be great when a company has no manufacturing facilities; the low denominator of this ratio creates a false sense of great performance.

Resilience. As the risk universe has expanded over recent years a supply chain’s resilience has become a vital measure of a company’s ability to compete effectively. Indices that do not take resilience into account should be viewed with caution.

Peer reviews. Incorporating the views of supply chain experts including practitioners and analysts into rankings is perfectly acceptable – up to a point.

Apportioning more than approximately 10% of a company’s overall score to peer reviews is excessive and not reflective of reality, unless the peers are from the same industry or similar industries. goldbrown2

This article first appeared on January 7, 2015 on LinkedIn and was republished with permission.

Yossi Sheffi is the Elisha Gray II Prof. of Engineering Systems at MIT, where he serves as Director of the Center for Transportation and Logistics.

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