What Exactly Is a Supply Chain, Anyway?

June 1, 2009
When it comes to supply chain proficiency, turning over inventory is still the name of the game.

If you want to be considered best-in-class at strategic supply chain execution, start by focusing on your inventory turns. That's the clear conclusion you'll reach after studying the results of AMR Research's annual ranking of the top supply chains of 2009. The top vote-getter this year, just as it was last year, was Apple, largely due to its phenomenal inventory turn rate (cost of goods sold/quarterly average inventory) of 45.5. Only Dell did better, with a slightly higher turn rate of 46.2.

The AMR rankings take a lot of things into consideration, including public opinion, with 20% of the total scores being based on “peer opinion,” i.e., supply chain practitioners as well as experts (disclosure: mine was one of the votes in the latter category), and another 20% coming from AMR analysts. So, 40% of the rankings has a bit of the American Idol popularity contest feel to it, with the AMR analysts playing the role of the judges, and the peers playing the part of the audience voting from home.

As you might expect, the peers and the analysts didn't always see things the same way. The two highest vote-getters from the public were Apple and Wal-Mart, whereas for the AMR analysts, the top two supply chains were Procter & Gamble and Samsung Electronics. And yet, Dell managed to nudge aside almost the entire pack to finish second only to Apple in the final round, thanks largely to its industry-best inventory turn rate (a category worth 25% of the vote). The other main factors in the rankings are three-year weighted return on assets (worth 25% of the total score), and three-year weighted revenue growth (worth 10%).

Apple's number-one ranking raises a compelling question: “What exactly is a supply chain, anyway?” While Apple of course has plenty of physical products, such as its popular iPhone and iPod appliances, a large chunk of the company's revenues come from digital products. What's the supply chain, for instance, of an iTune? Apple sells more than 1 billion songs per year off iTunes, with no perceptible supply chain to speak of, at least in terms of a physical product changing hands. That could be one of the reasons why AMR's analysts opted to go with P&G as having the best traditional supply chain. (For the record, I voted for Toyota in the top slot.)

Walt Disney, which finished at #16, is another instance of the blurring of what exactly constitutes a supply chain. Clearly, Disney manufactures toys, apparel, books and other physical products, but its revenues are also derived from its films, its ownership of the ABC TV network and other media properties. What's the supply chain of “The Little Mermaid” on Broadway, say, or an episode of “Desperate Housewives”?

Indeed, the whole nature of “inventory turns” means different things to different types of companies. While Dell's direct-to-consumer supply chain model is solidly centered on the production of computers, Apple's and Walt Disney's are far more wide-ranging. Whereas Dell sells its products one at a time, Apple and Disney can sell the same product (music, movies, etc.) to millions of different people. So we're definitely getting into apples vs. oranges territory when comparing inventory turns. In fact, I would suggest that if brick-and-mortar retailers like Wal-Mart, Tesco, Best Buy and Publix can all finish in the top 25, why not online retailer Amazon? For that matter, perhaps the ultimate in inventory turns would be Google, which excels at near-instantaneous delivery of “products” (i.e., search results), to the tune of nearly $22 billion in sales last year.

Anyway, the point of these types of lists is not to establish a consensus, since nobody ever agrees with all of the choices, but to stir up a debate about the worthiness of the choices. The full list, as well as AMR's commentary on the choices, is available at www.amrresearch.com.

Top 10 Supply Chains of 2009

1. Apple
2. Dell
3. Procter & Gamble
4. IBM
5. Cisco Systems
6. Nokia
7. Wal-Mart Stores
8. Samsung Electronics
9. PepsiCo
10. Toyota Motor

Source: AMR Research