Standardizing Benchmarking to Achieve Results

Benchmarking is one way to improve your supply chain's competitive advantage. And following these easy guidelines will help over any challenges benchmarking may present

Benchmarking is one way to improve your supply chain's competitive advantage. And following these easy guidelines will help over any challenges benchmarking may present

If you want to reduce your organization's operating costs or decrease cycle time, then you should be benchmarking. Although there is no guarantee of improvement in these areas, benchmarking will identify a starting point. As noted by Lynne Taylor, senior marketing manager of manufacturing for PeopleSoft Inc., "You can't improve what you can't measure. And unless you benchmark, you don't know what is a realistic measure."

Benchmarking is about identifying realistic performance targets and tracking improvement over time.

Supply chain in particular is well suited for benchmarking because it incorporates the core operating functions of an organization, is easy to measure, and can translate into bottom-line savings for an organization. "In a sense," said Taylor, "it is easy to benchmark supply chain because there are so many things you can measure." Organizations can look at how long it takes to fill a customer order, how fast inventory turns over, the costs per customer, and cycle time among other things — all of which translate into bottom-line dollars.

Chris Gardner, a benchmarking expert at the best practices research firm APQC, agrees. "Supply chain provides a wide area for benchmarking and goes to core functions of the business." Gardner said he finds that many organizations benchmark supply chain because they want to get a good sense of how they fare compared to industry peers.

"Benchmarking takes the guesswork out of how an organization is doing performance-wise and provides realistic improvement targets," said Gardner.

Gardner highlighted several reasons to benchmark supply chain. In addition to helping an organization identify baseline performance levels, it also helps assess operational progress over time. "Assessing progress on a periodic basis is critical," said Gardner. "If you can track your progress through benchmarking, then you will have a good indication whether improvement initiatives are working." From an internal perspective, benchmarking focuses attention on desired behaviors and results. When done correctly, it can also help an organization determine possible reasons for performance gaps and establish a business case. And, of course, tracking and implementing performance measures over time enables organizations to measure and realize financial benefits.

Although the benefits are clear, benchmarking presents significant challenges for many organizations. This is partially because valuable process measures and benchmarks are often nonexistent, proprietary or costly to uncover. "In addition," said Taylor, "it's not always clear which metrics will impact business performance."

Gathering data that enables an organization to achieve an apples-to-apples comparison is also a significant challenge for most organizations. And unless an organization is able to translate data into meaningful results, it is not adding value. "If you are not adding value," said Taylor, "then there is no reason to do it."

Apples to Apples

One of the most common benchmarking mistakes is to compare what Taylor describes as "apples to Maseratis." She said: "Everyone says they want the performance levels of top-notch companies. But directly comparing measurements may be like comparing apples to Maseratis — they have very little in common, and the comparison has no relevance."

Ideally, an organization wants to benchmark against a peer group that shares similar features. This is because a number of characteristics impact organizational performance. For example, the size of an organization, its geographic location and a regulatory environment may all affect its demographic composition and may be outside the control of management.

Achieving an apples-to-apples comparison is possible if an organization normalizes measures. Data normalization, said Gardner, is really about putting data on a common basis (e.g., per unit), which mitigates issues of organizational scale and supports inferences about relative performance. Also, for benchmarking purposes, it is necessary to use standardize units among organizations. For example, if an organization is measuring cost per recruit, then a recruit must defined consistently among the organizations involved in the benchmarking. In addition, the number of recruits must clearly be linked to total recruiting expenditures to provide meaningful information about cost management.

To further illustrate the concept of normalization, assume an organization wants to benchmark its operating costs against a much larger and best-in-class organization like Wal-Mart. Because of its size and the nature of its business, Wal-Mart probably has operating costs higher than any organization in the United States.

"To obtain a meaningful comparison," said Gardner, "you would have to develop a cost character analysis on a unit basis, such as employee costs per desktop produced." This kind of reporting, said Gardner, helps organizations engage in meaningful benchmarking with industry leaders to see how they compare.

Making Sense of Data

A second benchmarking challenge is related to what Taylor called the magic number theory. Organizations often put too much faith in reaching a metric goal and fail to identify the root cause of performance gaps.

"A lot of times," said Taylor, "companies focus on an improvement number that is either irrelevant or unrealistic."

Moreover, even if a benchmark target is realized, it does not always translate into success. "I've worked with a number of companies that reached a metric goal and still wondered why they are not doing better than their competitors," said Taylor.

To illustrate this point, suppose Company X is interested in benchmarking its average cost per customer. After conducting some basic research, it is determined that the average cost per customer across the industry is $350. Company X's cost per customer is around $500. This would indicate a performance gap of $150. In many cases, Company X would strive to reduce its cost to the industry average.

There can be two problems with this approach. First, as previously mentioned, organizations vary by size and geography, and industry standards do not account for these variations. In addition, the industry standard may not reflect true best-in-class performance. "Without additional benchmarking outside the industry, an organization has no way of knowing if best-practice peer organizations are actually top performers for a given business process," said Gardner.

According to Taylor, "Even if it is widely accepted that an industry standard is the 'gold standard,' it may not make sense for your company." Internal or external factors that are unique to a business or a regulatory environment, for instance, may make it impossible for an organization to achieve an industry benchmark.

It is important to get it right, however, because benchmarking the wrong thing can lead to a false sense of security, said Taylor. "If you base your goals on an industry average and on the whole the industry is not doing well, then your company is basically heading in the same direction."

Secondly, it may not always make business sense for an organization to drastically reduce costs. "In this scenario," said Gardner, "the organization assumes that simply reducing costs per customer will have an impact on overall business performance. Yet an organization needs to spend time understanding why there is a performance gap." A host of issues that relate to technology and training, for example, may be impacting cost per customer. This cost may result in higher customer satisfaction, which could lead to greater profitability in the long-run. Failure to uncover the root cause could have far-reaching implications to other areas of the business, which could be more costly in the long term.

Taylor said that business improvement efforts, when done correctly, can have a powerful impact. A large Australian-based juice manufacturer, for example, was able to realize roughly $5 million in savings. By aligning business and IT strategies, including expanding and refining what it was measuring, the company was able to focus on the big cost drivers in its business for dramatic and sustained business improvement, said Taylor.

Benchmark What You Can Control

"It is important to measure what you can control," said Taylor. "For example, [although] costs can be an important factor in any organization, you need to make sure that you are in fact measuring things that are within your ability to change."

If an organization wants to lower transportation costs, for instance, then it needs to recognize that certain elements are beyond its control, such as the price of gas. "You couldn't really measure transportation costs per se, because you can't control the price of gas." In this case, Taylor suggested that an organization measure things that can be controlled, such as more effective routes, delivery consolidations, and manufacturing strategies and locations.

The key is to focus on one or two strategic objectives that will have a high payoff for the organization. This involves evaluating the competitive landscape and identifying elements of the business that can be changed in order to move/stay ahead of competitors.

A U.S.-based manufacturing company, for example, discovered one of its competitors was making a similar product for significantly less by manufacturing it overseas, said Taylor. Moving operations abroad was not feasible; and at the same time, the manufacturing company knew it could not lower its production costs enough to compete with its overseas counterparts. Faced with these challenges, the company decided to reinvent its business approach. "In this case," said Taylor, "the company was operating in a commodity type market, and it ended up getting out of the commodity business and getting into a more customized business."

The manufacturing company changed its business approach, and as a result, profitability soared dramatically. Taylor said, "If this company had just focused on lowering costs and prices to try and match its competitors, not only would it have failed, but it would have missed an opportunity to reinvent the business."