Just how good is your supply chain?
Or rather, how good is it compared to the supply chain of other entities?
Those are the questions that Supply Chain Benchmarking seeks to answer.
Overall, that means more than performance measurements or quality audits. Business benchmarking in general seeks to identify strengths and weakness, and in turn help your enterprise to strategise, plan and operate. The same process can be applied across the board, or for specific business areas like sales, marketing, production – and of course supply chain.
The generally accepted starting point for today’s benchmarking methodologies was the work done by the Xerox Company in the 1970s.
At the time, Xerox was already a multi-billion dollar leader in the photocopier market.
It was also under severe pressure from Japanese competitors that were making copiers that were better, less expensive and, alarmingly, more profitable than those from Xerox.
Benchmarking was the first crucial step to improvement. Xerox compared internally via its own Japanese joint venture, Fuji Xerox. It compared externally with its direct competitors, especially those that were outperforming it. The results were a shock.
Xerox was taking twice as long to get a product to market. It had seven times the product defect rate and ten times the assembly line reject rate. It also dealt with nine times the number of production suppliers.
Once the ugly truth was known, Xerox management could set about fixing things. The company was able to revive its fortunes and re-establish itself as a market and quality leader.
Of course, other enterprises and their managers did not wait for Xerox to legitimise benchmarking. Records of other improvements through benchmarking go back to at least the early 1800s. An American industrialist, Francis Lowell, studied the techniques and design of British textile mills to take what was good (the technology) and improve on the rest (labour utilisation), and build his own world-class plant back in the U.S.
Smart supply chain and logistics managers have also used benchmarking-like approaches to improve their own operations. Supply chains are hard to manage because of the variety and number of functional, corporate, and geographical interfaces.
Other entities that achieve good performance in key areas show they have overcome these difficulties, suggesting that your organisation can too. The question is then no longer ‘if’, but ‘how’. Benchmarking can provide the insights and the answer.
Benchmarking for Improvement, but Only When It Makes Sense
Benchmarking for supply chains also has a ‘sanity-assurance’ role.
Benchmarking results can show companies how good they can or should be, but these higher levels may also be limits that are not worth exceeding. The logic is the following.
The market makes demands on enterprises and organisations in terms of speed and quality of supply. The pressure continues for as long as customers need or want improvement in supply.
The best suppliers then tend to a level of performance that satisfies customers. Once (or if) they get there, there will be no point in trying to go further and ‘over-satisfy’ customers.
Other suppliers should strive for similar levels of performance in order to be competitive, but for the same reasons, should not necessarily try to outdo the leaders. The battle now needs to be fought in other areas, either where a company needs to improve compared to others; or where an opportunity exists to better satisfy customers without uselessly over-satisfying them.
Where to Apply Supply Chain Benchmarking
What should you benchmark?
The choice is vast, but some benchmarks are more meaningful than others.
The starting point is the end-customer’s expectation. This gives the DIFOT measurement for instance – Delivery in Full and On Time. Fulfilling customer expectations has a cost. We then get another benchmark, which is the ‘cost to deliver’. Working backwards, additional benchmarks appear, such as sales forecasting accuracy and inventory turnover.
It may also be appropriate to apply DIFOT benchmarking to your own suppliers. (or SIFOT)
You want a compact set of high performing upstream business partners that in turn will ease your task of satisfying downstream partners such as distributors and resellers, and final customers.
The internal ramifications of these fundamental benchmarks will then depend on the nature of your enterprise.
Are storage density and bin-to-bin time relevant measures for you? What about inventory accuracy, order fill rate, pick-to-ship cycle time and freight costs? The right mix of these benchmarks inside your company may differ according to whether you operate in consumer product, electronics, food, pharmaceutical, or industrial product sectors for example.
Copying another company’s benchmark profile is like copying its strategy: risky at best and a recipe for disaster at worst, because although your business objectives may coincide, you are both likely to have different ways of achieving them.
Beyond Same-Industry Comparisons
Benchmarking against industry averages or competing industry peers is a natural thing to do.
After all, you and your competitors are vying for the same customers.
If you do something better in your supply chain that translates into added value perceived by your market, then you should crow about it (to your customers).
If you underperform, then you should fix it before customers defect to the competition. Either way, you want to know what the situation is. Comparing with direct competitors gives you a reading on these aspects.
Nevertheless, there may be opportunities to serve customers better (without over-satisfying) or to improve profitability that are currently overlooked by your peers.
Benchmarking on relevant supply chain criteria against non-competing companies in other industry sectors can sometimes be revealing.
Pharmaceutical companies may be collaborating to share cold-chain storage facilities and bring costs down in a way that could help food companies.
Consumer product companies may be using vendor-managed inventory methods in ways that could give an industrial product company an advantage too.
Beware once again however of simply replicating practices from elsewhere. Mass-market clothing vendors for example strive to keep outlets well-supplied with good availability for end-customers.
High-end fashion companies may choose to do exactly the opposite, to build customer appetite and desire by deliberately restricting supply and increasing the value of their niche offerings through increased rarity.
Building on Performance and Quality Assessments
Done with common sense and clear thinking, benchmarking can indeed provide benefits and pitfalls can be avoided. The benchmarking approach in itself is often a way for enterprises to better understand how their current processes and procedures work.
When you are obliged to pick out the parameters that truly determine the performance expected by customers, you also have a greater chance of spotting points of confusion that may have introduced inefficiencies or diluted operational results.
Data from supply chain benchmarking will contribute to better allocation of resources and higher returns on investment.
Just as Xerox found, it is the first, critical step towards improvement.
There are also differences that should be noted between benchmarking and performance measurements, or benchmarking and quality audits. All of these activities have their place in getting the best results possible out of an organisation, but they do different things.
Performance measurements were what made Andrew Carnegie’s steel mills great.
Charles Schwab drew chalk marks to indicate team outputs in the mills, fostering internal competition between teams to outdo each other. Benchmarking can use the data gathered through performance measurements, but can also compare them with the measurements made in other companies. Benchmarking goes beyond products or production output to embrace business practices, which is where more sustainable business advantage is often to be found.
Similarly, benchmarking is a keystone of quality improvement programs, but differs from a quality audit. An audit is designed to analyse processes and outcomes to see if they are contributing to achieving pre-defined goals.
Benchmarking not only requires an analysis of processes and outcomes, but seeks to identify areas for improvement.
Furthermore, benchmarking also gives an organisation greater visibility into how much improvement is desirable and how many or how few resources should be reasonably spent on making the improvement happen.
Practical Categories of Supply Chain Benchmarking
Levels of benchmarking can vary from operational to tactical and strategic. Benchmarking approaches also differ in the way they rely on internal cooperation, collaboration with third parties, or collection of data relating to competitors.
Supply chain benchmarking, like business benchmarking in general, can be done in the following areas. Different combinations are possible, for instance, internal process benchmarking or external strategic benchmarking.
- Performance benchmarking. Based on a blow for blow comparison often with competitors on specific supply chain parameters. The aim is to close gaps for any underperforming areas and capitalise on areas of superior performance. As your competitors are unlikely to let you into their supply chain secrets, the data may be collected through industry surveys or trade association projects with the results made available to those willing to participate.
- Process benchmarking. Already a step up from performance benchmarking, process benchmarking seeks to improve end to end processes and operations. Extra work is required to map out processes, although benefits can be relatively rapid. Comparison with organisations (not necessarily in the same industry sector) using best practices can also lead to innovation and quantum jumps in improvement.
- Strategic benchmarking. Scrutinises longer term supply chain strategies that have made top performers successful. Identifies core competencies and improvements in the ability to adjust to new external environments. Requires stamina to see changes through, although the benefits then tend also to be more consequential.
- Internal benchmarking. Compares supply chain operations between business units in different countries, for instance. There should be no difficulty in obtaining the benchmark data and improvements can also be rapid. However, innovation and significant change may be difficult to achieve in such a closed system.
- External benchmarking. Looks outside the organisation and its branches to benchmark other entities that have been identified as ‘best in class’. The opportunities for real advancement are greater than with an internal benchmarking approach. The effort required is correspondingly greater. Care must be taken to interpret and apply benchmarking results correctly. Looking at international companies amplifies these different aspects further: greater potential for innovative advancement, greater expense in carrying out the benchmarking, and greater complexity in correctly interpreting the results.
Supply Chain Benchmarking Trends and Objectives
Benchmarking techniques in general continue to evolve and so do those that apply to supply chains.
A recent development is competence benchmarking.
The goal here is to improve the actions and behaviours of individuals and teams in order to improve performance.
Ultimately the enterprise becomes a learning organisation with an in-built capability to adapt and change.
For supply chains and logistics organisations, this has a particular relevance in that average worker age is still above that of other functional sectors: if new or younger talent is hard to attract, then the personnel in place will need to become correspondingly more flexible.
Performance and process (best practice) benchmarking are both destined for greater popularity in the near future.
More accessible than strategic benchmarking, they allow organisations to more easily identify opportunities for improvement.
Favourite supply chain goals are increased demand forecast accuracy, and improved sales and operations planning. Hot on their heels come better integration of supply chain planning across the organisation, as well as more effective use of technology to support supply chains.
In some cases, performance indicators and measurements will be simple to find and apply. In other cases, organisations will need to use imagination and innovation to find ways of benchmarking the types of performance they want to improve.
New Opportunities and Fundamental Truths
Benchmarking has come a long way in terms of sophistication since Francis Lowell used it to build a better textile mill; and even since the pioneering efforts of Xerox some 40 years ago.
As supply chains continue to increase in importance to enterprise performance and competitiveness, so will supply chain benchmarking. New data acquisition possibilities and analysis techniques, including those being developed for Big Data and the imminent Internet of Things, may open up new benchmarking vistas.
However, smart supply chain and logistics managers will remember not to lose sight of the forest for the trees.
Clear thinking will continue to be an essential success factor for making supply chain benchmarking relevant and beneficial in terms of supply chain improvements.
Want to Find Out More?
If you want to find out more about Supply Chain Benchmarking why not join our WebClinic on 26th March 2015?
You can register your place right here: How Benchmarking Can Boost Your Performance
I look forward to seeing you there.
Oh, there are some great discounts on our Supply Chain Benchmarker services right now. But they’ll go soon.