Presented by:A Raj Shravanthi

Benchmarking

Introduction • Benchmarking is the process of continuously comparing and

measuring against other organizations - anywhere in the world - to gain information on philosophies, policies and practices in order to adapt them to one’s own situation to significantly improve performance.

• Benchmarking is measuring performance against that of best-in-class organizations, determining how the best in class achieve those performance levels and using the information as the basis for goals, strategies and implementation.

• Benchmarking is the comparative evaluation of technologies, production processes and products of an organization, compared to the leading organizations in the same market.

• Improvements of 30%-50% are typical when using the benchmarking process.

Definition

• Benchmarking is the practice of being humble enough to admit that someone else is better at something, and being wise enough to learn how to match them and eve surpass them at it

(APQC, 1992)

History • This technique was originally rooted from Japanese industry

members.• Benchmarking was made popular by Xerox in 1980s.• Other significant companies such as Nissan/Infiniti, ICI Fibers,

Texas, American Express, Kodak Rover, AT&T, Chevron and 3M have also committed to benchmarking and have successfully used the technique to excel in their respective industries on a global scale.

• Benchmarking methodology is based on the plan, do, check, act (PDCA) cycle, also known as Deming cycle, a standard four phase continuous improvement cycle

The core of the current interpretation of benchmarking is:

• Measurement, of own and the benchmarking partners’ performance level, both for comparison and for registering improvements.

• Comparison, of performance levels, processes, practices, etc.

• Learning, from the benchmarking partners to introduce improvements in your own organization.

• Improvement, which is the ultimate objective of any benchmarking study.

Benchmarking usually evaluates performance in the following fields:– Finance– Management of Resources and Personnel– Strategy– Research and Development– Production Technology– Product and Marketing– Quality and Customer Satisfaction– Warehouse management– Supply chain

Benchmarking emphasizes attaining so-called breakthrough improvements, as shown below (Andersen and Pettersen, 1995):

Some examples are :• Long admittance times in hospitals & Hotel

receptions • Too lengthy setup of machines • Planning the delivery of fresh concrete or a Hot pizza

delivery • Unstructured maintenance of power turbines or

Maintenance of aircraft engines • Difficult to manufacture shell cases with the right

cylindrical shape and smooth surface or Manufacturing of lipstick tubes

Examples of Benchmarking

Difference between innovation & benchmarking

Benchmarking Types

The major benchmarking types are: – Performance, – Financial, – Functional, – Strategic, and – Product benchmarking

Supply chain benchmarks are categorized into two:– Internal Benchmarking– External Benchmarking

Internal Benchmarking• Internal benchmarking allows an organization with

more than one facility with the same supply chain processes to contrast and compare the ways in which processes are performed in each facility.

• The benchmarking process can look at a number of operations that are performed at each facility. It can then compare how they are performed and what improvements can be made by evaluating the benchmarking results.

•

six simple steps to start an internal benchmarking process include:1. Identify the process to benchmark. For example, production,

warehouse management, receiving, shipping, or quality controls.2. Managers of the process identified in step one agree to a set of

key performance indicators (KPI) such as changeover time , receiving time standard deviation, shipping accuracy, average lead time for quality test, or fill rate. In this step, managers also need to agree to a standard way to calculate the KPIs to avoid confusion down the road.

3. Collect the KPIs agreed to in step two and compare the results.4. Organize a collaborated effort to understand the reason why one

process is better than the other based on the results from step three. In many cases, a manager from one of the processes will visit the other process with the goal of discovering a better way to do things.

5. Prioritize the findings and turn them into improvement projects to adopting the best practices.

6. Execute the project and realize the results.

External Benchmarking• Unlike internal benchmarking, where benchmarking happens at the tactical level of

the business, external benchmarking is used to compare a company’s performance

at a strategic level.

• In external benchmarking, you can compare the strategic KPIs such as inventory

turnover, revenue, profit, or any other industrial specific KPIs.

• Unlike internal benchmarking, your competitor is unlikely to share their wisdom on

how to improve inventory turnover, reduce total landed cost, or any other industry

specific KPI.

• In this case, the best approach is to employ research and consulting firms to

perform performance studies to know what you are doing wrong (or what the

competitors are doing right). This lets the company identify the areas of weakness

and it can then work at coming up with a plan to improve the situation.

• Another two types of benchmarking include:– Qualitative– Quantitative

• In qualitative benchmarking, often called “best practices” or “leading practices,” managers gather data on techniques for solving supply chain problems and improving performance.

• Managers compare their techniques to those of organizations with similar supply chains.

• The second type is the quantitative benchmarking of key performance indicators (KPIs), business metrics, and scorecards.

• This activity involves examining a given supply chain and gathering data on performance, not practices.

• The goal is to identify any performance differences and note which processes need to be improved and by how much.

• Companies often conduct this type of quantitative benchmarking while doing a financial review of company performance.

• They also frequently use quantitative benchmarking to tie the company’s supply chain goals to its overall strategy

Procedure

• Data Collection from the corporation / organization.

• Entering the data into the Best Practice database and compiling the evaluation diagrams.

• Composing the evaluation report based on results and diagrams from the database.

• Discussing the evaluation's results with the corporation / organization and with experts, in order to explore new solutions.

• Stating proposals for improvement and applying innovation methods.

(1) Planning:• For the optimal results of benchmarking to be reaped, the inputs and

outputs need to be re-defined; the activities chosen should be measurable and thereby easily comparable, and thus the benchmarking metrics needs to be arrived at.

• Prior to engaging in the benchmarking process, the total process flow needs to be given due consideration. For instance, improving one core competency at the detriment to another proves to be of little use.

• Therefore, many choose to document such processes in detail ( process flow chart), so that omissions and errors are minimized; thus enabling the company to obtain a clearer idea of its strategic goals, its primary business processes, customer expectations, and critical success factors.

• An honest appraisal of the company's strengths, weaknesses and problem areas, would prove to be of immense use when fine-tuning such a process.

• The next step in the planning process would be for the company to choose an appropriate benchmark against which their performance can be measured.

(2) Collection of Information:• Primary and secondary data.• Primary data refers to collection of data directly from the

benchmarked company/companies itself, while secondary data refers to information garnered from the press, publications or websites.

• Exploratory research, market research, quantitative research, informal conversations, interviews and questionnaires, are still, some of the most popular methods of collecting information.

• When engaging in primary research, the company that is due to undertake the benchmarking process needs to redefine its data collection methodology.

• Drafting a questionnaire or a standardized interview format, carrying out primary research via the telephone, e-mail or in face-to-face interviews, making on-site observations; and documenting such data in a systematic manner is vital, if the benchmarking process is to be a success.

(3) Analysis of Data:

• Data analysis, data presentation, results projection,

classifying the performance gaps in processes, and

identifying the root cause that leads to the creation of such

gaps (commonly referred to as enablers), need to be then

carried out.

(4) Implementation:• This is the stage in the benchmarking process, where it

becomes mandatory to walk the talk i.e far-reaching changes need to be made, so that the performance gap between the ideal and the actual is narrowed and eliminated wherever possible.

• A formal action plan that promotes change, should ideally be formulated keeping the organization's culture in mind, so that the resistance that usually accompanies change is minimized.

• Ensuring that the management and staff are fully committed to the process, and that sufficient resources are in place to facilitate the necessary improvements, would be critical in making the benchmarking process, a success.

(5) Monitoring:

• In order to reap the maximum benefits of the

benchmarking process, a systematic evaluation should be

carried out on a regular basis.

• Assimilating the required information, evaluating the

progress made, re-iterating the impact of the changes and

making any necessary adjustments, are all part of the

monitoring process.

Benchmarking wheel Model explained by Andersen (1995)

Tools used in supply chain benchmarking

• There are two types of measurements – parametric and non-parametric.

• Parametric analysis = Benchmarking normally used gap analysis based techniques for performance measurement.

• Some of the popular gap analysis based techniques are the “spider” or “radar” diagram and the “Z” chart.

• These tools are very graphical in nature.• Advantages of these tools are the graphical approaches made

them easy to understand and they are capable of showing multiple dimensions simultaneously.

• However, their disadvantage is it causes inconveniences to the analysts as analysts have to integrate all the elements into a complete picture.

• Another well-known method used is the ratio.• It computes the relative efficiencies of the output versus the inputs

and is easily computed. • However, a problem with comparison via ratios is that different

ratios give a different picture and it is difficult to combine the entire set of ratios into a single judgement.

• Analytic hierarchy process maturity matrix is another alternative technique used in benchmarking of performance measurements.

• This technique utilizes a weighted score in the analysis of various benchmarks and provides a single score using perceptual values set forth by decision makers.

• This is a multi-attribute utility technique. • Though, this method helps to quantify measure and provide

managerial input, it is subjugated to high degree of subjectivity.• Statisticak methods such as regression and descriptive statistics are

also used to analyse data in performance benchmarking.

Non- parametric methods:

• one of the commonly used tools in performance measurement is balanced scorecard (BSC)

• BSC provides a comprehensive framework that translates a company’s strategic objectives into a coherent set of performance measures.

• BSC is a management system that can motivate breakthrough improvements in critical areas such as product, process, customer and market development.

• The scorecard basically covered four different perspectives from which to choose measures.

• It complements traditional financial indicators with measures of performance for customers, internal business/processes and innovation and learning activities (Kaplan and Norton, 1996).

• In this way, BSC is distinguished by itself by being able to link the company’s strategic objectives to the long-term trend analysis for planning and performance evaluation.

Balance Scorecards

• Balanced scorecard is a strategic planning andmanagement system that helps everyone in anorganization to understand the role towards ashared vision.

• Robert Kaplan has proposed the logic of Balanced Scorecard – Strategic Planning.

• Howard Rohm proposed model of balanced score card for a Federal Government Logistics Centre

• Robert Kaplan also proposed using scorecards in Collaborative Planning, Forecasting and Replenishment (CPFR) by focusing the Key Performance Indicators (KPIs)

Data envelopment analysis (DEA)• Another non-parametric tool that is commonly used for

benchmarking is data envelopment analysis (DEA). • DEA uses the linear programming technique to evaluate the

efficiencies of the analyzed units.• DEA is able to evaluate the performance measures

quantitatively as well as qualitatively, hence enabling managers to make reasonable judgement on the efficiency of the resource usage.

• The concept of efficient frontier analysis suggested by Farrell (1957) forms the basis of DEA for evaluation of performance units.

• At such, it takes into consideration the best value that can be obtained from the set of data and is not based on the average value.

• DEA is a linear-programming-based methodology that can evaluate multiple inputs and multiple outputs to calculate performance measure.

• This measure is often in the form of ratio of total weighted output to total weighted input.

• This weighted generated ratio represents the relative efficiency of a DMU.

• The objects of DEA are “decision-making units” (DMU).• A DEA requires the inputs and outputs for each decision-making

units (DMUs) to be specified. • It will then define efficiency for each DMU as a weighted sum of

outputs divided by a weighted sum of inputs, where all efficiencies are restricted to lie between 0 and 1.

• In calculating the numerical value for the efficiency of a particular DMU, the weights are chosen so as to maximize its efficiency, thereby presenting the DMU in the best possible light.

The Challenges of Benchmarking• Sponsorship—every benchmarking initiative needs a

sponsor, the higher in the organization the better.• Scope—selecting the supply chains to be benchmarked is

critical; it’s not a simple process.• Selection of processes and metrics—focusing on strategic

elements helps keep the program targeted and useful (deep metrics in a few areas rather than many metrics across numerous areas).

• Standards—standard definitions of supply chain processes (e.g., what activities are in manufacturing or procurement) enable “like-for-like” benchmarks across divisions or companies. Conversely, lack of standards make meaningful comparisons difficult if not impossible.

• Sources—identifying sources of data for metrics and having clear pointers to which processes generate transactional data necessary for calculations.

• Cost—benchmarking can be expensive, especially when outside consultants are used. It’s not uncommon for the cost of a single benchmark to range between $300,000 and $500,000.

• Time—the benchmarking process can take from three to five months; set expectations accordingly.

• Deriving meaning—the benchmarking initiative must be structured so that the results produced are meaningful.