15.7 Benchmarking

In The Art of War, a general from ancient China by the name of Sun Tzu stated:

In other words, effectively competing against other companies requires you to know the following and be able to apply the information to two types of benchmarks:

1. Know Yourself: Internal Benchmarking. How are you doing in terms of different measures of performance? This is where your own balanced scorecard comes in. Simply getting a snapshot of your performance is not enough. You need to use your balanced scorecard to collect your historical performance. Let’s say your current quality level is at 95% ppm; how you view that metric would drastically differ if your quality level grew from 92% as opposed to fell from 98%.

   What is the overall process capability of your company? For instance, retailers have mystery shoppers visit their stores to assess customer service levels in their stores. This type of benchmarking can come from many sources. Meijer, a major chain of hypermarkets in the Midwest United States, would ask customers a random question regarding their service experience at checkout through the pin pad. McDonald’s, on the other hand, prints out customer survey links on random receipts. Walgreens augments customer survey links on their receipts with third-party mystery shoppers who come into their stores and evaluate staff friendliness, store cleanliness, product in-stock status, and checkout speed. This information is then used to compare performance across the entire company (and competitors) to identify leaders and laggards.

2. Know Your Peers: External Benchmarking. While it’s tempting to think of your competitors as the enemies, remember that you are all trying to grow the same industry. More importantly, understanding what your competitors are doing could also lead you into understanding whether you are relatively better than your competitors, in which case it could be a unique source of competitive advantage, or if your competitors are dominant, in which case you will probably need to make a concerted effort to improve or perhaps reconsider your current competitive strategy.

   External benchmarking is more about competitive outcomes. More importantly, whereas internal benchmarking is about your own performance, external benchmarking formally asks how you compare, often in terms of customer impression and favorability, against your industry peers. Many third-party companies conduct competitive benchmarking: JD Power and Associates releases its annual automotive rankings on dimensions such as initial quality and vehicle dependability. Consumer Reports releases similar studies on the most and least reliable vehicles that can be compared across brands, segments, and price points.

Benchmarking Process

Regardless of whether you choose to perform benchmarking yourself or use a third party, there are some universal steps that would help to ensure that you get the information that you need to help you make the proper decisions.

1. Determine What Area to Benchmark. The first consideration of doing your own benchmarking is to thoroughly understand your company’s own operational processes. Do you suspect that your company can reduce its defect rate? Or perhaps do you believe that your current processes are generating extra waste? Typically, your target for benchmarking must be a significant source of value creation to the company. One important thing to remember is that the area that you select needs to have upper management support due to the amount of labor, time, and money required.

2. Identify Proper KPIs. Your next step is to consider the exact measure to benchmark. For each area or process, there tends to be many potential targets. For instance, inventory alone has measures such as inventory turnover, days inventory, cycle time, and more. While many of these measures are related, each measure presents a unique view or context: whereas days inventory tells you how many days of inventory your company holds during a particular period, inventory turnover instead tells you how frequently you are turning over your inventory within that same period.

3. Compare Company Performance. This is where you will need to determine whether you want to conduct an internal benchmark or external benchmark. Whereas an internal benchmark allows you to better understand where you stand as compared to the past or across multiple facilities, an external benchmark instead unveils how you are doing relative to the competition. The goal is to identify both areas of deficiency and best practices. Best practices identified through internal benchmarking should be spread across the organization; those identified through external benchmarking should be considered for adoption. One caveat: best practices you identified may not be right for your company.

4. Develop and Implement Improvement Plan. Combining all the information you have collected thus far, you should have an understanding of both current and desired performance levels. Following your company’s game plan for continuous improvement, you will need to arrange for a project owner as you chart a course toward improving the specific KPIs you have identified through your benchmarking process.

Assisting Your Supply Chain Partners

One last thing about benchmarking: the data that you collect through both your benchmarking efforts and the general supply chain processes can be used to improve not only your own company but also your suppliers.

For instance, Walmart’s Retail Link database can be used by suppliers to benchmark themselves against their peers to better understand in what ways they are outperforming or underperforming the competition. Doing so not only allows your suppliers to proactively implement continuous improvement projects, thereby contributing to your company’s success, but also promotes greater collaboration with your suppliers. Your suppliers may even reach out to your company for assistance if they encounter an especially difficult challenge in their continuous improvement journey.