Not so long ago, we posted an article on this blog recommending that when benchmarking your supply chain, you do so internally and externally. Nothing has changed since then, but what if it’s not practical for your company to conduct an internal and external benchmarking project, or you simply need to prioritise one over the other.
It’s not essential to do both. Nevertheless, in a situation where you have to choose, how should you decide?
The following pros and cons of both internal and benchmarking should help you if you find yourself in a position of selecting just one of the options.
Internal Supply Chain Benchmarking: The Pros
Internal benchmarking means comparing the performance of multiple business units, functions, or facilities across your enterprise. For example, you might benchmark all your warehouses, or the outbound supply chain operations of different regions.
Some key advantages of internal benchmarking are as follows:
- Your company has control of the benchmarking data, so you should be able to vouch for its accuracy and reliability. If not, at least you have the opportunity to work on the data quality before conducting your benchmarking project;
- Depending on the scale of your project, it may be considerably less expensive to conduct than an external benchmarking exercise;
- Internal benchmarking supports continuous improvement and process standardisation efforts;
- Internal benchmarking makes it relatively easy to identify best practices taking place within your enterprise;
- Goals based on internal benchmarks are easier to sell, since they are already being attained somewhere within your organisation.
It’s also entirely possible to plan and execute an internal benchmarking project with the exclusive use of internal resources, although of course there are benefits to engaging external specialists, especially in the case of a large-scale project or if your company has no experience of supply chain benchmarking.
The Cons of Internal Supply Chain Benchmarking
There is of course, a reason why we recommend the use of external and internal benchmarking, and it’s simply because the strengths of one practice offset the limitations of the other. In the case of internal benchmarking, a couple of weaknesses exist, namely:
- Internal benchmarking creates a closed loop in which it may be hard to raise standards beyond those of the best-performing teams, business-units, or facilities;
- It may not be as effective as external benchmarking when it comes to encouraging innovation.
The Pros of External Benchmarking
External benchmarking takes performance comparison beyond the horizons of your organization, providing insights into how your competitors, industry peers, or companies in other industries are performing.
You can perform external supply chain benchmarking at any time, but it can be especially valuable if internal benchmarking isn’t yielding significant performance improvements.
The following advantages (or pros) of external benchmarking ensure that when it’s done well, returns on investment can be generous, as subsequent performance improvements drive cost savings in your supply chain organisation and increased profits for your business:
- External benchmarking provides you with the ability to learn how your organisation is performing within your industry. It can tell you if you are among the top performers, if your performance is average, or if you’re really struggling against the majority of your peers;
- It can help you identify best practices within your industry, or even those adopted by other industries, which you can then evaluate and if appropriate, adapt for use in your supply chain operations;
- You can use external benchmarking to set performance objectives, which once met, will place your company among the best in your sector;
- When applied to competitor supply chains, external benchmarking can help you identify weaknesses, helping you catch up with competitors that are outperforming your company;
- It helps your management teams and workforce to become more accepting of outside ideas and influences.
Without external benchmarking, you really have no way to tell how well your supply chain is performing in comparison with others. That lack of awareness that might be costing your company a lot of money that could otherwise be saved. Why? Because best in class supply chains operate at up to 50% less cost than their peers!
External Benchmarking Cons
In order to be successful, external benchmarking requires a lot of preparation, especially when it comes to peer-selection (choosing the supply chain organisations against which you will benchmark your own). An external benchmarking project can be quite complex and resource-intensive. Other potential challenges include:
- A risk that data, and therefore results, are not reliable if care is not taken to select the right data-sources;
- Internal teams may not be as receptive of goals derived from external benchmarking results, as there is no way to demonstrate attainability. It’s not always easy to convince people that another company’s achievements can be replicated;
- It isn’t always easy to find appropriate peer-companies against which to benchmark, especially if you’re trying to benchmark against competitors.
A Suggested Approach to Supply Chain Benchmarking
Hopefully the pros and cons explained here will help you decide which way to go if you have to choose between internal and external benchmarking. The approach we would suggest though, if practicable, would be to commence with internal benchmarking.
There is plenty of scope to find improvement opportunities early on and adopt internal best practices. Indeed, the larger your organisation, the more there will be to find.
As you begin to raise performance across your enterprise, and further improvements become harder to achieve, try to graduate to external benchmarking, which will help your teams to get out of their comfort zones and focus more on innovation.