Internal and External Benchmarking in the Supply Chain

You may have heard debates around the piece as to whether internal or external supply chain benchmarking is the best way to find your focus for supply chain improvement.


If you haven’t taken a position in that debate yet (or even if you have), we’d like to explain why actually, the companies most successful in supply chain management are using both methods.


First though, we should probably take a brief look at each of these two benchmarking approaches and their pros and cons. That should help to illustrate why the most effective benchmarking strategy will be one that combines them both.


Internal Supply Chain Benchmarking

Internal supply chain benchmarking can be a very positive and productive first step on the way to performance improvement, as it’s something that can be implemented at a relatively low cost compared to an external benchmarking project.

Internal benchmarking can be used to compare performance across multiple business units or facilities within your own enterprise, whether they are distributed regionally, nationally, or globally.


An Internal Benchmarking Example

Let’s assume your company operates a number of distribution centres around Australia. To perform an internal benchmarking exercise, you would first need to determine what performance elements to focus on. For example, you might decide to benchmark the following elements:

  • On-time dispatch
  • Units picked per man-hour
  • Picking accuracy (correct quantity and correct SKUs picked)

Internal benchmarking involves taking the same measurements at each of the distribution centres and evaluating the results.


Unless you already have things well-standardised across your organisation, your measurements will reveal that one or two DCs consistently outperform the rest in one or more of the measured elements.


These top-performing DCs will now be clear targets for further investigation, to discover what they are doing differently to the facilities with poorer performance. By identifying your internal “best practices” and implementing them across all the distribution centres, you should be able to get all sites achieving similar results, which will of course lift your overall logistics performance.


Limitations of Internal Benchmarking

Internal benchmarking has the advantages of economy, relative ease of implementation, readily accessible information, and often, fast improvement results.


However, internal benchmarking is something of a closed system and may not encourage a great degree of innovation.


At some point, performance will plateau; after all internal best practices have been identified and implemented. The only way to discover new improvement strategies at that point is to start looking outside the organisation.


External Supply Chain Benchmarking

Benchmarking your supply chain against other organisations can be beneficial to your business in a number of ways. For example:

  • You can understand how your supply chain performance compares with the general standard in your industry sector
  • You can investigate and evaluate best practices in your industry and in supply chains with similar characteristics to your own
  • External benchmarking is more likely to drive significant change and innovation in your supply chain

On the other hand, external benchmarking is a much more complex undertaking and requires selection of the right peers to compare performance against. It’s not always easy to interpret results correctly and the cost of execution can be considerable.

Unlike internal benchmarking, which can be implemented relatively easily using internal resources; a first-time external benchmarking project is best executed with the aid of external specialists. This will help you avoid the most common pitfalls and perhaps allow access to a wider range of peer organisations than might otherwise be possible.


The Benefits of Combining Internal and External Benchmarking

So if external benchmarking facilitates performance step-changes and propagates innovation, why bother with internal benchmarking?


Well, first and foremost, any improvement is better than none and internal benchmarking will almost certainly enable inroads to be made.


It can be a really good idea to begin by focusing internally if your company hasn’t benchmarked before, because when you move into the improvement phase, you’ll be setting targets which have already been achieved within your organisation. This provides assurance that the goals are realistic, helping to reduce the risk of change resistance as you implement internal best practices.

At the same time, external benchmarking enables you to stretch your teams further and introduce new approaches to performance improvement. It also keeps you informed about your position relative to best-in-class companies.

Meanwhile, a continued focus on internal benchmarking will help you keep performance levels constant across your operation and stay alert to fluctuations, which might indicate development of new internal best practices to adopt or if the trend is negative, may mean you need to adjust methods adopted in response to external benchmarking.


Don’t Make it a Case of “Either-Or”

Next time you hear anyone debating the value of internal versus external benchmarking; you can wear a wry smile. You know now that the most effective way to benchmark a supply chain operation is to use the two methods in concert with one another.


But don’t satisfy yourself with your valuable knowledge. Put it to use and give your supply chain organisation the best possible chance of success.


If you need a little help, Benchmarking success is right here to support you in both internal and external benchmarking. Spend some time looking around our site to find out more, and if you’d like to talk to us, don’t hesitate to get in touch.