Why Benchmark and How to Do It
Data from the BMS database demonstrates that supply chains providing best-In-class service do it at half the cost of their peers.
Please explain how this can be
- Get it right the first time—every time
“We don’t make many mistakes so there is less rework, returns, and expediting”
- Focus on the detail
“Costs become readily apparent when you have a passion for service excellence. You can’t look at one without looking at the other.”
- Price service relationship
“Because our service is consistently superior and our customers know it and rely on it, we both increased our market share, and could also afford to charge more than our competitors.”
Begin with the End in Mind
From Stephen Covey’s “Seven Habits of Highly Effective People” summarised below, Habit No 2 is to ‘Begin with the end in mind’.
- Habit 1: Be Proactive
- Habit 2: Begin with the end in mind
- Habit 3: Put first things first
- Habit 4: Think ‘win-win’
- Habit 5: Seek first to understand and then to be understood
- Habit 6: Synergise
- Habit 7: Sharpen the saw
Before embarking on a journey to supply chain excellence, the first step is to determine ‘the end’ on target. How is that target to be set? From benchmarking against the best, understand the gaps in service and cost performance and then setting out a strategy and plans to bridge the gaps.
Lessons from Sports People about Benchmarking
- Roger Bannister was the first man in recorded history to run a mile in under 4 minutes in April 1954.
Until that time no one had broken this barrier and many claimed that it was not possible for man to run that fast over this distance. However this turned out to be a glass ceiling when he broke the record.
Over the next 18 months his record was broken 12 times! What made the difference? The glass ceiling was broken. A new benchmark had been set against which to aim. “The end” had moved.
- The fastest man in the world over 100m is Usain Bolt. He is the benchmark. He is the best. To aspire to be the best what is the first thing that one would need to know?
Answer – the time, i.e. 9.58 seconds. If you aspire to your supply chain being the best, the first thing that you need to know is – how good is the best? What is the benchmark?
- Just because you are the best today doesn’t guarantee that status will last into the dim and distant future. Look at dual Olympian Johnny Weismuller. At one stage he was the best in the world.
He was the benchmark in the pool. He held 69 world records and at one stage held EVERY world record from 50 yards to 1 mile! But that was some time ago. His world records are now being broken by 13 year olds.
Just because you are the best today doesn’t mean that you will be tomorrow. So re-benchmarking against the market place on a regular basis, to understand what the ‘new best’ is, is essential.
“Only 24 percent of executives surveyed believe that the market leaders of today will still be the leaders in five years”
Source: Bain & Company Management Tools & Trends Report, 2009.
“Benchmarking is the most popular management tool”*
Bain & Company has been conducting global Management Tool & Trends surveys since 1993 – the same year that Benchmarking Success began.
The 2009 report demonstrated that the most popular management tool was benchmarking.
The survey, conducted in January 2009 encompassed 1,430 international executives from companies from a broad range of industries and focuses on 25 tools that are available to executives.
Benchmarking knocked off strategic planning to top the tool usage list. Why? Because benchmarking was seen as a priority in achieving cost savings in the business while improving service simultaneously.
One executive observed that for benchmarking to be most effective, his company has to dig deeper. “I’d like to see more granular, actionable benchmarking in the future. That way if we’re not doing well compared to our competitors, it’s a red flag to address a problem.”
* Source: Bain & Company, Management Tools & Trends 2009
The Size of the Prize
So if improved customer service drives significant cost savings, how much could we save if we improve our service performances?
- BMS Size of prize is breakthrough methodology to value improvement opportunities and illustrates high level improvement results associated with costs and service levels.
- The cost savings possible if performance is improved by 1 decile rank and 2 deciles rank in the key supply chain cost driving areas, including perfect order, cash to cash cycle and supply chain functional cost silos.
- The calculation logic of the Size of Prize is based on the following:
- Using key areas of supply chain cost silos, perfect order and cash to cash cycle.
- Positioning of the company under review as “decile” placing for each of these key areas (i.e. decile 10 = top 10%, decile 1 = bottom 10%)
- Calculate the savings if company improves by 1 decile ranking for each of the key areas.
- Also calculate savings for improving 2 deciles.
- Calculating both the direct SC and indirect SC savings.
- A sample is set out below using the Plumbing Chart approach
“You can’t improve what you don’t measure”
If performing isn’t measured and benchmarked against peers, competitors, internal comparisons or imposed targets, how can improvement be validated?
Benchmarking performance – both service and cost performance – through a series of in-depth KPI’s is the BMS approach to ‘improving service through benchmark measurement’.
So How Do You Measure it?
In essence, benchmarking involves carrying out a ‘super-audit’ of a company’s end-to-end supply chain from supplier to customer delivery. Categories should include at least some of the following:
- Overview of supply chain management
- Management of inventory
- Manufacturing contribution to supply chain
- Distribution centre/warehouse management.
- Transportation – inbound and outbound.
- Customer service
- Supply chain costs
During the audit, it is necessary to capture significant data, known as key performance indicators (KPIs), which can then be measured and compared through the use of sophisticated diagnostic tools, such as the SCOR model.
Essential KPIs to be measured include some or all of the following, depending on the industry:
- Delivery in full. This measures the percentage of orders that were delivered in full over a given time period.
- Delivery on time. This KPI measures inbound deliveries or those you make to your customers to determine the percentage of sales or purchase orders that are made on time.
- Delivery in full and on time (DIFOT). This KPI is calculated by dividing the number of orders delivered in full and on time by the total number of orders delivered in a given time period.
- Supply chain cost as a percentage of sales. If, for example, your company concludes sales worth $2 million with supply chain costs totalling $200,000, supply chain management cost as a percentage of sales would be 10%.
- Cash-to-cash cycle time. This KPI measures the average elapsed time from when your company pays for raw materials or finished goods to when the end customer makes payment.
- Stock turns. This KPI calculates the rate at which your inventory is consumed. It is measured by dividing the cash value of inventory consumed in a year by the cash value of inventory usually held in your warehouses.
The diagnostic process will lay bare the strengths and weaknesses of the various links in the supply chain as well as calculate the costs of all interventions along the way.
The results are then compared, or benchmarked, against the data of businesses operating similar supply chains, allowing a company to identify areas where efficiencies can be effected and where costs can be cut.
Because data from rival companies are hard to come by, Benchmarking Success is here to help you. BMS keeps a database of KPIs from more than 800 supply chains across a range of industries. Feel free to check out the services on offer.