Executive Briefings

Benchmarking Helps Companies Chart Path to Better Performance

Benchmarking your company to better understand how it is performing in relation to others is an important step in identifying opportunities for improvement.

Thomas Steel Strip, an Ohio-based manufacturer of cold-rolled specialty steel, was bleeding red ink early in this decade when it decided to undertake a benchmarking exercise to identify needed changes.

"Somehow we had to find a way to reduce our fixed costs, yet keep the same performance, or improve our performance," says Denny Wist, president and COO. The company engaged APQC, Houston, for the benchmarking exercise. "This was a new venture for us so we had a lot of worries about what was the right way to do this," Wist says.

APQC, a non-profit organization leader in performance analytics and benchmarking, uses a proprietary Process Classification Framework to benchmark companies against data from its Open Standards Benchmarking Collaborative (OSBC) database. The OSBC contains results of detailed surveys of more than 7,000 companies covering seven major process areas. "All metrics are validated, normalized and aggregated to ensure the data is relevant and accurate," says Marisa Brown, senior program manager. Brown emphasizes that APQC never reveals individual company data without permission. "When companies complete our surveys, it is like putting the information in Fort Knox," she says.

Typically, a client is benchmarked against aggregated data from companies both inside and outside its industry. "We thought it was a good combination to use metals companies as well as a broader range of companies," says Wist. The OSBC "worked very well for us. It had the right level of detail, the right amount of specific data and it applied to the things we were looking at."

The supply chain was one area that Thomas Steel Strip focused on. After reviewing the benchmarking results, Wist says, the company "changed the structure, changed the people, changed the processes and changed how it measured" supply chain operations. The result was "a nice improvement," he says. "Inventory turns are up, finished goods are half of what they were and our whole product flow is working better."

Many companies, like Thomas Steel Strip, turn to benchmarking when they know they are underperforming and they want to pinpoint and prioritize areas for improvement. Others benchmark on a regular basis to ensure that operations and results are on track and aligned with corporate goals. "Everyone knows that in order to manage processes you have to measure them," says Derek Jones, research and development lead in the supply chain practice at Accenture, New York. "When you have a performance measurement program in place, you need something to compare it to, which is what benchmarking provides."

Benchmarking also is a "good way to look in the mirror and understand if you are spending the right amount of effort on the right things," says Trevor Miles, director of product marketing at Kinaxis, a supply chain technology company that focuses on solutions to enhance operations performance. "If there is something you are doing that gives you a competitive advantage, it is worth spending the effort to ensure you maintain that advantage," he says. "Don't benchmark areas where the activity is like a commodity and you only need to keep pace with your peers."

The supply chain often is the subject of benchmarking efforts because of its overall impact on the business, Miles says. "In financial statements, anything that includes gross margin is directly related to the supply chain-how you sell goods to customers, how you manufacture products and how you purchase materials from suppliers. The supply chain is absolutely key to understanding how well you are doing."

Because the supply chain spans cross-functional activities, performance measuring and benchmarking can enable companies to see if they are making the right trade-offs, says Debra Hofman, vice president of AMR Research, Boston. "For example, transportation and logistics folks are usually incented to trim costs as much as they can, but sometimes that could happen at the expense of service," she says. "If you are not looking at cross-functional metrics, such as total perfect order, you may not know that."

"Everyday something in the supply chain changes," says Bruce Tompkins, a principal of Tompkins Associates, a supply chain consulting, integration and benchmarking firm based in Raleigh, N.C. "If you are not on top of those changes, you fall behind. Benchmarking helps you keep up with what is going on and see what you should focus on."

Different Approaches

Just as there are different reasons for benchmarking, there also are different approaches. Companies can do a general, broad-brush exercise by using publicly available financial information, says Kelly Thomas, senior vice president of i2 Technologies, a supply chain solutions company based in Dallas. In the past 15 to 20 years, he notes, the internet has made accessing this information much faster and easier, while regulations have increased the amount of information that public companies are required to report. "You can do a certain amount of comparison at a high-level just using this data and that is always a good place to start," Thomas says. A measure such as return on invested capital is good to use at the industry level, while return on assets shows how well individual companies are using their property, plant and equipment, he says.

Harry Ghuman, group vice president at software giant Oracle, Redwood Shores, Calif., agrees that looking at more easily available metrics at an aggregate industry level is a "good first task to see if you are leading or lagging your industry." Data at that level, however, "is not very actionable," he says. "It does let you know if there is an issue, but to get actionable information you need to investigate at greater depth."

Providing that depth is what companies like APQC and Tompkins Associates promise with their large databases and standardized processes. These ensure that clients are benchmarking against the right peer groups and that the measures used will result in apples-to-apples comparisons, they say.

Ensuring consistency in metrics from different companies has been a challenge in benchmarking "forever and always," says Tompkins. To address this issue, Tompkins Associates' online surveys have "information bubbles that pop up on each and every metrics question and some process questions." When a user puts the cursor on a question, a definition comes up that defines how that metric should be entered, he explains. The definition represents the most common understanding and use of that metric based on Tompkins Associates' extensive research. "We also have built in checks and balances to identify entries that appear to be outside normal parameters," he says. "Our system will question such entries and if they are really out of whack, it won't let the user make the entry."

Tompkins has long helped clients with benchmarking, but it entered the arena in a formal way in 2004 when it purchased a small company that was doing benchmarking work for the Supply Chain Consortium, a group of companies that contribute to a benchmarking database. Tompkins Associates provides staff support for the consortium. Of the current 270 members, about half are in the retail sector and half in manufacturing, Tompkins says. "We have a good cross section in terms of company size and business model, including many companies that are household names," he says.

APQC relies on the huge database it has complied through the Open Standards Benchmarking Collaborative and on its proprietary Process Classification Framework (PCF), which "gives a common language to organizations that want to benchmark with each other," says Brown. The PCF breaks down the enterprise into very consistent operating processes and management and support processes, she explains. "So when an organization talks about manufacturing, it knows that these are the processes included and that each process has these activities associated with it. That makes it a lot easier to compare information and ensures that you are getting an apples-to-apples look across organizations," says Brown. APQC's methodology allows companies to not only look at processes that are fairly common to all organizations, but also to drill down into the specific activities under each process so that it is easier to see what better performing companies are doing differently.

APQC also manages the SCOR (Supply Chain Operations Research) benchmarking portal for the Supply Chain Council. "Because of our global databases and because we have all the infrastructure in place, the Supply Chain Council asked APQC to facilitate and oversee their online benchmarking portal that is tailored specifically to the SCOR model," says Brown.

If a company wants to benchmark on its own by finding partners willing to share performance data - a level of cooperation uncommon among competitors - it also should take time to standardize definitions up front, suggests Brown. "Otherwise the results may not be very useful. You won't know with any certainty what people meant by their answers." She says this is an area where the old adage really applies: if you fail to plan, you plan to fail. "Planning is the single biggest success indication in any benchmarking effort," says Brown.

Accenture's Jones agrees. "The first thing you have to establish is what you want to accomplish with benchmarking," he says. "Otherwise, benchmarking may become an end to itself rather than a tool in the overall management process." Additionally, "those objectives have got to come from the top," he says. "You want to benchmark things that ultimately will help you control what shows up on the balance sheet, so the initiative has to start with your business strategy and how you create value."

Another key decision is determining which company or peer group to benchmark against. The tendency is to look at competitors, but "just comparing yourself to industry peers will help you only get as good as they are; it typically doesn't help you get better," Jones says. "You are not likely to leave anyone in the dust with that approach." And it is of no help if you already are the industry leader, he adds. "In that case, you have to look outside your industry to companies with similar characteristics. BMW, for example, might be better off benchmarking against makers of other high-end luxury goods."

Ghuman also stresses the importance of looking outside your own industry. "Benchmarking only against industry peers may be too inward looking," he says. "You may find that you are doing very well compared with others in your industry and still be leaving a lot of opportunities on the table because your industry is not as advanced as others."

"While it is important to understand where you stand relative to your industry peers, sometimes the industry as a whole may not be where the top performers are," agrees Brown. "You don't want to compare yourself to the best of the worst. We believe you should make comparisons with a variety of different peer groups to see how well you are truly performing and where the biggest opportunities are."

In looking outside your industry group, Ghuman suggests benchmarking against companies that have a similar go-to-market strategy, such as selling direct to customers or selling through distributors. "Companies also need to think through what types of products they have - whether they are long life-cycle or short life-cycle products, for example," he says. "In many companies you have different types of products and aggregating everything will not give you the right answer."

When benchmarking the supply chain, the industry or products involved often are unimportant, says Hofman. "You are not benchmarking your product; you are benchmarking your supply chain, so there is no need to limit your comparisons to companies in the same business." Rather, the key issue is to benchmark against companies with the same supply chain characteristics, she says. "If you want to compare your raw materials levels, for example, and you are running a make-to-order supply chain, you don't want to compare yourself to companies with a make-to-stock supply chain."

There is an exception to this rule, however, says Hofman. "In some situations, you may want to compare yourself to companies that have opposite business models. For example, if you have decided to outsource manufacturing, it may be a good idea to compare yourself to a company that has decided not to outsource to see how your choice holds up. Maybe you are not getting the benefits you think. Maybe your costs really aren't lower. So you want to differentiate between the inherent characteristics of your supply chain vs. the characteristics that represent a business choice that can be changed."

Similarly, says Tompkins, "If you are mostly a truckload operation you don't want to compare yourself to a company that uses a lot of airfreight. You can find people in many different industries doing awesome things in truckload."

The process used at Tompkins Associates allows clients to select an infinite number of filter criteria, he says. "They take our database of these 260 companies that have completed different surveys and they can slice that information however they want. They can get an industry slice and see what they learn, then they might look at companies with a similar truckload spend. In each instance, they can create a filter and run a query against the database using that filter." The results can then be put into a dashboard format "that gives them a very clear picture of where they stand," he says.

Now What?

Knowing where you stand is important, but it is only half the equation. You also need to know what to do with that information.

"One of the things we see companies struggle with is how to take the results of a benchmarking exercise and make them actionable," says Hofman. Too often companies make the mistake of taking a number from a better performing peer group and use that as a target, she says. "For example, let's say the best-in-class companies spend 1 percent of revenue on transportation. You don't want to just take that number and use it as a target without really understanding all the contributing factors. That company may be making a trade-off somewhere else that you would not want to make. So you need to use the numbers directionally. If the median in your comparison group is 2 percent and you are at 10 percent, you now have room for improvement."

"Our system is geared around helping companies not only identify opportunities for improvement, but also showing them how to leverage that knowledge," says Tompkins. "They can see what the top quartile companies are doing in specific areas, such as the warehouse technologies they are using, the features that are turned on, their picking approaches and so on. To make the most of benchmarking, companies have to really dig in and learn what changes are needed and then follow through with implementation of those changes," he says.

APQC is constantly analyzing its database to find action/performance correlations that may be helpful to the OSBC membership, says Brown. "We are looking for actions or processes that are correlated with better performance, or, in some cases, that have a negative correlation." APQC often compiles this information in reports that it publishes on its Web site (http://www.apqc.org). "With everything we publish we try to be very clear about how we are defining things and the linkages we see. If we are correlating outcomes with certain activity, we want to make sure we clearly explain how we got there and calculated the results," says Brown.

Accenture also is trying to come up with meaningful correlations, says Jones. "We have all seen dozens of reports showing basic, progressive and leading-edge practices in various areas," he says. "Consultancies can churn those out by the truckload." Such reports usually are one dimensional, he says. "Without some indication that adopting a leading-edge practice actually will give you a better result, you may just be rearranging deck chairs on the Titanic."

Accenture's recent research on high-performance businesses takes a two-dimensional approach, he says. "We looked at both performance measurements - objective things like inventory turns, order fill rates, and transportation costs - then cross-tabulated those against capability measurements. The result is a two-dimensional report that shows that better performing companies may be leaders in some capabilities but not others. This is important in choosing where to invest, so you are not out trying to fix every process but really targeting the capabilities and processes that will give you a performance boost," he says.

Making benchmarking actionable means "bringing it into your sales and operations planning cycle and your day-to-day planning so that the targets you set as a result of benchmarking are in front of people whenever they make a decision about the future," says Miles. "Benchmarking should not be about the past. It is about the future and doing the things that will get you to where you want to be."

RESOURCE LINKS:
Accenture, www.accenture.com
AMR Research, www.amrresearch.com
APQC, www.apqc.org
i2 Technologies, www.i2.com
Kinaxis, www.kinaxis.com
Oracle, www.oracle.com
Tompkins Associates, www.tompkinsinc.com

Thomas Steel Strip, an Ohio-based manufacturer of cold-rolled specialty steel, was bleeding red ink early in this decade when it decided to undertake a benchmarking exercise to identify needed changes.

"Somehow we had to find a way to reduce our fixed costs, yet keep the same performance, or improve our performance," says Denny Wist, president and COO. The company engaged APQC, Houston, for the benchmarking exercise. "This was a new venture for us so we had a lot of worries about what was the right way to do this," Wist says.

APQC, a non-profit organization leader in performance analytics and benchmarking, uses a proprietary Process Classification Framework to benchmark companies against data from its Open Standards Benchmarking Collaborative (OSBC) database. The OSBC contains results of detailed surveys of more than 7,000 companies covering seven major process areas. "All metrics are validated, normalized and aggregated to ensure the data is relevant and accurate," says Marisa Brown, senior program manager. Brown emphasizes that APQC never reveals individual company data without permission. "When companies complete our surveys, it is like putting the information in Fort Knox," she says.

Typically, a client is benchmarked against aggregated data from companies both inside and outside its industry. "We thought it was a good combination to use metals companies as well as a broader range of companies," says Wist. The OSBC "worked very well for us. It had the right level of detail, the right amount of specific data and it applied to the things we were looking at."

The supply chain was one area that Thomas Steel Strip focused on. After reviewing the benchmarking results, Wist says, the company "changed the structure, changed the people, changed the processes and changed how it measured" supply chain operations. The result was "a nice improvement," he says. "Inventory turns are up, finished goods are half of what they were and our whole product flow is working better."

Many companies, like Thomas Steel Strip, turn to benchmarking when they know they are underperforming and they want to pinpoint and prioritize areas for improvement. Others benchmark on a regular basis to ensure that operations and results are on track and aligned with corporate goals. "Everyone knows that in order to manage processes you have to measure them," says Derek Jones, research and development lead in the supply chain practice at Accenture, New York. "When you have a performance measurement program in place, you need something to compare it to, which is what benchmarking provides."

Benchmarking also is a "good way to look in the mirror and understand if you are spending the right amount of effort on the right things," says Trevor Miles, director of product marketing at Kinaxis, a supply chain technology company that focuses on solutions to enhance operations performance. "If there is something you are doing that gives you a competitive advantage, it is worth spending the effort to ensure you maintain that advantage," he says. "Don't benchmark areas where the activity is like a commodity and you only need to keep pace with your peers."

The supply chain often is the subject of benchmarking efforts because of its overall impact on the business, Miles says. "In financial statements, anything that includes gross margin is directly related to the supply chain-how you sell goods to customers, how you manufacture products and how you purchase materials from suppliers. The supply chain is absolutely key to understanding how well you are doing."

Because the supply chain spans cross-functional activities, performance measuring and benchmarking can enable companies to see if they are making the right trade-offs, says Debra Hofman, vice president of AMR Research, Boston. "For example, transportation and logistics folks are usually incented to trim costs as much as they can, but sometimes that could happen at the expense of service," she says. "If you are not looking at cross-functional metrics, such as total perfect order, you may not know that."

"Everyday something in the supply chain changes," says Bruce Tompkins, a principal of Tompkins Associates, a supply chain consulting, integration and benchmarking firm based in Raleigh, N.C. "If you are not on top of those changes, you fall behind. Benchmarking helps you keep up with what is going on and see what you should focus on."

Different Approaches

Just as there are different reasons for benchmarking, there also are different approaches. Companies can do a general, broad-brush exercise by using publicly available financial information, says Kelly Thomas, senior vice president of i2 Technologies, a supply chain solutions company based in Dallas. In the past 15 to 20 years, he notes, the internet has made accessing this information much faster and easier, while regulations have increased the amount of information that public companies are required to report. "You can do a certain amount of comparison at a high-level just using this data and that is always a good place to start," Thomas says. A measure such as return on invested capital is good to use at the industry level, while return on assets shows how well individual companies are using their property, plant and equipment, he says.

Harry Ghuman, group vice president at software giant Oracle, Redwood Shores, Calif., agrees that looking at more easily available metrics at an aggregate industry level is a "good first task to see if you are leading or lagging your industry." Data at that level, however, "is not very actionable," he says. "It does let you know if there is an issue, but to get actionable information you need to investigate at greater depth."

Providing that depth is what companies like APQC and Tompkins Associates promise with their large databases and standardized processes. These ensure that clients are benchmarking against the right peer groups and that the measures used will result in apples-to-apples comparisons, they say.

Ensuring consistency in metrics from different companies has been a challenge in benchmarking "forever and always," says Tompkins. To address this issue, Tompkins Associates' online surveys have "information bubbles that pop up on each and every metrics question and some process questions." When a user puts the cursor on a question, a definition comes up that defines how that metric should be entered, he explains. The definition represents the most common understanding and use of that metric based on Tompkins Associates' extensive research. "We also have built in checks and balances to identify entries that appear to be outside normal parameters," he says. "Our system will question such entries and if they are really out of whack, it won't let the user make the entry."

Tompkins has long helped clients with benchmarking, but it entered the arena in a formal way in 2004 when it purchased a small company that was doing benchmarking work for the Supply Chain Consortium, a group of companies that contribute to a benchmarking database. Tompkins Associates provides staff support for the consortium. Of the current 270 members, about half are in the retail sector and half in manufacturing, Tompkins says. "We have a good cross section in terms of company size and business model, including many companies that are household names," he says.

APQC relies on the huge database it has complied through the Open Standards Benchmarking Collaborative and on its proprietary Process Classification Framework (PCF), which "gives a common language to organizations that want to benchmark with each other," says Brown. The PCF breaks down the enterprise into very consistent operating processes and management and support processes, she explains. "So when an organization talks about manufacturing, it knows that these are the processes included and that each process has these activities associated with it. That makes it a lot easier to compare information and ensures that you are getting an apples-to-apples look across organizations," says Brown. APQC's methodology allows companies to not only look at processes that are fairly common to all organizations, but also to drill down into the specific activities under each process so that it is easier to see what better performing companies are doing differently.

APQC also manages the SCOR (Supply Chain Operations Research) benchmarking portal for the Supply Chain Council. "Because of our global databases and because we have all the infrastructure in place, the Supply Chain Council asked APQC to facilitate and oversee their online benchmarking portal that is tailored specifically to the SCOR model," says Brown.

If a company wants to benchmark on its own by finding partners willing to share performance data - a level of cooperation uncommon among competitors - it also should take time to standardize definitions up front, suggests Brown. "Otherwise the results may not be very useful. You won't know with any certainty what people meant by their answers." She says this is an area where the old adage really applies: if you fail to plan, you plan to fail. "Planning is the single biggest success indication in any benchmarking effort," says Brown.

Accenture's Jones agrees. "The first thing you have to establish is what you want to accomplish with benchmarking," he says. "Otherwise, benchmarking may become an end to itself rather than a tool in the overall management process." Additionally, "those objectives have got to come from the top," he says. "You want to benchmark things that ultimately will help you control what shows up on the balance sheet, so the initiative has to start with your business strategy and how you create value."

Another key decision is determining which company or peer group to benchmark against. The tendency is to look at competitors, but "just comparing yourself to industry peers will help you only get as good as they are; it typically doesn't help you get better," Jones says. "You are not likely to leave anyone in the dust with that approach." And it is of no help if you already are the industry leader, he adds. "In that case, you have to look outside your industry to companies with similar characteristics. BMW, for example, might be better off benchmarking against makers of other high-end luxury goods."

Ghuman also stresses the importance of looking outside your own industry. "Benchmarking only against industry peers may be too inward looking," he says. "You may find that you are doing very well compared with others in your industry and still be leaving a lot of opportunities on the table because your industry is not as advanced as others."

"While it is important to understand where you stand relative to your industry peers, sometimes the industry as a whole may not be where the top performers are," agrees Brown. "You don't want to compare yourself to the best of the worst. We believe you should make comparisons with a variety of different peer groups to see how well you are truly performing and where the biggest opportunities are."

In looking outside your industry group, Ghuman suggests benchmarking against companies that have a similar go-to-market strategy, such as selling direct to customers or selling through distributors. "Companies also need to think through what types of products they have - whether they are long life-cycle or short life-cycle products, for example," he says. "In many companies you have different types of products and aggregating everything will not give you the right answer."

When benchmarking the supply chain, the industry or products involved often are unimportant, says Hofman. "You are not benchmarking your product; you are benchmarking your supply chain, so there is no need to limit your comparisons to companies in the same business." Rather, the key issue is to benchmark against companies with the same supply chain characteristics, she says. "If you want to compare your raw materials levels, for example, and you are running a make-to-order supply chain, you don't want to compare yourself to companies with a make-to-stock supply chain."

There is an exception to this rule, however, says Hofman. "In some situations, you may want to compare yourself to companies that have opposite business models. For example, if you have decided to outsource manufacturing, it may be a good idea to compare yourself to a company that has decided not to outsource to see how your choice holds up. Maybe you are not getting the benefits you think. Maybe your costs really aren't lower. So you want to differentiate between the inherent characteristics of your supply chain vs. the characteristics that represent a business choice that can be changed."

Similarly, says Tompkins, "If you are mostly a truckload operation you don't want to compare yourself to a company that uses a lot of airfreight. You can find people in many different industries doing awesome things in truckload."

The process used at Tompkins Associates allows clients to select an infinite number of filter criteria, he says. "They take our database of these 260 companies that have completed different surveys and they can slice that information however they want. They can get an industry slice and see what they learn, then they might look at companies with a similar truckload spend. In each instance, they can create a filter and run a query against the database using that filter." The results can then be put into a dashboard format "that gives them a very clear picture of where they stand," he says.

Now What?

Knowing where you stand is important, but it is only half the equation. You also need to know what to do with that information.

"One of the things we see companies struggle with is how to take the results of a benchmarking exercise and make them actionable," says Hofman. Too often companies make the mistake of taking a number from a better performing peer group and use that as a target, she says. "For example, let's say the best-in-class companies spend 1 percent of revenue on transportation. You don't want to just take that number and use it as a target without really understanding all the contributing factors. That company may be making a trade-off somewhere else that you would not want to make. So you need to use the numbers directionally. If the median in your comparison group is 2 percent and you are at 10 percent, you now have room for improvement."

"Our system is geared around helping companies not only identify opportunities for improvement, but also showing them how to leverage that knowledge," says Tompkins. "They can see what the top quartile companies are doing in specific areas, such as the warehouse technologies they are using, the features that are turned on, their picking approaches and so on. To make the most of benchmarking, companies have to really dig in and learn what changes are needed and then follow through with implementation of those changes," he says.

APQC is constantly analyzing its database to find action/performance correlations that may be helpful to the OSBC membership, says Brown. "We are looking for actions or processes that are correlated with better performance, or, in some cases, that have a negative correlation." APQC often compiles this information in reports that it publishes on its Web site (http://www.apqc.org). "With everything we publish we try to be very clear about how we are defining things and the linkages we see. If we are correlating outcomes with certain activity, we want to make sure we clearly explain how we got there and calculated the results," says Brown.

Accenture also is trying to come up with meaningful correlations, says Jones. "We have all seen dozens of reports showing basic, progressive and leading-edge practices in various areas," he says. "Consultancies can churn those out by the truckload." Such reports usually are one dimensional, he says. "Without some indication that adopting a leading-edge practice actually will give you a better result, you may just be rearranging deck chairs on the Titanic."

Accenture's recent research on high-performance businesses takes a two-dimensional approach, he says. "We looked at both performance measurements - objective things like inventory turns, order fill rates, and transportation costs - then cross-tabulated those against capability measurements. The result is a two-dimensional report that shows that better performing companies may be leaders in some capabilities but not others. This is important in choosing where to invest, so you are not out trying to fix every process but really targeting the capabilities and processes that will give you a performance boost," he says.

Making benchmarking actionable means "bringing it into your sales and operations planning cycle and your day-to-day planning so that the targets you set as a result of benchmarking are in front of people whenever they make a decision about the future," says Miles. "Benchmarking should not be about the past. It is about the future and doing the things that will get you to where you want to be."

RESOURCE LINKS:
Accenture, www.accenture.com
AMR Research, www.amrresearch.com
APQC, www.apqc.org
i2 Technologies, www.i2.com
Kinaxis, www.kinaxis.com
Oracle, www.oracle.com
Tompkins Associates, www.tompkinsinc.com