Supply Chain Benchmarking: Get the Gain Without the Pain - Basics of Benchmarking

By Joe Francis -- Supply Chain Management Review, 4/1/2008

Previous page: Supply Chain Benchmarking: Get the Pain Without the Pain (Introduction)

Before going further, it might be helpful to provide some basic definitions and describe my earlier benchmarking experiences at Compaq to put things in context.

There are two main types of benchmarking: qualitative and quantitative. They both share certain essential features, but have quite different purposes and outcomes.

• In qualitative benchmarking, often called “best practices” or “leading practices,” managers gather data on techniques for solving supply chain problems and improving performance. If you were having issues with supplier forecasting, for example, you might look at your capabilities with regard to demand planning, S&OP, and CPFR. These techniques are generally applicable, provide valuable results, and have good staying power. Managers compare their techniques to those of organizations with similar supply chains. They then analyze the differences, looking for opportunities to improve certain processes. When you say “benchmarking,” many companies think only of this type of qualitative benchmarking. Basically, this was the type of supply chain benchmarking program we conducted at Compaq.
• The second type is the quantitative benchmarking of key performance indicators (KPIs), business metrics, and scorecards. This activity involves examining a given supply chain and gathering data on performance, not practices. Managers then compare this performance data to those of organizations with similar supply chains. The goal is to identify any performance differences and note which processes need to be improved and by how much (that is, what new standards need to be attained). Companies often conduct this type of quantitative benchmarking while doing a financial review of company performance. They also frequently use quantitative benchmarking to tie the company's supply chain goals to its overall strategy.

Our benchmarking efforts at Compaq were mainly of the qualitative variety. We had a relatively easy time launching the program as the head of supply chain strategy was the sponsor. He had the authority in the management hierarchy to compel the participation of supply chain managers throughout the company. We also had urgency around the program because of loss of market share. It was clear we didn't have a robust strategy linking top-line performance and supply chain tactics in a changing computer market that saw Dell and HP in particular achieving rapid growth. The qualitative analysis confirmed that we definitely didn't have a detailed linkage between strategy and operations in the field.

In retrospect, however, I realize that it wasn't a perfect program. We were unsure of which areas to benchmark, so we covered all possible supply chain processes and metrics companywide. This turned out to be a complex undertaking, and ultimately we covered a lot of areas needlessly. The program took us the better part of four months and cost about $350,000 in fees with our Big Five consulting partner. The results we did achieve were highly dependent on the consulting firm's organization of the approach, analysis, and communication of the outcome. Yet all of this “walked out the door” after the consultants issued their final report.

We were satisfied with the results, but I was dissatisfied with the process. We had a wide but fairly shallow (internal) benchmark that gave us valuable direction. Yet we found it difficult to prioritize and focus the program because it was so large and covered so many different supply chains. Moreover, we didn't get any real detail on what activities needed improvement and by how much.

In the end, we decided to focus on order cycle time (and inventory) in three of Compaq's seven major supply chains. Order cycle time then stood at 27 days average, and we had months of inventory. We had very low maturity practices to manage order cycle time. Yet we found that by correcting some of the deficiencies in how we managed processes, we could reach a five-day average order cycle time with at least two weeks less inventory. This focus would end up saving weeks of cash cycle time, which resulted in the billions of dollars of working capital savings. Each day of working capital was worth a few hundred million dollars. Twenty days of improvement later we hit the $3 billion mark in capital, and $100+ million in profit improvement—my first billion-dollar SCOR project!

Several years later, after the merger of Compaq and Hewlett-Packard, we undertook another benchmarking program to look at internal costs in one division. At the outset, it seemed simpler than the broad Compaq study. Since it was quantitative rather than qualitative, we didn't have to juggle huge masses of best-practice data. In addition, the project focused on one specific metric rather than trying to aggregate and align process, metrics, and practices. Among the other plus factors: we had a relatively easy time with the benchmarking launch; C-level sponsorship; the appropriate authority in the management hierarchy (as head of business process management, I worked with his head of strategy to execute the program); and the post-merger urgency to reduce costs significantly.

Despite these favorable conditions, this turned out to be the most painful benchmarking I've ever been through. Instead of using industry standard metrics that showed how we compared against our competitors, we ended up with highly customized metrics and views on the data. We worked again with a Big Five consulting firm (different from the first one) that did the custom research on competing companies, burned through about $400,000 in fees, and spent months gathering data and performing analysis. In this case, we had a narrow but deep benchmark (internal and external) that gave us good direction. However, lack of standards for comparing the performance data created a lot of extra work. And once again, we did not develop any in-house competency as the consultants did all the organization, research, analysis and communication of the benchmark results.

Continue to The Challenges of Benchmarking

In this article:

• Introduction
• Some Basics of Benchmarking
• The Challenges of Benchmarking
• Early Experiences with the Benchmark

Resource Center