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Benchmarking both internal and external can provide valuable data for improving supply chain performance and has two main benefits. First, external comparisons place your performance in an industry context, which helps to identify supply chain improvement opportunities. And second, internal benchmarking helps you to identify which of your business units, regions, or locations are the best performers. Then you can pinpoint the underlying practices that make the difference and adopt those practices across the company. Companies typically use external benchmarking to study business practices of industry competitors as a basis for improving their own performance. Benchmarking is not just the study of another company s performance levels it s about the practices that lead to those performance
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levels. An effective benchmarking effort will help you to understand what level of quantitative performance is possible and, more importantly, what practices can deliver this level of performance. Besides external competitors, we believe that companies should study noncompetitors in other industries provided that they have similar supply chain characteristics. Why look outside your own industry Because often what works in one industry can be applied successfully to another. But be careful which companies you compare yourself against. You should compare yourself to peers companies with similar production processes, distribution channels, or other dynamics that allow a valid comparison. Otherwise, it s less likely you ll be able to set realistic targets. External benchmarking requires collecting performance data often highly sensitive data from other companies. Many companies are reluctant to provide such data directly to competitors or even to noncompetitors. To get around this roadblock, consider participating in benchmarking surveys managed by independent third parties. These benchmarking service providers specialize in defining relevant supply chain metrics and working with participating companies to ensure that the data collected are unambiguous and accurate. When choosing a service provider, look for one that offers a thorough assessment of the supply chain practices associated with best-in-class performance. This link between practice and performance is the key to understanding how to change your supply chain to reach new performance levels. Many companies make the mistake of thinking that participating in a benchmarking survey is the same as conducting a benchmarking assessment, or they want to have access to a supply chain database without any plans to participate in a survey. As Michelle Roloff, general manager of PRTM s benchmarking subsidiary, The Performance Measurement Group, LLC, notes, The benchmarks are only as good as the data the organizations submit. We want survey responses from companies that are using benchmarking to change how they do business. This means they re willing to invest the time needed to collect accurate information from a variety of sources. An external benchmark is only useful if a company knows how its own organization is performing in the same area. An effective benchmarking program starts with a thorough understanding of your own processes and level of performance. This means generating a comprehensive set of internal metrics. Internal benchmarking doesn t depend on sensitive data from other companies. Instead, it involves measuring the performance of comparable
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CHAPTER 5 Core Discipline 5: Use Metrics to Drive Business Success
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functional areas, processes, and facilities within your company using consistent definitions. For instance, you might compare the performance levels of a set of manufacturing facilities, warehouses, distribution centers, purchasing organizations, or order-management groups. In an internal benchmarking program, best-in-class functions are identified, and their benchmark metrics become the basis of performance targets for similar functions within the company. Although internal benchmarking can be easier than collecting external data from competitors, most large companies are extremely complex, with multiple regions and business units. If your company does not have common processes, information systems, and underlying data across business units, internal benchmarking can be a major undertaking. Even so, it s the right place to start. Once you ve agreed on what to measure and how to define the metrics, collecting internal benchmarking data is relatively simple. Since internal organizations operate within the same corporate structure, there s usually minimal controversy about whether or not the basis of comparison is relevant. You should monitor your internal benchmarking effort closely on rare occasions, internal benchmarking can result in unproductive competition among business units or divisions. In extreme cases, business units may try to game the system to deliver winning results. If you see this, you will need to take immediate action to reset behavior. Once you ve generated your internal metrics and collected relevant benchmarking data, the next step is external benchmarking comparing your company s performance against that of other companies. You may choose to limit your comparison to companies within your own industry or extend your comparison to companies in other industries. Some benchmarking services offer custom comparison populations, where you can select a specific set of companies that share similar business characteristics, such as product complexity, geographic distribution, or manufacturing strategy. Analyze the performance gaps between your company and your comparison group. Pay special attention to strategically critical areas that have subpar performance. Follow this gap analysis by investigating the causes of any performance issues and assessing the business practice changes that will be necessary to close the gaps. To do this effectively, make sure to benchmark both qualitative and quantitative data. Qualitative data include an assessment of the business practices that the comparison population uses to run its businesses. External benchmarking can be a very powerful tool when making the business case for supply chain transformation because an external
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