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Benchmarking

An important goal of benchmarking is to provide information useful for developing solutions to improve performance. There are right ways and wrong ways to undertake an external benchmarking study. These are applicable to benchmarking done either internally or externally. Benchmarking studies identify the goals and objectives as part of the planning phase. The first step in the process is to clearly establish the goals, including the information that must be collected to answer the relevant benchmarking questions. The plan will include a schedule, the resources, and the specific activities that need to be completed to accomplish the deliverables. A second important question is where the benchmarking information will be collected and from whom. A third consideration is who will collect the information and in what form. After the benchmarking information has been collected, it is important to determine the analytical tools and methods required to answer questions. The team must also consider how the benchmarking information will be communicated and how it will be incorporated to improve internal operations. It is important to bring together a cross-functional team to undertake the benchmarking activities that have the required analytical skills to successfully quantify their analysis.

The team should align the benchmarking process to the project’s goals and objectives in the project charter. The project charter acts as a guide as to where the benchmarking study will begin and end. After the team has aligned to the project charter and its key milestones, which should be broken down into key activities and work tasks that form the basis for the benchmarking plan. Assignments are made to complete the planned work tasks. The team should be trained to collect the benchmarking data in a standardized manner to ensure the analysis can be accurately extrapolated across the various internal processes that are part of the study.

Internal benchmarking is done with similar organizational functions in the same organization. An example would be comparing key performance metrics across several distribution centers in a logistics network, such as inventory turnover by distribution center. If the distribution centers have similar operations, products, and sales volumes, then comparison of turnover ratios would be useful if poorer performing distribution centers could learn from the higher performing ones. But if some have different operational designs or serve differ market segments, then an internal benchmarking comparison might not be useful.

If this is a process analysis, then a process map is also needed. It should include metrics related to time, cost, and quality within the benchmarking scope. This will create a clear understanding of work tasks, operational definitions, work sequences, and methods as well as inspection procedures. It is also important to walk through the process to ensure the required information has been accurately collected for analysis from the people doing the work. It is important that the correct analysis is conducted to reach unambiguous conclusions. As an example, when we find one distribution center is better than the others relative to inventory turnover, we need to support this statement with why it is better. What is operationally different between the best and the others? To summarize, internal and external benchmarking are useful methods to identify solutions for effectively improving products, processes, and other systems.

As a first step, organizations should internally benchmark themselves against the best of the processes. The best process may be defined by the distribution center with the highest turnover ratio. This best performance is an entitlement level. Entitlement is a concept used to understand how much a process can be improved without major redesign. It is not unreasonable to ask why all distribution centers do not have similarly high turnover ratios. What is the best distribution center doing that the others are not? An internal benchmarking study should be designed to gain information for how to move poorly performing processes to better performing ones. In other words, what can be reasonably accomplished through internal improvements given current constraints (i.e., design limitations relative to products, process, and other systems)?

External benchmarking compares organizations in the same industry sector (i.e., direct competitors or competitors in completely different sectors but doing similar functions). Competitive benchmarking is conducted through industry associations or third-party research organizations. In these studies, it is important to ensure an “apples-to-apples” comparison between the products, services, and other systems being compared to each other. This requires that the organizations being benchmarked have similar processes.

When benchmarking is conducted with organizations outside an industry, the benchmarking organization may be able to gain insights into how radical changes to their product, services, or supporting processes might improve internal operating performance. As an example, Federal Express Corporation (FedEx) evaluated the Internet technology explosion of the mid-1990s and began to offer transfer of information through e-mail. They partially redefined themselves as an information courier. Also, United Parcel Service (UPS) and FedEx have formed associations with other organizations to create seamlessly integrated processes. Examples include Kinko’s, Staples, and other consumer sales outlets where customers can drop off packages or send documents via e-mail with electronic signatures. External benchmarking enabled UPS and FedEx to expand market share beyond their original service offerings. In summary, the important elements of a benchmarking study are to ensure relevant information is collected, analyzed, and will be useful for making improvements.

 
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