One of the most common supply chain inquiries we receive at AMR Research is the request for benchmarking data. Yet while they desperately want data, companies often struggle with how to use it effectively: What constitutes valid benchmark data, how to compare their own data to the benchmark data, what conclusions they should draw from the data, and how to translate the conclusions into prioritized projects to achieve company goals. For many companies, the search for benchmarking data becomes the end itself rather than the means to an end.
Measuring performance and periodically benchmarking it are critical components to the ability to excel over time. The best companies do this right. While doing all of this is important, however, good processes and governance will only get you halfway there. Most important in this effort is the clarity that you are benchmarking to improve end-to-end supply chain performance in the context of company goals and making it an ongoing process to drive continuous improvement.
To help companies navigate the benchmarking arena effectively, here are seven factors for success:
Keep Your Eye on the End-to-End Goal
While companies benchmark for many reasons, the ultimate goal should be to improve the end-to-end performance of the supply chain rather than any one particular aspect of it. The importance of doing a benchmark for the right reasons cannot be overstated. The companies most successful at benchmarking came away with information they often didn’t expect going into the process: whether and how well they were executing against their business strategy and, if not, how to execute better.
Companies typically do a benchmark to baseline and compare to the competition, look for industry best practices, and set performance targets, to name a few reasons. Often, however, the stated goals are only part of the story. An interesting variety of pressures tend to drive benchmark initiatives.
Companies often start the process thinking they’ll find out if they’re holding too much inventory, or if their costs are too high, or how they’re doing on-demand forecasting. But the real value of a benchmark isn’t in the individual numbers themselves, and it’s not in the comparison of each metric, in isolation, against some industry average. The value lies in the totality of the metrics as a group: How does each metric interrelate with the others? What do the interdependencies tell you about the tradeoffs you’re making? Are those tradeoffs consistent with your business strategy? Are there levers you can pull so you don’t have to make those tradeoffs but can still achieve your goals?
Comparisons of one metric or another that are done in a vacuum and seek some ideal number are particularly dangerous. For example, a company may look for the lowest transportation cost and then use that as its own target. But when a company is particularly good on a certain metric, it’s often making a tradeoff somewhere else allowing it to achieve that.
The company with the lowest transportation cost, for example, also may have the longest transportation time and the highest rate of damage-in-transit, reflecting poor service from the carriers.
Select the Right Metrics
Clarity on the purpose of the benchmark will help reveal the right metrics — not too many but not too few — that are external in nature and offer an end-to-end view of your supply chain and where you’re making tradeoffs.
For quantitative benchmarking, the metrics portfolio should be small, cover the end-to-end supply chain, and use calculations based on industry standards, such as the SCOR model. Focus only on the metrics that matter and can be managed, and select outside-in metrics that measure and translate your performance as your customer experiences it. Mapping your end-to-end supply chain metrics against a model such as the Hierarchy of Supply Chain Metrics can help you ensure you have enough metrics to get a good end-to-end view of the supply.
Identifying the enablers in use and mapping them to the metrics is also important. Companies make large investments in enabling technology and best practices, such as sales and operations planning, forecasting tools, vendor-managed inventory, and e-commerce. It’s useful to know whether you are getting the benefits for which these tools were implemented.
For example, companies use demand-planning software to help achieve better forecast accuracy. Use the benchmark to point you to whether the technology and best practices you’ve implemented provide the benefits you anticipated and where you might focus efforts to further improve the use of the technology or practices.
Define a Feasible Scope
Recognizing that you have multiple supply chains, clearly define a scope for the benchmark that allows you to aggregate your supply chain operations at a level that is neither too high nor too granular to be meaningful.
Most companies have multiple supply chains operating within their total global supply chain, and the definition of what constitutes a supply chain is often independent of a company’s organizational structure. For example, consider a food and beverage manufacturer in which one of the divisions sells dry and refrigerated goods. We would expect transportation costs for refrigerated goods to be higher than for dry goods; combining these into one set of numbers would aggregate data to a meaningless level.
To define the scope, think at the metric level. Identify the products, channels and geographies for which data can reasonably be combined to ensure a level of aggregation that is not too large (where you’ve combined such disparate performance that the result will be meaningless) or too small (where you’re so focused that it’s not useful).
Compare, Based on Supply Chain Characteristics, Not Products
Identify the characteristics of the scoped supply chain and look for a comparison group of like supply chains, not like products.
Once the scope has been defined with clean and clear boundaries, look for a peer group to compare against. The selected peer group could come from other divisions within your organization or from an external comparison.
To define a valid external comparison, look for supply chains with similar characteristics, such as the nature of the distribution channel, the nature of the supply channel or the manufacturing strategy (make-to-order vs. make-to-stock, for example). Benchmarking against supply chains that make the same product is less important, except to the extent that the product affects the expected outcome of the metrics, as noted above in the refrigerated vs. dry goods example.
At the same time, look for comparisons in which different business decisions were made, as this will help determine how well a strategy is achieving its goals. For example, a company with predominantly outsourced manufacturing can compare against supply chains with in-house manufacturing as long as the metrics are managed carefully to get a true comparison.
Get the Process Right
Put the right resources in place with clearly defined roles and responsibilities to collect data, and be realistic about the time frame.
Conducting a benchmark must be managed as a project, with the right roles and responsibilities in addition to a well-defined process and timeline.
A benchmark project needs a sponsor to lead the project and a coordinator to manage the data collection effort. Typically, the sponsor is the head of the supply chain or related organization. The benchmark coordinator is responsible for pulling together the necessary people, data, tasks and analysis in a structured and systemic manner. The coordinator usually calls on resources from different parts of the organization to provide data specific to those areas.
Having the right person as coordinator is critical to success. The coordinator must be at the right level in the organization with enough influence and be respected enough by peers to be able to mobilize the effort. This person also must have a deep enough knowledge of the supply chain to gather the right data and validate it.
The benchmarking process involves several important steps. Collection and validation of the data, typically the longest part of the process, can present unexpected challenges. Having the right systems and tools to enable collection of accurate data is an advantage that provides repeatability. Most large organizations have disparate systems, processes and interpretations of data, and data gathering is a one-off, tedious manual exercise. While this is a business-owned and business-led initiative, IT may need to be involved to work out how to coordinate data or tools across systems.
Even more challenging can be applying and interpreting the metric definitions in a way that ensures you have comparable data to the peer group. Even with a clearly defined calculation, differences from company to company mean there is still plenty of room for interpretation. For example, in calculating a stock-out, are back orders included? What is the right definition of on-time delivery given different customers have different windows of acceptability? Should you include inbound transportation costs in your direct material costs or net them out?
The time and effort required to collect data cannot be underestimated. Success here is tied closely to having the right coordinator. In AMR’s benchmarking studies, companies occasionally were able to collect the data for one North American end-to-end supply chain in four to six weeks. More often, it took eight to 12 weeks, including numerous discussions, to clarify the metric definitions.
Turn the Data Into Action
Look at the interdependencies between metrics rather than comparing each metric to the benchmark number. Use the interdependencies to identify tradeoffs in the supply chain and the levers you can pull to fix them, prioritize the results into actionable projects and get buy-in to ensure optimal execution of the improvement projects.
Often the most difficult step in the process is turning the data into action. The data itself can be overwhelming and unclear, and different people will have legitimately different interpretations of what it is telling them. In addition, the results can highlight subpar areas of performance, perhaps resulting in resistance and defensiveness. As noted earlier, the scope of an end-to-end supply chain by definition often transcends organizational boundaries and business owners, bringing with it internal politics and sometimes conflicting agendas.
How the data will be used is also a factor, and closely tied to the overall culture of a company. People tend to be defensive if they believe the results will be used to blame, highlight inadequacies or reduce financial incentives. In companies that make it clear the results will be used for continuous improvement and to identify problem areas in the entire system rather than in individuals, people tend to embrace the results of a benchmark and look for ways to apply it.
This article is adapted from an AMR Research report entitled “Benchmark Your Supply Chain: Seven Factors for Success.” Debra Hofman is research vice president in the AMR Research Supply Chain research group. Contact her at firstname.lastname@example.org. Janet Barrett is a managing vice president and can be contacted at email@example.com.