Identifying areas of improvement in a supply chain and making efforts to tackle them is a continuous process. One of the methods to do this is through a series of benchmarking tests, which allows the organization to identify those areas and prioritize the effort. These areas can be productivity, inventory positioning, inventory efficiency, supplier performance, and supply chain risk.
The Necessity of Benchmarking
Benchmarking is an assessment process, which measures the performance of an organization’s supply chain by taking into consideration quantity, value and time. For instance, the efficiency of the inventory can be ascertained by identifying your current position in the efficiency frontier. Benchmarking thus gives organizations a tangible measure of efficiency of different processes in the supply chain.
Benchmarking Types
The major benchmarking types are performance, financial, functional, strategic, and product benchmarking. Every benchmarking project of an organization might not incorporate all these benchmarks and may use them in combination. Supply chain benchmarks are categorized into two, which are explained in some detail below:
Internal Benchmarking
Internal benchmarking allows an organization with more than one facility with the same supply chain processes to contrast and compare the ways in which processes are performed in each facility. The benchmarking process can look at a number of operations that are performed at each facility. It can then compare how they are performed and what improvements can be made by evaluating the benchmarking results. Here are six simple steps to start an internal benchmarking process
1) Identify the process to benchmark. For example, production, warehouse management, receiving, shipping, or quality controls.
2) Managers of the process identified in step one agree to a set of key performance indicators (KPI) such as changeover time , receiving time standard deviation, shipping accuracy, average lead time for quality test, or fill rate. In this step, managers also need to agree to a standard way to calculate the KPIs to avoid confusion down the road.
3) Collect the KPIs agreed to in step two and compare the results.
4) Organize a collaborated effort to understand the reason why one process is better than the other based on the results from step three. In many cases, a manager from one of the processes will visit the other process with the goal of discovering a better way to do things.
5) Prioritize the findings and turn them into improvement projects to adopting the best practices.
6) Execute the project and realize the results.
While the benchmarking steps above will yield some improvement, the major improvement can be found when you benchmark your current process against the theoretical optimum. By developing an end-to-end supply chain optimization model, you will be able to identify the efficient frontier and benchmark your current position relative to it. In practice, the results from benchmarking using theoretical optimum on average reduce total inventory by 25% to 40%.
External Benchmarking
If your company is already performing internal benchmarking and wants to look at other ways through which processes can be improved, it can look at external benchmarking. Unlike internal benchmarking, where benchmarking happens at the tactical level of the business, external benchmarking is used to compare a company’s performance at a strategic level.
In external benchmarking, you can compare the strategic KPIs such as inventory turnover, revenue, profit, or any other industrial specific KPIs. Companies that do not have supply chain processes that are as good as their competitors naturally want to know the reasons behind it. Unlike internal benchmarking, your competitor is unlikely to share their wisdom on how to improve inventory turnover, reduce total landed cost, or any other industry specific KPI.
In this case, the best approach is to employ research and consulting firms to perform performance studies to know what you are doing wrong (or what the competitors are doing right). This lets the company identify the areas of weakness and it can then work at coming up with a plan to improve the situation.
Click on the icons below to download a case study on end-to-end optimization from OPS Rules or to download the first chapter of Dr. Simchi-Levi’s book, Operations Rules.
Written by Billy Hou, a consultant at OPS Rules Management Consultants