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Benchmarking of Purchasing: How to Reach "Best Practice" in Supply

Author(s):

Dr. Dr. habil. Ulli Arnold
Dr. Dr. habil. Ulli Arnold, Professor of Business-to-Business Marketing and Supply Management, University of Stuttgart, Germany 70174, +49/711/121-3161, ulli.arnold@po.uni-stuttgart.de
Eberhard E. Scheuing, Ph.D., C.P.M., A.P.P.
Eberhard E. Scheuing, Ph.D., C.P.M., A.P.P., NAPM Professor of Purchasing and Supply Leadership, t. John's University, New York 11439, 718/990-6161, ulli.arnold@po.uni-stuttgart.de

83rd Annual International Conference Proceedings - 1998 

Abstract. Although benchmarking is one of the most discussed management tools, it is still not used as a strategic tool in supply management. Benchmarking is often regarded as a kind of comparison. In fact, it is much more: It helps to improve purchasing processes in a powerful way. Therefore, we concentrate on the concept of supply process benchmarking. This kind of benchmarking is connected (a) with the purchasing process itself, and (b) with the relationship between the purchasing process and other business processes.

Basics of Benchmarking: The 8i-Model. A benchmark is a standard to reach or use as a basis of measurement. The benchmarking process enables business functions to establish continuous improvement for gaining competitive advantage. The improvement standard is oriented at world class performance. Camp (1989) was first to propose benchmarking as a management tool at Xerox. Purchasing is one of the business functions which still do not realize the benefits of strategic benchmarking. Today, supply management is a core competency in enterprises with lean structures. By outsourcing non-core-activities, manufacturing penetration in industrial companies goes below 50%, in specific industries even below 20%. To deal with these new opportunities, purchasing must not only become better, it must establish best solutions. Best practices refer (1) to the purchasing process itself, and (2) to the connection between the purchasing process and other business processes, like engineering or marketing. Benchmarking is a way to measure one's own performance and to identify best practices in other firms.

But benchmarking is much more than just comparing. It is a strategic approach to implementing best practices by analyzing a company's own processes, identifying benchmarking partners, adopting appropriate tools and methods, and improving practices continuously. Other business functions, like manufacturing and engineering, still use this powerful tool to improve their processes in a fundamental way. Now, business results depend more and more on supply processes and their performance. Therefore, buyers must be able to improve process quality continuously.

We do not propose to focus on a number of metrics to compare things that are not comparable. Best practices for procurement processes are not limited to internal purchasing structures. To achieve optimum overall performance, internal supply processes must be connected and integrated with other internal processes, such as engineering processes, and with external processes, especially supplier processes.

The major tool for adopting supply process benchmarking is the 8i-model. It includes eight steps from identification to intensifying (see Figure 1).

Figure 1 is not available in text-only version of this article.

Figure 1: 8i model

Phase 1 in the Benchmarking Process: Identification ("i1"). Phase 1 evaluates the status quo of the purchasing function within the company. Its main goal is to answer the questions: (1) What are we doing right now, and (2) how are we doing it today. For benchmarking supply processes, the first step is to define the major purchasing processes in detail. Within the framework of a benchmarking project conducted with five industrial companies, we were able to define eight master processes and two sub-processes (see Table 1).

Table 1 is not available in text-only version of this article.

The master processes should reflect more than 80% of total purchasing manpower to gain substantive results in the following phases. In our case, the companies A to E spend 85% to 100% of their time on the master processes.

Phase 2 in the Benchmarking Process: Information ("i2"). Information is the core of benchmarking. Without information, benchmarking would not be a worthwhile strategic management tool. In the information phase, all benchmarking partners compare their cost situations. They use a cost structure analysis which gives the cost per cost driver for each master process. The starting points are the total costs for the procurement function. These costs are mainly staff costs for buyers, supply managers etc. In the case of our benchmarking project, staff costs are dominating (see Table 2). To reach best practice, supply process benchmarking should concentrate on all staff intensive processes.

Table 2: Cost structure

Cost pattern: Company:A B C D E
Overhead 13% 5% 15% 5% 9%
Secondary costs 9% 4% 6% 17% 3%
Primary costs 78% 91% 79% 78% 88%
(staff costs out of primary c.) (93%) (94%) (92%) (88%) (93%)
Total 100% 100% 100% 100% 100%

After analyzing the cost structure, one needs to obtain information about the master process costs of all benchmarking partners. Table 3 shows the results for our benchmarking project.

Table 3: Costs of master processes

Table 3 is not available in text-only version of this article.

Major cost differences have to be analyzed in detail. But it is not enough to measure the cost differences, it is also necessary to ask the question why. Process analysis is the only way to determine the best practices established by the benchmarking partners.

Phase 3 in the Benchmarking Process: Illustration ("i3"). Changes are rarely popular. To show the necessity of change as a result of the benchmarking process, staff and management must be informed in a convincing manner. An example for such an illustration tool is the "cockpit information system" which is used by Bosch Telecom (see Figure 2). The cockpit includes all major metrics like quality or cost and shows the historical situation (e.g. last year) and the actual situation as well as the best practice number derived from benchmarking results.


Figure 2: The benchmarking "cockpit." Figure 2 is not available in text-only version of this article.

Phase 4 in the Benchmarking Process: Integration ("i4"). The next step after identifying and illustrating one's own situation compared to the best practice benchmarking partner is to integrate best practices. Supply management has to esamine best practice solutions regarding the possibility of transferring them into the own purchasing function. This includes analyzing specifics of the best practice solution, its transferability, and the adaptability of the own processes and structures (see Figure 3).

Figure 3: Integration of best practice solutions. Figure not available in text-only version of this article.

Phase 5 in the Benchmarking Process: Investing ("i5"). Adapting best practice methods often requires additional investments. For example, the best practice company was able to reduce the costs of a master process in a significant way by establishing an electronic purchasing system. This system is able to communicate via EDI with major suppliers. Building such a system requires a major investment. But this investment pays off by lowering direct material costs. We found that companies without best practices in supply often look at the purchasing function as a form of overhead. To the contrary, strategic supply management creates value. It is able to lower total cost of ownership (TCO) if it is powerful enough. To reach this power, management has to invest in purchasing (see Figure 4).

Figure 4: Total cost of ownership approach. Figure not available in text-only version of this article.

Phase 6 in the Benchmarking Process: Installation ("i6"). Adoption of best practices requires a smoothly functioning electronic infrastructure. Purchasing becomes more and more of an "e-supply" function with internal and external computer systems. E-supply is based on client/server-purchasing systems with EDI-connections, intra- and extranet, and web-based electronic marketplaces. This allows supply management to gain relief from routine transactions and concentrate on strategic purchasing tasks.

Phase 7 in the Benchmarking Process: Implementation ("i7"). As a company evolves from an inflexible hierarchy to flexible networks of independent centers, purchasing must implement best practices. Substantially based in the purchasing competency module, today's purchasers can and must deploy their talents to upgrade their team's role from that of a cost center to a center of excellence which serves as a prime source of their organization's competitive advantage in the marketplace (see Figure 5).


Figure 5: Purchasing as a center of excellence. Figure not available in text-only version of this article.

Centers of Excellence are units that serve as sources of lasting competitive advantage and future growth of an organization (Arnold, Scheuing 1998). Purchasing is one of these centers establishing best practices in supply chain management.

Phase 8 in the Benchmarking Process: Intensifying ("i8"). Establishing best practices is not short-term oriented. Rather, it is a process of continuous improvement. As shown in Figure 1, the 8i model refers to a circle, starting again at i1 for a new "round" of benchmarking. Sometimes it makes sense to keep the benchmarking partners, but often there are new companies that establish best practices which define the new industrial standard.

REFERENCES

Camp, R. C. (1989). Benchmarking. Milwaukee/Wisconsin 1989.

Arnold, U., Scheuing, E. E. (1998). Purchasers as Change Agents: Supply Leadership in the "Borderless Organization". International Purchasing Roundup. A Collection of Presentations from NAPM's 83rd Annual International Purchasing Conference. Edited by Paul Novak and Terri Tracey. Tempe/AZ: NAPM 1998.


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