Benchmarking and Purchasing
Author(s):
Lee Buddress, C.P.M.
Lee Buddress, C.P.M., Assistant Professor, Portland State University, P.O. Box 751, Portland, OR 97207 503-725-4769.
Alan R. Raedels, C.P.M.
Alan R. Raedels, C.P.M., Professor, Portland State University, P.O. Box 751, Portland, OR 97207 503-725-4769
79th Annual International Conference Proceedings - 1994 - Atlanta, GA
INTRODUCTION
Benchmarking has received much attention in recent years. This paper
looks first at the definition of benchmarking, its purposes, roles and uses.
Next, the benchmarking process is reviewed followed by a look at internal and
external benchmarking. Lastly, the benchmarking process is applied to the
purchasing function followed with a discussion of the CAPS Purchasing
Performance Benchmarks.
WHAT IS BENCHMARKING?
Benchmarking is an external focus on internal activities, functions, or
operations to achieve continuous improvement. One objective of benchmarking
is to support the value creation process. This provides specific performance
targets for improvement instead of relying on intuitive feel. A second
objective is to prioritize the opportunities for improvement. Using more
objective data from external sources allows the firm to better assess and
prioritize its operations. A third objective is to aid in balancing
performance against customer expectations thereby providing another
perspective. A fourth objective is to identify where major changes are
necessary or possible thus helping to provide the incentive necessary to
leapfrog the cycle of change.
The targets of benchmarking include strategic issues, roles of
operations, processes, and effectiveness and efficiency of operations.
Benchmarking of strategic issues provides a means to evaluate the firm's
performance relative to its competitors and others. Benchmarking of roles
allows the firm to compare what a person or function does for the organization
as compared to other companies. In other words, is the firm doing the right
things? Benchmarking of processes allows the firm to compare how it is
performing various activities compared to others or in other words, is the
firm doing things right? Benchmarking of effectiveness and efficiency allows
the firm to see how its performance rates against others.
Benchmarking can be used in several contexts. Clearly when an
organization is starting a quality program, such as Total Quality Management,
benchmarking is a useful tool to determine the firm's current performance
level versus the performance level of other organizations. Another time to
begin benchmarking is when focusing on operations improvements as the
benchmarks will provide a basis for comparison with other organizations.
Other situations which lend themselves to the application of benchmarks are
changes brought about by new management, new operations or ventures or a
competitive crisis.
One reason for benchmarking is to indicate to employees and customers
that management is oriented to looking for opportunities to improve existing
processes, rather than waiting for problems to come knocking. A second reason
for benchmarking is that it establishes goals and measures that reflect an
external focus and therefore are not perceived as arbitrary targets not based
on reality. Lastly, benchmarks help promote teamwork and process improvements
based on competitive need and on objective data.
THE BENCHMARKING PROCESS
There are six steps in the benchmarking process: identifying the issues,
collecting data on current processes, collecting external data, analysis of
the data, development of improvements and implementation of the improvements.
Identifying the issues defines the benchmark area by identifying potential
drivers and external organizations to benchmark. Particular areas to look at
include customer needs, performance gaps, areas of potential competitive
advantage or areas which are major causes of problems.
Collecting data on the process means developing process maps and
collecting performance data on those processes. A firm cannot evaluate its
improvement or performance relative to other organizations if it does not have
information on current performance levels.
Once the internal processes are documented, the process of collecting
data from other organizations begins. Other organizations could include
companies in other industries, competitors or other divisions of the same
company. A questionnaire is developed to obtain the desired information and
then the information is collected using either mail surveys or personal or
phone interviews.
Once the data is collected, the performance drivers need to be
identified. Performance drivers are factors which determine the firm's
ability to perform. Inherent drivers are factors in the environment which
affect outcomes, but are not changeable, at least in the short-term, by the
firm. An example would be public policy. Structural drivers are factors
which are embedded in the organization's design, structure and location.
These are the strategies and systems set in place by management. Performance
related drivers are the result of productive activity such as quality or
delivery.
Once the data has been analyzed, ways to improve the process must be
developed. Here the normal problem solving process is applied to identify
causes of and potential solutions to the problem. Lastly, the improvements
are implemented and the results measured.
INTERNAL BENCHMARKING
Internal benchmarking is the process of measuring the performance of
internal processes. The purpose is to improve existing performance by
detailing the existing process, identifying areas where performance is not up
to desired levels, establish common practices and procedures within the
organization, open the lines of communication within the organization and
provide data for prioritizing improvement opportunities. It also provides the
first step for external benchmarking.
The benefits of internal benchmarking are many. First, by exposing the
existing process to scrutiny it helps overcome the "not created here syndrome"
common in many companies. Second, it leads to the identification of the true
root causes of problems avoiding treatment of symptoms which never truly
alleviate the problem. Third, it identifies existing solutions to problems
which are present in the organization reducing time spent reinventing the
wheel.
EXTERNAL BENCHMARKING
There are three types of external benchmarking: competitive, industry,
and best-in-class. Competitive benchmarking focuses on key production methods
and characteristics which provide competitive advantage. The concern with
competitive benchmarking is that it may violate antitrust regulations. The
antitrust issues can be dealt with by not asking for price information or data
on future plans and focusing on the processes. Knowledge of practices does
not mean collusion on prices, but may actually increase competitiveness. It
is extremely important to involve the firm's legal counsel before undertaking
competitive benchmarking.
Industry benchmarking is used to establish performance standards and to
detect trends. The data is collected with the identity of the respondents
being kept anonymous thus preventing any antitrust issues. Ideally the
results should be shared with all participants in the study.
Best-in-class benchmarking is based on the assumption that processes are
similar across industries. Therefore, a firm should find the firm that
performs that process "the best" and study it. By going outside the industry,
antitrust issues are avoided.
PURCHASING BENCHMARKING
If we apply the benchmarking process to purchasing, we first must
identify the issues. The first question to ask is, "What does purchasing have
to do well for the firm to succeed?" Next, purchasing must identify the
customer's, both internal and external to the firm, needs. Research by
Buddress and Raedels indicates that customers value delivery, quality, and
service the most but most purchasing departments and buyers are evaluated
based on cost/price issues.
Next, data is collected on the current processes. Purchasing needs to
identify who is involved in each type of procurement process, why are they
involved, what role do they play in the process and why are they doing it.
Tables 1 and 2 present some examples of measures a purchasing department might
consider on both the quantitative and qualitative dimensions.
Third, is the collection of external data. A decision needs to be made
on whether to look at industry data, competitor data, or go after
best-in-class examples. one major source of industry information can be the
Center for Advanced Purchasing Studies (CAPS) Purchasing Performance
Benchmarks.
The fourth step in the process is to analyze the data to draw
conclusions about how your purchasing department rates relative to others.
Steps five and six, developing and implementing improvements will follow but
will take time as changing purchasing processes impacts a large number of
individuals which will slow the organizations ability to change.
Table 1
Example Measures - Quantitative
Cost oriented
- Cost per good unit produced
- Return on assets
Productivity
- Total output divided by total resource inputs
- Value added per employee
Delivery
- on-time delivery percentage
- Order processing time
- Component lead times
Quality
- Billing error rates
- Yield rates
- Incoming supplier defects (ppm)
- Warranty claims
Service
- Service response time
- Parts availability when requested
Table 2
Example Measures - Qualitative
Product complexity
- Number of parts
- Number of product options
Capacity
- Number of bottlenecks
- Materials velocity
Customer satisfaction
- Satisfaction index
- Survey results
- Ease of use
Marketing/distribution
- Number of warehouses
- Number of new products
Paperwork
- Number of days to process an order
- Average number of contacts per order filled
- Days to close general ledger/accounts
CAPS BENCHMARKS
The CAPS Purchasing Performance Benchmarks are created using a six step
process. First, a committee of industry executives is formed to determine
what specific data should be collected. Second, data items are specifically
defined through an iterative process by the committee. Third, firms are
selected to participate in the study and are surveyed. Fourth, CAPS
summarizes the data. Fifth, the results are sent to participants for their
comments. Lastly, the results are released publicly. Table 3 lists the
industry for which CAPS has performed one or more benchmarking studies.
Table 3
Available CAPS Benchmarking Reports
- Petroleum
- Food manufacturing
- Food service
- Semiconductor
- Banking
- Telecommunications services
- Chemical
- Carbon steel
- Pharmaceutical
- Computer and telecommunications equipment
- Transportation
- Aerospace/defense contracting
- Construction/engineering
- Appliance
- Paper
- Nonferrous metals
- Machinery
SUMMARY
The primary focus of benchmarking is continuous improvement. In order
to effectively use benchmarking, a firm must begin by benchmarking its
internal processes, identifying the critical success factors and their
appropriate measures. Second, users of benchmarking must realize that it is a
continuous process. Your firm isn't stagnant and neither is the competition.
By continually monitoring what others are doing, benchmarking provides a
continuing incentive for improving the firm's processes. Lastly, purchasing
can benefit from benchmarking both in terms of internal processes and
suppliers. Start today!
BIBLIOGRAPHY
Books:
- Camp, Robert C., Benchmarking: The Search for Industry Best Practices That
Lead to Superior Performance, Milwaukee, WI: Quality Press, 1989.
- Liebfried, Kathleen and McNair, C. J., Benchmarking: A Tool for Continuous
improvement, New York: Harper Business, 1992.
- Miller, Jeffrey G., DeMeyer, Arnoud, and Nakane, Jinichiro, Benchmarking
Global Manufacturing, Homewood, IL: BusinessOne
Irwin, 1992.
Articles:
- Budding, Jeanette, "Comparing for Improvement", NAPM Insights, November 1992, pp. 38-39.
- Budding, Jeanette, "Prices: A Look at Lengths and Practices," NAPM Insights,
September 1992, pp
- Frazelle, Edward H., "Benchmarking Warehouse Performance," NAPM Insights, April 1993, pp. 6-7.
- Lester, Marilyn, -Taking Benchmarking a Step Further," NAPM Insights, July
1991, pp. 22-23.
- Seaman, Debra S., "A 'How-to' Guide to Using Benchmarking," NAPM Insights, March 1992, p. 8.
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