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:

  1. Camp, Robert C., Benchmarking: The Search for Industry Best Practices That Lead to Superior Performance, Milwaukee, WI: Quality Press, 1989.
  2. Liebfried, Kathleen and McNair, C. J., Benchmarking: A Tool for Continuous improvement, New York: Harper Business, 1992.
  3. Miller, Jeffrey G., DeMeyer, Arnoud, and Nakane, Jinichiro, Benchmarking Global Manufacturing, Homewood, IL: BusinessOne Irwin, 1992.

Articles:

  1. Budding, Jeanette, "Comparing for Improvement", NAPM Insights, November 1992, pp. 38-39.
  2. Budding, Jeanette, "Prices: A Look at Lengths and Practices," NAPM Insights, September 1992, pp
  3. Frazelle, Edward H., "Benchmarking Warehouse Performance," NAPM Insights, April 1993, pp. 6-7.
  4. Lester, Marilyn, -Taking Benchmarking a Step Further," NAPM Insights, July 1991, pp. 22-23.
  5. Seaman, Debra S., "A 'How-to' Guide to Using Benchmarking," NAPM Insights, March 1992, p. 8.

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