Performance Benchmarking: A Comparison with Excellence

An ongoing approach for establishing performance standards, processes, measurements, and objectives
is benchmarking. This process is not exclusive to purchasing or supply chain practices, but rather, it is
utilized by corporate- and functional-level executives and managers. Benchmarking also plays a crucial
role when setting purchasing and supply chain management performance objectives and action plans.
Before delving into specific benchmarking applications, it is imperative to gain a comprehensive
understanding of the benchmarking process.

**Benchmarking Overview**

Benchmarking entails the continuous measurement of products, services, processes, activities, and
practices against a firm's most successful competitors or those companies recognized as industry or
functional leaders. Formally, the benchmarking process involves measuring performance against that of
best-in-class companies, understanding how these best-in-class entities achieve their performance
levels, and using this information as the foundation for establishing a company's performance targets,
strategies, and action plans.

Benchmarking is not limited to comparisons with competitors; firms often rely on non-competitor
comparisons as a source of information, especially when benchmarking a process or functional activity
common to firms across different industries, such as supply chain management. In such cases, it is
usually more accessible to obtain benchmarking data and information from cooperative non-
competitors.

Benchmarking is essential for firms that do not lead their industry. Unfortunately, many U.S. firms did
not recognize the need for performance benchmarking until foreign competitors captured a significant
share of the global market. Even industry leaders should practice performance benchmarking regularly.
Failure to understand their competitors' actions and capabilities could result in a loss of market
leadership.

**Types of Benchmarking**

There are three fundamental types of performance benchmarking. The first type is strategic
benchmarking, which involves a comparison of one firm's market strategies against those of others.
Strategic benchmarking often focuses on leading competitors to gain a profound understanding of their
market strategies. Armed with this knowledge, a firm can develop strategies and plans to compete
effectively or preempt their rivals.
The second type of benchmarking is operational benchmarking, a process typically followed by the
purchasing function when conducting benchmarking comparisons. Operational benchmarking
concentrates on different aspects of functional activity and identifies methods to achieve best-in-class
performance. Selecting the function and activities within that function to benchmark is crucial for the
success of operational benchmarking. Firms should benchmark functional activities that offer the
greatest long-term return.

The third type of benchmarking is support-activity benchmarking. During this process, support functions
within an organization demonstrate their cost-effectiveness compared to external providers of the same
support service or activity. Firms are increasingly using support-activity benchmarking to control internal
overhead and rising costs.

**Benchmarking Benefits**

Companies actively pursuing performance benchmarking hope to benefit in various ways. The
benchmarking process helps identify the best business or functional practices to include in a firm's
business plans, ultimately leading to performance improvement. Benchmarking can also alleviate
resistance to change by demonstrating what it takes to maintain corporate or functional leadership by
looking outside the organization. Additionally, benchmarking can serve as a source of market intelligence
and foster valuable professional contacts between firms.

**Benchmarking Critical Success Factors**

Several factors are critical to the success of benchmarking. Performance benchmarking must be
integrated into a firm's culture as a permanent part of the system that establishes goals, objectives, and
competitive strategies. Executive management's support for the process is essential.

A firm must commit to gathering necessary data, identifying the best-in-class company for an activity,
understanding why that company excels, and quantifying benchmarked performance measures. The
success of the benchmarking process relies on detailed and accurate benchmarked data and information
that becomes part of a firm's action plans and performance objectives.

Managers should embrace benchmarking as a continuous learning process from other companies, even
if it involves acknowledging a competitor's way of doing business. To overcome resistance, benchmarking
non-competitors' activities and performance is an option. However, strategic benchmarking still requires
comparisons against direct competitors.

**Information and Data Sources**

Benchmarking data sources include trade journals, business library resources, and the World Wide Web.
Trade journals and industry publications often feature firms distinguished in some way. If these sources
are insufficient, a firm can directly contact benchmark targets for additional information.

Industrywide conferences and professional seminars also serve as valuable sources of information,
particularly at the functional level. Leading firms often present at these meetings, offering insight into
the most highly regarded companies in specific business areas or practices.

Suppliers can be another source of information, with purchasers seeking their opinions on the best
companies for each benchmark performance area. Professional consultants or industry experts can also
help identify benchmarking candidates.

Ongoing major purchasing benchmarking initiatives conducted by organizations like CAPS Research
provide essential information, including specific industry-by-industry performance benchmarks and
leading-edge supply strategies. These findings are accessible through resources like Knowledge Central,
an online database sponsored by CAPS Research.

**The Benchmarking Process**

Robert Camp outlined five distinct phases before a firm can fully benefit from the performance
benchmarking process. Exhibit 19.6 on page 732 visually presents these five phases.

**1. Planning**

In this initial phase, a firm addresses issues such as selecting which products or functions to benchmark,
which companies to use as benchmarking targets (competitors, non-competitors, or both), and how to
identify data and information sources. Benchmarking plans should focus on process and methods rather
than solely on quantitative performance results. The process and methods underlie the quantitative end
results.
**2. Analysis**

Data and information collection and analysis take place during the second phase. The firm must
determine how and why the benchmarked company outperforms others. A variety of questions should
be asked to understand the benchmarked company's processes, methods, and activities thoroughly.

- In what product or functional areas is the benchmarked company better?

- Why is the benchmarked company better?

- How significant is the performance gap between the benchmarked company and our company?

- Can we incorporate the benchmarked company's best practices into our operating plans?

- Can we project future performance levels and rates of change?

**3. Integration**

Integration is the process of communicating and gaining acceptance of the benchmarking findings
throughout the organization. During this phase, management begins to establish operational targets and
functional goals based on the benchmarking findings.

**4. Action**

The action phase involves translating the benchmark findings into detailed action plans. This includes
designating personnel responsible for carrying out the plans, developing a schedule for updating plans
and objectives over time, and establishing a reporting system to communicate progress toward
benchmarking goals.

**5. Maturity**

A firm reaches maturity when benchmarking becomes an accepted process for establishing performance
plans and objectives. Benchmarking maturity is also evident when continuous performance
improvement results directly from the benchmarking process.
In conclusion, a formal process like benchmarking is essential for establishing performance targets and
action plans with an external focus. Without external comparisons, organizations may lose sight of best
practices and what their competition is doing. Purchasing and supply chain managers must embrace
benchmarking when setting goals, objectives, and measures that represent best-in-class performance.