BENCHMARKING

A Practical Guide for Smaller Manufacturers

Bench marking has made its way onto most lists of “Must Do Business Practices for Well-Managed Companies.” Customers – and even lenders – want to see “what you’re doing in Benchmarking.” The QS standards even explicitly require it.

But what exactly is Benchmarking? A scan of articles in the business and trade press supply some buzzwords and phrases that constitute a rough definition:

• “Best Practice”

• “Partnerships”

• “Performance Metrics”

• “Looking beyond your competition and your industry.”

That is, Benchmarking involves measuring your own performances on some thoughtfully selected metrics. It involves somehow finding companies that exemplify “best practice,” and measuring their performance. And it involves learning how these top companies do it – probably through plant visits or from carefully structured interviews. Typical success stories recount huge improvements due to emulating L.L Bean’s order management system, or incorporating Ford’s design-for-manufacturability concepts.

Unfortunately, replicating these success stories is not straightforward – especially for Small to Midsize Enterprises (SMEs). Indeed, we have seen many smaller firms plunge in gamely, only to get bogged down in the search for Best Practice partners.

The central culprits, in our view, are the standard Benchmarking “how-to” manuals. We find them poorly suited to smaller manufacturers. A variety of outlines and flowcharts have been used to describe the tasks in a benchmarking study. Typical among them is this seven-step process:

1. Determine what functions to benchmark

2. Define appropriate materials

3. Identify best practice companies

4. Measure own and best practice performance

5. Estimate performance gaps; set goals

6. Implement improvement plan

7. Monitor results

The problem isn’t with the task list itself; this is a useful and broadly applicable overview of what it means to benchmark.

Rather, what’s wrong with most benchmarking manuals is that they implicitly address a Fortune 100, corporate-level audience. They emphasize steps 4-7: the whys and hows of lining up plant visits, conducting interviews, platting charts, and gaining buy-in on implementation. Finding appropriate partners is assumed to be a straightforward matter of electronic literature searches, combined with structured networking in benchmarking circles.

In contrast, our experience suggests that it’s in steps 1-3 that smaller manufacturers need practical guidance on. With little prior knowledge of how they compare, they are unsure in which areas they should focus their benchmarking efforts. Standard searches for best practice operations yield few ‘hits’, and almost none from among their smaller-plant peers. This leaves managers to mind their personal contacts, with no way to validate whether the firms they find are truly best practice operations. The all-too-common result? The exchange of mediocrity on a poorly defined topic.

We suggest a three-step approach to launching your benchmarking effort.

Step 1 Define Value-add
Value-added is defined as sales less the cost of any purchased parts, materials and services. It measures the market value of the work done at the plant. We nominate Value-Added per Employee for four reasons:

1. It measures labor productivity, a fundamental indicator of efficiency.

2. It is strongly correlated with profitability, but unlike profitability is not subject to the vagaries of inconsistent accounting.

3. It is an excellent predictor of a company’s technological and organizational sophistication.

4. Variation on this measure is huge.

The formula is sales less purchased parts, materials and services divided by number of employees

Note that value added per employee can vary greatly form industry to industry. For example a software provider could be 3 to 4 times greater then a tool and die shop. The reasons for this are quit obvious- the software provider doesn’t have the huge material cost. The national industry average is $75,000 for smaller manufacturer and $160,000 for Fortune 1000 companies. However, when you look into your industry specifics you will notice the wide range of performance is striking from top to bottom. In every industry, the worst company in the top 10 percent achieves Value-Added per Employee at least double that of the best company in the bottom quarter. These differences represent quantum leaps in performance. A plant can’t double its Value-Added per Employee just by updating some machines, or by tweaking plant layout, or sending its employees to a quality course. It needs to make fundamental changes in what’s getting done, and how. (Of course, the definition of an “industry” can include some dissimilar plants servicing different markets. The top 10% level may not be a relevant target for all plants. Therefore we might suggest using a Performance Benchmarking Service to help in the selection of a customized comparison group for each participant, so that your performance is rated against true peers.)

An excellent strategic planning exercise is to consider how your company could increase its Value-Added per Employee to the top 10% level for your industry. Most shops conclude – correctly – that simply tightening up labor standards (i.e., reducing the denominator) while maintaining current practices won’t get them there. What’s required is a combination of three approaches:

1. Big changes in work organization and efficiency; to reduce the labor and purchases needed to achieve a given level of sales.
   
   For example, a sheet metal fabricator has revamped its incentive and authority systems. All production workers are now organized into teams, with each team given responsibility – and being rewarded – for achieving ever-higher productivity on their assigned tasks. This firm has achieved roughly a 20% increase in its value-added per employee in the past three years.
    

2. New technology, to reconfigure processed to be faster, more controlled, and less labor-intensive.
   
   Shops at the high end on Value-Added per Employee are far more likely than average to report widespread use of computers and keyboards by their workforce. The tie between computer use and higher value-added per employee is compelling. In a study done by Performance Benchmarking; Just over 30% of their clients increased employee computer use by more than 35% from 1998 to 2002. These shops reported an average increase in value-added per employee of 19.7% over the same period. In contrast, a similar number of firms reported that employee computer use actually fell from 1998-2002. Their average value-added per employee went up by only 7%.
    

3. More distinctive, higher margin products or services, to increase the dollar value of sales for a given level of purchases and labor costs.
   
   Companies unable to protect themselves from price pressures can be forced to pass through their efficiency gains to their customers. Making big moves on Value-Added per Employee require shielding yourself from this sort of price-squeezing. One Performance Benchmarking client is a provider of electric-discharge machining (EDM) services. They typically offered turnaround time of two weeks, but realized they could often do it much faster. They polled their customers and found many were willing to pay a significant premium for one or two-day turnaround. The bottom line: a 25% growth in annual sales, with little increase in labor or material requirements.

In crafting your list of success factors, give careful consideration to your bargaining power in customer relationships. Does “listening to the customer” translate into following their price, quality, and delivery directives? Or can you improve you position by providing valued services or products that they cannot get elsewhere?

Step 2 - Correctly Estimate Performance
In our experience, manufacturers almost universally overrate their performance until confronted with hard numbers. We have asked participants to provide self-rankings along with their initial questionnaires. That is, before receiving any feedback from us, participants indicated in which category they felt they belonged, relative to their industry:

• Top 5 percent

• Top 10 percent, but not top 5 percent

• Top 25 percent, but not top 10 percent

• Top half, but not top 25 percent

• Top 75 percent, but not top half

• Bottom 25 percent

They provided these ratings separately for the areas of quality, scheduling and delivery, workforce management, design, and production.

Until faced with hard data, fully 81% of the shops we’ve served thought they ranked in the top quarter of their industry; 96% believed themselves in the top half.

Thus, benchmarking is invaluable for its shock value. Time and again, we have seen managers react with disbelief at feedback that tells them their plants are merely mediocre – or worse – at activities they view as strengths. So, if you have never taken a systematic look at other businesses, do it. Expect some disappointing news. And be prepared to use it to motivate change in your organization.

Step 3 – Don’t be Disillusioned
A lot of disillusionment with benchmarking stems from misconceptions about what it means to be a good performer. The truth is, there is no such thing as The Best Practice Organization. No company or plant is good at everything.

For Example: A study preformed by GDC- Total Business Solution, where they carefully selected a set of 31 metal forming plants, but the pattern holds true for virtually any industry. These plants were in similar lines of business: all produce stamped parts to print, with typical piece price under $5, in volumes of at least 1000 units per order. All shops were ranked on each of 10 critical performance measures: on-time percent, inventory turns, scrap rate, and the like. The result? None outshines the others across the board. Virtually all are near the top of the group on some measures, and near the bottom on others. Further, every firm looks mediocre on average. Even the firm with the best composite ranking scored no better than 15th out of 31 on some performance measures, with an average rank of 10th out of 31.

If noting else; this example should demonstrate why benchmarking-as-industrial-tourism will always fail. You cannot simply line up plant visits of firms with reputations for being “good” and expect to see best practices across the board. So don’t view benchmarking as a chance to “see how Acme does things.” First figure out the one or two measures you most want to target. Then zero in on the shops that are good at that.

Once you have focused your search area, be resourceful and committed. To be sure, you now have several benchmarking “dating services” available to you - services that attempt to link firms with complementary interest. But don’t expect that finding the partners you really want - plant-level technical experts at small-to-medium-sized firms- will be easy. Most members of benchmarking organizations are Fortune 500 firms – as many as half are not even manufacturers. So the more your critical success factors related to shop floor operations, the less likely you are to form partnerships via that route.

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