Benchmarking: A Key First Step to Supply Chain Continuous Improvement

By Bruce Tompkins, Principal, Tompkins Associates

Introduction

Today, everyone—and I mean everyone—is challenged to greatly improve their supply chain’s performance. No matter how large or small your operation, there is a need to:

1. Improve service levels with improved inventory management
2. Reduce supply chain operating costs
3. Reduce order cycle time
4. Ship 100% accurate orders
5. Improve supply chain security and control, and
6. Improve flexibility

No one is exempt from the growing demands being placed on all aspects of the supply chain. The critical questions that managers are asking (or should be asking) are, “How does my supply chain stack up against my competitor’s supply chain?” and “What are the best practices employed by highly successful companies to drive supply chain improvement?” The need for improvement is a given, but without answers to some difficult questions, managers don’t know where to start, in what direction to head or how to create the roadmap. From our experiences, the best way to accurately answer these questions is to participate in a benchmarking and best practices review process.

We have defined benchmarking as the search for the best practices that will lead to superior company performance and the ability to compare that performance to the same functions in another organization. Benchmarking and best practices are tools to provide direction for the development of a strategic supply chain improvement plan. Supply chain managers participate in benchmarking and best practices in order to get the answers to questions like:

• What are the supply chain best practices in use by the leading companies in our industry and other similar industries?
  
• How are we doing in comparison to our peers—below average, average, above average, exceptional?
  
• Are our costs reasonable and in line with operations similar to ours?
  
• Are there any major gaps in our supply chain strategy that will leave us at a competitive disadvantage?
  
• Are we ahead of or behind the curve in applying new supply chain technology?
  
• Are we missing breakthrough opportunities?
  
• How can we demonstrate the areas in which we are doing a good job?
  
• How can we build consensus around the initiatives that we feel certain are correct?

Most companies have participated in some form of benchmarking at some point; but, in general, have not been satisfied with the results. The typical benchmark and best practices process is sponsored by an individual company that is paying a consultant to study a few competitors to “search for best practices,” or by a journal or trade association that does not have the resources to provide the level of depth that is required to develop improvement plans. These surveys suffer from narrow and limited question content and a lack of detail and have a limited number of participating companies.

In order for benchmarking and best practices to be meaningful, the process must:

1. Have relevant content – The data gathered must be from companies like yours, so that apples to apples comparisons are possible. It is also important that companies participating in the survey help define the topics and content.
   
2. Have a balance between the level of detail and the time required to complete the process
   
3. Have high levels of participation by the right companies and individuals so that the number of data points allows the correct comparisons to be made
   
4. Provide a variety of ways to see the results and access the information so it is focused and actionable

If the benchmarking process is structured properly, it will allow you to measure your performance against best-in-class companies and identify improvement opportunities. It will also help you to understand how your operating practices compare to your competition, which may lead to breakthrough insights and broaden the thinking of your management team. The process should also provide a valuable scorecard of supply chain metrics and help to prioritize improvement opportunities. Increasingly, it is important to build consensus behind the opportunities with the greatest ROI in order to get commitments from management to spend the needed capital and resources.

Benchmarking and Best Practices Review

Tompkins Associates is now into the third year of Benchmarking and Best Practices reviews in the Retail and Industries categories with the Supply Chain Consortium. The following are a sampling of supply chain benchmarks and best practices from our database in the areas of Supply Chain Technology, Distribution Center Best Practices and International Supply Chains.

Supply Chain Technology

The application of technology to improve processes is nothing new, but in increasing numbers, companies are employing technology to gain competitive advantage. When asked about what technologies they were using, companies provided the information presented in Figure 1.

Figure 1. Supply Chain Technology Applications

In the area of Warehouse Management Systems (WMS), a number of best practices surfaced from the survey that helps to understand the sources of warehouse management solutions. Figure 2 shows the split between best-of-breed and custom sources for reported solutions.

Figure 2. WMS Sources

Generally, it is considered a best practice to acquire a packaged solution either from a best-of-breed or ERP vendor. This approach is based on cost and core competency considerations. Best-of-breed and ERP vendors spread development and support costs across multiple clients and regularly enhance their products.

Another key finding from the survey is the degree of integration required for a successful WMS solution. Figure 3 summarizes reported external and internal applications integration.

Figure 3. Application Integration with WMS

Integration plays a key role in the effectiveness of most WMS solutions. The flow of information to and from the WMS can have a direct impact on operational and supply chain effectiveness.

Distribution Center Best Practices

An area of focus in distribution center (DC) operations involved the trends managers have seen in the last three years and what they expect those same trends to be for the next three years. In general, most are seeing more and more complexity from an increase in imported products to inbound order size to the number of SKU’s.

Figure 4. Historical Distribution Trends

Imports have shown the greatest percentage increase and are becoming a key driver for supply chain management across all industries. The second contributing factor is direct to consumer sales, which grew 19 percent.

Survey participants were asked how they see these same trends changing in the future. Figure 5 presents the findings indicating complete agreement from our participants that imports, direct to consumer sales and the degree of automation in DC operations will increase over the next three years.

Figure 5. Future DC Operations Trends

The extent of the growth is greatest in the areas of imports, flow through volume and inbound order size. This tells us that the pressure will really be on the entire supply chain with increased imports and the need to reduce storage by flowing products through DC’s.

International Supply Chains

Global third party logistics (3PL) companies are a growing trend in international supply chains. The survey asked about the most important opportunities to improve global supply chain performance through 3PL’s. Results are presented in Figure 6.

Figure 6. Third Party Logistics Performance Metrics

An interesting view of the international supply chain can be obtained by analyzing the amount of transportation capacity that companies source directly versus through a 3PL network. Figure 7 presents the survey data for ocean and air freight. In most instances for air freight, small volumes and the requirement to handle pickup and delivery at the point of origin and destination encourage working through third parties. The answer is more complex for ocean carriers. The decision will depend on freight volumes, who builds ocean containers and the proportion of FCL (full container load) and LCL (less than container load) containers.

Figure 7. Capacity Sourced Directly vs. Through 3PL

A final point on international supply chain concerns the area of port diversity. If ocean freight is a key component of your supply chain and your business model has a high sensitivity to service disruptions, then port diversity is an important consideration. Figure 8 provides survey data on planned shifts in port usage by participating companies.

Figure 8. Planned Shifts in Port Usage

Clearly the data indicates that many shippers have begun evaluating the risk profiles at deep water ports and making moves to reduce risk along with transportation costs.

The Continuous Improvement Process

Benchmarking and Best Practices is the key first step to supply chain continuous improvement. Follow these steps to use benchmarking to drive supply chain strategic improvement planning.

1. Establish your supply chain performance baseline using benchmarking and best practices data.
   
2. Develop a gap analysis of your current processes with the identified best practices.
   
3. Drill down into specific supply chain processes and identify improvement opportunities that will significantly impact performance.
   
4. Develop goals, objectives and a project plan for each improvement opportunity.
   
5. Organize resources to make recommendations and implement justified improvements.
   
6. Return to Step 1 and do it again.

Conclusions

It’s clear that the demands being placed on your supply chains will continue to grow into the future. Therefore, it is imperative that a process be put in place to systematically compare your supply chain performance against competitors and to understand the best practices that are driving significant improvements. Without this process, you will not deploy your limited resources as effectively.

There is a right way and wrong way to do benchmarking and best practices. By using benchmarking as the key starting point for continuous improvement and by following the proven methodology presented in this article as a roadmap, you will enjoy ongoing supply chain success.