Performance Improvement
Back to the Basics: Benchmarking Your Way to the Highest Bottom Line
By Bruce Tompkins, Executive Director, Supply Chain Consortium
Nowadays, companies seem to be looking in many different directions to improve business performance. With all of the flashy options that are available, it is easy to forget about the basics like benchmarking their way to a higher profitability. Businesses need to take a long, hard look at the bottom line, the top line and everything in between and ask themselves, "What performance measures have gotten us to this point? And, how can we improve our performance to help enhance the bottom line?"
Organizations that benchmark their operations relative to their peers find that there is a strong correlation between supply chain performance metrics and their financial performance. That is, those that measure their performance data relative to others in their industries are much more apt to see improved financial results.
The Supply Chain Consortium recently published the Financial Metrics Report: Is Your Company an Industry Leader or Laggard? which allows companies to measure themselves against their peers. Overall, the statistics in the report show that companies that network and benchmark, like Consortium members, have a competitive advantage.
Members have continuous opportunities to network and learn from each other throughout the year with in-depth survey reports and a members-only annual conference -- the Supply Chain Leadership Forum. By getting involved in such a forum with their peers, these companies are able to get an advance view of what industry leaders are doing in many operational areas and what benchmarks they need to set to make sure their companies are achieving peak-to-peak performance.
Likewise, companies need to know which performance improvements are most important in driving their companies' financial metrics. The Financial Metrics Report covers a range of financial areas including profitability, operating, liquidity, and market valuations ratios. Each of the calculations affects the other in some way, and increasing the totals for areas such as inventory turnover and asset turnover and decreasing the days of sales outstanding can help boost sales, earnings and profit ratios.
It is very telling that Consortium members scored above average in many of the categories. For instance, return on equity (ROE) comparisons for participating companies are very favorable industry by industry, and the group's top quartile* companies have an ROE average of 25.1%, which is remarkable. However, there are no immediate benefits from a high ROE. Instead, participants have learned that the earnings need to be reinvested in the companies at the high ROE to give them a high growth rate.
Furthermore, return on assets (ROA) is significantly higher for the Consortium companies as compared to their industry counterparts, and those in the manufacturing industry nearly doubled the ROA of non-member manufacturing companies. For the ROA rate, industry and business types are a major factor. Businesses that are inclined to have more assets are usually those with a lower ROA. That is why it is best to compare across an industry when benchmarking companies against others.
Member companies also closely mirror their industries' averages of 5-6 total inventory turns per year, but leading companies in the Consortium's network are averaging 12 turns a year. The number of inventory turns also correlates with the type of industry -- product type, size, cost, durability and life cycle can all impact turnover. Some results are not surprising but important to note. As expected, participating companies in the grocery, food and beverage category have a much higher turnover rate than those in hobby, toys, and sporting goods.
In the quest to improve business performance, benchmarking your way to the bottom line is key. By not measuring your operations against your competitors and peers, a large piece of the puzzle is missing and future profitability is impacted. One the other hand, companies that benchmark and take action are able to improve their supply chain performance as well as their financial performance, moving their way up the spectrum from industry laggards to industry leaders.
*A quartile divides a range of data values into four equal parts, each part equals one fourth (1/4) of the total surveyed population.
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This article is available for re-print with attribution. If you would like more information or an interview, please contact Keri McManus, (919) 855-5516.
The Supply Chain Consortium is the premier source for supply chain benchmarking and best practices knowledge. With 175 participating retail, manufacturing and wholesale/distribution companies, the Consortium sponsors a comprehensive repository of 17,000-plus benchmarks complemented by search capabilities, online analysis tools, topic forums and peer networking for supply chain executives and practitioners. The Consortium is led by the needs of its membership and an Advisory Board that includes executives from Campbell Soup, Hallmark Cards, Ingram Micro, Mervyn's, Molson Coors Brewing Co., Target, The Pep Boys, and Coca-Cola Co. To learn more about how your company can become a member of the Supply Chain Consortium, contact John Foley, 919-855-5461 or visit www.supplychainconsortium.com.
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