Benchmarking – A Practical Guide for Smaller Manufacturers

Benchmarking has made its way onto most lists of “Must-Do Business Practices for Well-Managed Companies”. But what exactly is benchmarking? A scan of articles in the business and trade publications supplies 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 performance on some thoughtfully selected metrics. It involves finding companies that exemplify “best practice” and measuring their performance. Typical success stories recount huge improvements due to emulating L.L. Bean’s order management system, or incorporating Ford’s design-for-manufacturability concepts.

Common Pitfalls for Small and Midsize Enterprises

Unfortunately, duplicating these success stories is not that easy. The main culprits, in our view, are the standard benchmarking “how-to” manuals. We find them poorly suited to smaller manufacturers. Typical among them is this seven-step process.

1. Determine what functions to benchmark
2. Define appropriate metrics
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

What’s wrong with most benchmarking manuals is that they implicitly address a Fortune 100, corporate-level audience. They emphasize steps four through seven.

In contrast, our experience suggests that it is in steps one through three that smaller manufacturers need practical guidance. Standard searches for best practice operations yield few hits, and almost none from amongst smaller-plant peers. This leaves managers to mine their personal contacts, with no way to validate whether the firms they find are truly best practice operations.

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

Step 1

Value-Added per Employee for a quick, meaningful assessment of your overall performance.

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 recommend the following four reasons to explore the Value-Added per Employee concept.

• It measures labor productivity, a fundamental indicator of efficiency.
• It is strongly correlated with profitability.
• It is an excellent predicator of a company’s technological and organizational sophistication.
• Variation on this measure is huge.
• 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 that simply tightening up labor standards while maintaining current practices won’t get them there. What’s required is a combination of three approaches:
• Big changes in organization and efficiency, to reduce the labor and purchases needed to achieve a given level of sales.

For example, one client who used Performance Benchmarking, a sheet metal fabricator, revamped its incentive and authority systems. All production workers are now organized into teams. Each is given responsibility and rewarded for achieving 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.

• New technology, which reconfigure processes, results in faster, more controlled, and less labor-intensive tasks.

Among our benchmarking participants, shops at the high end of Value-Added per Employee are far more likely than average to report widespread use of computers and keyboards by their workforce. Just over 50 Performance Benchmarking clients increased employee computer use by more than 35% from 1993 to 1995. 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 1993-1995. Their average Value-Added per Employee went up by only 7%.

• More distinctive, higher margin products or services, to increase the dollar value of sales for a given level of purchases and labor costs.

Another client, who used Performance Benchmarking, is a provider of electric-discharge machining 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 a 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 your position by providing valued services or products that they can not get elsewhere?

Step 2

Insist on hard comparative data in evaluating your strengths and weaknesses.

In our experience, manufacturers almost universally overrate their performance until confronted with hard numbers. We have asked participants to provide self-rankings along with initial questionnaires. When faced with hard data, 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. 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

Mount a committed and focused search for Best Practice partners.

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.

You cannot simply line up plant visits to 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 interests.

Reprinted (abridged version) with permission from MMTC’s Manufactories Volume 5, Issue 2, Spring 1999