1. What are the three types of performance benchmarking? Which type is most commonly used by the purchasing function?
Benchmarking is the process of comparing one’s business processes and performance metrics to industry bests or best practices from other companies. Dimensions measured are quality, time and cost. In the process of best practice benchmarking, management identifies best firms in their industry or in another industry where similar processes exist and compares results and processes of the targets to one’s own results and processes. In this way, they learn how well targets perform and business processes which explain why these firms are successful.
Performance benchmarking allows initiator firm to assess their competitive position by comparing products and services with those of target firms. Corporate benchmarking has moved beyond product-oriented comparisons to include comparisons of process with those of competitors.
There are two primary types of benchmarking:
• Internal benchmarking: comparison of practices and performance between teams, individuals or groups within an organization
• External benchmarking: comparison of organizational performance to industry peers or across industries
These can be further distilled as follows:
• Process Benchmarking: Demonstrate how top performing companies accomplish the specific process in question. Such benchmarking is collected via research, surveys/interviews, and site visits. By identifying how others perform the same functional task or objective, people gain insight and ideas they may not otherwise achieve. Such information affirms and supports decision-making by executives.
• Performance Metrics: “Performance metrics” give numerical standard against which a client’s own processes can be compared. These metrics are usually determined via a detailed and carefully analyzed survey or interviews. Clients can then identify performance gaps, prioritize action items, and then conduct follow-on studies to determine methods of improvement.
• Strategic Benchmarking: Identify the fundamental lessons and winning strategies that have enabled high performing companies to be successful in their marketplaces. Strategic benchmarking examines how companies compete and is ideal for corporations with a long-term perspective.
• Benchmarking is #1 most used global management tool, yet most companies fail to use benchmarking to their full advantage.
Benchmarking can be internal (comparing performance between different groups or teams within an organization) or external (comparing performance with companies in a specific industry or across industries). Within these broader categories, there are three specific types of benchmarking: 1) Process benchmarking, 2) Performance benchmarking and 3) Strategic benchmarking. These can be further detailed as follows:
• Process benchmarking - the initiating firm focuses its observation and investigation of business processes with a goal of identifying and observing the best practices from one or more benchmark firms. Activity analysis will be required where the objective is to benchmark cost and efficiency; increasingly applied to back-office processes where outsourcing may be a consideration. Benchmarking is appropriate in nearly every case where process redesign or improvement is to be undertaking so long as the cost of the study does not exceed the expected benefit.
• Financial benchmarking - performing a financial analysis and comparing the results in an effort to assess your overall competitiveness and productivity.
• Benchmarking from an investor perspective- extending the benchmarking universe to also compare to peer companies that can be considered alternative investment opportunities from the perspective of an investor.
• Benchmarking in the public sector - functions as a tool for improvement and innovation in public administration, where state organizations invest efforts and resources to achieve quality, efficiency and effectiveness of the services they provide.
• Performance benchmarking - allows the initiator firm to assess their competitive position by comparing products and services with those of target firms.
• Product benchmarking - the process of designing new products or upgrades to current ones. This process can sometimes involve reverse engineering which is taking apart competitors products to find strengths and weaknesses.
• Strategic benchmarking - involves observing how others compete. This type is usually not industry specific, meaning it is best to look at other industries.
• Functional benchmarking - a company will focus its benchmarking on a single function to improve the operation of that particular function. Complex functions such as Human Resources, Finance and Accounting and Information and Communication Technology are unlikely to be directly comparable in cost and efficiency terms and may need to be disaggregated into processes to make valid comparison.
• Best-in-class benchmarking - involves studying the leading competitor or the company that best carries out a specific function.
• Operational benchmarking embraces everything from staffing and productivity to office flow and analysis of procedures performed.
• Energy benchmarking - process of collecting, analysing and relating energy performance data of comparable activities with the purpose of evaluating and comparing performance between or within entities. Entities can include processes, buildings or companies. Benchmarking may be internal between entities within a single organization, or - subject to confidentiality restrictions - external between competing entities.
2. What is the benefit of developing performance measures that focus on cost versus purchase price?
Using the cost-based system, a buyer is able to quantify additional costs if a supplier fails to perform as expected. Total cost of doing business with supplier can be calculated by supplier performance index (SPI). This index is calculated for each item or commodity provided by the supplier and has a base value of 1. It is represented by the following formula: SPI = (Purchase Price + Non-performance Cost) / (Purchase Price). The closer SPI is to 1, the better the supplier. Non-costs should include qualitative factors.
Benefits a buyer can achieve by using this approach include:
• the ability to source requirements based on total cost consideration
• a methodology to increase supplier accountability and control
• an equitable and consistent evaluation tool
• definition of supplier performance expectation
• communication of the firm’s buying priorities to suppliers
• the ability to perform sourcing risk assessment
• enhancement of internal communication for reporting critical supplier sourcing information
• the ability to provide positive supplier reinforcement
• a basis for a supplier award program
This system is the least subjective of the three because it quantifies the total cost of doing business by considering non-performance costs. Main difficulty in the use of the system is its complexity and its requirement that users have a developed cost accounting system. Though this sounds like an ideal way of dealing with costs, it is difficult to ide...