29.1 What is Benchmarking?

Benchmarking is an ongoing process involving industries from all walks of life and all categories of production. The principle is that no company is 100% perfect, and if you continuously search for better solutions, you will improve your efficiency and become an exceptional company, which can later form a benchmark for similar companies. It essentially compares the business processes and performance metrics including cost, cycle time, productivity, or quality with another company widely considered to be the industry standard benchmark and/or having best practices.

29.2 Definitions for Benchmarking

While the dictionary meaning is “anything used as a standard point of reference,” the other definitions are cited as:

1. Benchmarking is the process for improving performance by continuously identifying, understanding, and adapting the best practices and processes followed by similar companies, and implementing the results.
–Wikipedia

2. Benchmarking is the systematic search for best practices, innovative ideas, and highly effective operating procedures.
–Besterfield et al.

3. Benchmarking is the process used by the management in which the businesses use an industry leader as a model in developing their business practices.
–ASQ

4. Benchmarking is a continuous systematic process of measuring products, services, processes, or work practices against the toughest competitors or those companies recognized as the industry’s best.
–Xerox Corporation

5. Benchmarking is the search for the industry’s best practices and the adoption of such practices to ensure superior performance.
–Robert Camp

In a nutshell, benchmarking is a systematic method or a popular TQM tool by which the organizations measure themselves against best industry practices. It is a legal and above-board manner of finding out about others' techniques of better performances and using it or improving on it for better results.

29.3 Types of Benchmarking

1. Performance benchmarking: The company’s competitive position is assessed, comparing the products and services with those of other companies.

2. Product benchmarking: The basic functional performance and quality features of a company’s products are compared and benchmarked with competitors’ products, with a view to improve the functional features. It becomes useful in designing products that match precise user expectations, at minimum possible cost, by applying the best technologies available worldwide. The development of Taurus cars by Ford Motors is an illustration.

3. Process benchmarking: The firm focuses its investigations with a goal of identifying and observing the best practices adapted in one or more benchmark firms, producing the same or similar products in the cement industry. The study conducted recently by the National Productivity Council of India in the cement industry of South India is an illustration of this.

4. Strategic benchmarking: This involves the study of corporate level strategies adapted by successful industries.

5. Generic benchmarking: Sometimes one type of industry benchmarks a part of its products with that of other types of industries that use these parts. For example, an automobile manufacturer may want to benchmark their hydraulic systems with those of say, Disneyland.

6. Functional benchmarking: Specific functions like billing, distribution network recruitment are compared.

7. Competitive benchmarking: Here certain parameters are compared to the competitors’ with their cooperation, after obtaining special permission for getting vital information. While analyzing your competitors, you also identify the best company in the industry, even if it is located elsewhere and is in a different market segment.

8. Financial benchmarking: The annual financial results are compared and analyzed in order to assess the overall performance, productivity, and profitability of the concern.

9. Operational benchmarking: This embraces everything from staffing and productivity to the office flow, and analyzes the procedures adapted.

10. Internal benchmarking: Assessment comparisons are made within departments or within sister concerns.

11. Collaborative benchmarking: Sometimes benchmarking is carried out collaboratively by groups of companies either through common consultants or by professional associations or bodies. An example is the earlier cited work done by NPC of India in the cement industry. Another commonly cited illustration is the voluntary collaborative study carried out in 1977 by the Dutch Municipal Water Supply Companies through their industry association.

12. Metric benchmarking: This involves using information on cost or production information to identify strong and weak performing units. The two most common forms of quantitative analysis used in metric benchmarking are data envelope analysis (DEA) and regression analysis. DEA estimates the cost level an efficient firm should be able to achieve in a particular market. In infrastructure regulation, DEA can be used to reward companies/operators whose costs are near the efficient frontier with additional profits. Regression analysis estimates what the average firm should be able to achieve.

29.4 Some of the Parameters That Can be Benchmarked

1. Return on investments

2. Return on assets

3. Cost per unit

4. Cost per order

5. Net present worth of the shares

6. Sigma level in quality control

7. Customer satisfaction index

8. Sales cost revenue

9. Service cost/revenue

10. Service response time

11. Distribution cost/Revenue

12. Material overheads

13. Manpower performance ratio

14. Absenteeism

15. Employee morale.

29.5 General Concept of Benchmarking

While the general concept of benchmarking is shown in Fig. 29.1, the detailed procedure can be as illustrated in Fig. 29.2.

29.6 Phases of Benchmarking

A. Preparatory phase: When a preliminary meeting of all concerned people is called for and the details are explained. The planned phases and procedures are subjected to brainstorming based on which of the subsequent phases are planned as explained below. The purpose of this phase is to place benchmarking activities on a firm footing.

B. Planning phase: This is the basic phase for conducting a benchmarking investigation. Here the plans are developed by addressing the key questions of

• What is to be benchmarked?

• Who will be the benchmark partners?

• What is the method of data collection?

C. Analysis phase: When the data collected is analyzed for the purpose of comparison with other benchmarked companies. The key questions to be addressed here are:

• What is the performance of the benchmark partners, for each parameter?

• What is our performance compared to theirs?

• In what way, and in what parameters of their performance are theirs better than ours?

• What is the lesson to be learned from them?

• How can we apply the lessons to our company?

D. Integration phase: When the goals are developed and integrated into the benchmarked parameter or process so that significant performance improvements are made. The key questions in this phase are:

• What are the critical proposals given as a result of the analysis?

• Has management accepted the findings?

• What are the goals that are needed to be modified and what are the finally drawn up goals?

• Have all involved parties been clearly communicated to about the goals?

E. Action phase: When detailed action plans needed to achieve the goals are drawn and developed. The key questions that need to be addressed here are:

• Will the plans allow the achievement of the stated goals?

• How will progress be tracked?

• What is the schedule for recalibration of the benchmarks?

29.7 Stage of Benchmarking

Wikipedia elaborates the above in the following steps:

1. Identify your problem areas: Because benchmarking can be applied to any business process or function, a range of research techniques may be required. They include: informal conversations with customers, employees, or suppliers; exploratory research techniques, such as focus groups; or indepth marketing research, quantitative research, surveys, questionnaires, re-engineering analysis, process mapping, quality control variance reports, or financial ratio analysis. Before embarking on comparisons with other organizations, it is essential that you know your own organization's functions, processes; base-lining performance provides a point against which improvement efforts can be measured.

2. Identify other industries that have similar processes: For instance, if one were interested in improving hand-offs in addiction treatment, he/she would try to identify other fields that also have hand-off challenges. These could include air traffic control, cell phone switching between towers, or transfer of patients from surgery to recovery rooms.

3. Identify organizations that are leaders in these areas: Look for the very best in any industry and in any country. Consult customers, suppliers, financial analysts, trade associations, and magazines to determine which companies are worthy of study.

4. Survey companies for measures and practices: Companies target specific business processes using detailed surveys of measures and practices used to identify business process alternatives and leading companies. Surveys are typically masked to protect confidential data by neutral associations and consultants.

5. Visit the “best practice” companies to identify leading-edge practices: Companies typically agree to mutually exchange information beneficial to all parties in a benchmarking group and share the results within the group.

6. Implement new and improved business practices: Take the leading-edge practices and develop implementation plans which include identification of specific opportunities, funding the project, and selling the ideas to the organization for the purpose of gaining demonstrated value from the process.

7. Repeat the process: Benchmarking is an ongoing process. Best practices can always be improved upon by constant vigilance and analysis of the competitor practices.

29.8 Different Approaches to Benchmarking

Robert Camp, one of the early authors on this subject has, in his book, The Search for Industry Best Practices that Lead to Superior Performance (1989), summarized the above procedure in 12 steps as:

1. Select the subject ahead

2. Define the process

3. Identify the potential partners

4. Identify the data source

5. Collect data and select partners

6. Determine the gap

7. Establish the process differences

8. Target future performances

9. Communicate

10. Adjust goals

11. Implement

12. Review/recalibrate

Xerox’s 10-step procedure

1. Identify what is to be benchmarked

2. Identify comparable organizations

3. Determine data collection methods and collect data

4. Determine current performance gap

5. Project future performance levels

6. Communicate benchmark findings and gain acceptance

7. Establish functional goals

8. Develop action plans

9. Implement specific actions and monitor progress

10. Recalibrate benchmarks

The above can also be represented as in Fig. 29.2.

29.9 Tips for the Consultants

AT&T had given the following tips to consultants for successful conduct of the benchmarking procedure.

1. Determine who the clients are, who will use the information to improve their processes.

2. Advance the clients from the literacy stage to the champion stage.

3. Test the environment. Make sure that the clients can and will follow through with the benchmarking findings.

4. Determine the urgency. Panic or disinterest indicate little chance for success.

5. Determine the scope and type of benchmarking needed.

6. Select and prepare the team. Overlay the benchmarking process onto the business planning process.

7. Develop the benchmarking plan.

8. Analyze the data.

9. Integrate the recommended action.

10. Take action.

11. Continue improvement.

29.10 Costs of Benchmarking

This benchmarking is moderately expensive, though most companies find that the benefits would more than pay off. The major benchmarking costs are:

(a) Visit costs: They include travel, accommodation, token gifts, and other miscellaneous expenditure.

(b) Time costs: The benchmarking teams will be investing time and energy in collection and analysis of the data and for the implementation. This would also take them away from their routine tasks, necessitating additional staff recruitment.

(c) Database costs: After having collected and analyzed the data, the companies find it useful to maintain a database of the best practices. This could be useful for their future reference, as well as sharing and partnering with other companies.

29.11 Advantages of Benchmarking

1. Best practices could be incorporated in a company’s operations; thereby productivity, sales, and profitability would increase.

2. It provides targets that have been achieved by others.

3. Resistance to change from within would be less if ideas come from outside.

4. Technical breakthroughs could be identified early, thereby improving upon the quality of the product.

5. Advancement in employee’s knowledge and experience.

6. It helps the company to conduct SWOT analysis to learn its weaknesses and the scope of improvement.

7. Customers’ requirements can be met in a more systematic manner.

8. Effective goals can be set and achieved.

29.12 Limitations of Benchmarking

1. It entails subjective judgment.

2. It is difficult to get useful information from the competitors.

3. It requires a thorough understanding of current products and processes.

4. It is purely a creative activity.

5. It is a costly and time-consuming activity.

6. It is still subject to resistance to change from employees to some extent.

29.13 Professional Associations and Institutions Exclusively for Benchmarking

Internet Service Providers’ Benchmarking Association (ISPBA) is a free association of procurement and supply-chain organizations within major corporations, with a mission to identify “Best in class” internet service provision business processes which when implemented would lead member companies for achieving exceptional performance. It conducts benchmarking studies to identify the practices that improve overall performance of the members’ organizations.

Its objectives are: To conduct benchmarking studies is important for the internet service provision processes.

• To create a cooperative environment where full understating of the performance and enablers of “best in class” internet service provision processes can be obtained and shared at reasonable costs.

• To use the efficiency of the association to obtain process performance data and related best practices regarding internet service provision.

• To support the use of benchmarking to facilitate internet service provision process improvement and the achievement of overall accuracy, timeliness, and efficiency.

29.14 Conclusion

The term benchmark originates from a mark on a permanent object indicating elevation, and serving as a reference in topographic surveys and tidal observations. From this chapter, it can be shown how apt it is to compare our performance with leaders in the industry and improve ourselves to ascend the ladder of success.

In one of their course works, NIQR cited the following benchmarking illustrations.

1. Hindustan Lever Limited benchmarked its rural marketing against a beedi manufacturer.

2. Modi Xerox benchmarked its level of Customer Satisfaction Measurement (COSAM) against Rank Xerox, Portugal.

3. Kelvinator India benchmarked its components and product cost against Godrej—GE applications.

4. Gabriel India Auto Ancillary Maker benchmarked its customer delivery times with UK-based British Filters.

5. Arvind Mills regularly benchmarks its compensation strategy against Proctor & Gamble as well as Hindustan Lever.

6. 35 Companies spanning 7 different businesses of RPG group regularly benchmark against each other on cost management, value engineering, purchase management, inventory management, sales forecasting, etc.

7. L & T have benchmarked engineering and project management with that of Bechel Corporation of the US.

8. Citibank has benchmarked five key processes against a courier company.

9. Matrix Applications has benchmarked customer satisfaction against its archrivals Carrier Aircons and National Panasonic.