BENCHMARKING - PERFORMANCE AND PROCESS ANALYSIS

BENCHMARKING ” PERFORMANCE AND PROCESS ANALYSIS

PREPARATION OF THE BENCHMARKING PROPOSAL

Factors to be considered in the preparation of the benchmarking proposal include:

• Mission

• Objective/scope

• Statement of importance

• Information available

• Critical questions

• Ethical and legal issues

• Partner selection

• Roles and responsibilities

• Visit schedule

• Data analysis requirements

• Form of recommendation

ACTIVITY BEFORE THE VISIT

The approach that follows is very comprehensive. It might not be economical to follow all the steps in every study. Let practical common sense be the guide to action.

Understanding Your Own Operations

You need to understand your own operations very thoroughly before comparing them with the operations of others. Here are some steps you should take to make sure that you understand your current methods :

• Ask open -ended questions. For example, for "who":

  • Who does it per the job description?

  • Who is actually doing it?

  • Who else could do it?

  • Who should be doing it?

• Ask similar questions for what, where, when, why, and how.

Activity Analysis

Activity analysis consists of the following steps:

1. Define the Activity

Activities can be defined through:

• Function

• Process

• Marketing and sales

• Sell products

Activity: These are the major action steps of a process. For example, make a proposal.

Task: Prepare proposal draft

Operation: Type proposal

2. Determine the Triggering Event

Identify what happens to trigger the activity. Why does the activity get performed at a specific time? What is the status of material or information before the activity occurs? What documentation signifies that the activity is to start?

Example: Receive material

Material receipt document

3. Define the Activity

Document how to perform the activity. Indicate what has to be done and the order in which it is done. This will define all business procedures, policies, and controls. Questions to ask include:

• What are the key process variables ?

• What controls these variables?

• What levels lead to optimum performance?

• What are the causes of variation?

• What are the limitations?

Activities should be classified in terms of repetitive versus non-repetitive, primary versus secondary, and required versus discretionary. It is important in this analysis to determine limitations, sources of error, rejects, and delays.

Example: Raw material

Inspection process manual

4. Determine the Resource Requirements

Identify the resources to perform the activity. Include factors such as direct material, direct labor (hours and grade), equipment requirements, information requirements, and space requirements. The resources might come from more than one department. It is crucial to trace all of the resources required to perform the activity.

The resources can be determined by a careful analysis of the chart of accounts. When making the cost analysis, carefully choose among using actual, budgeted, standard, or planned cost information.

Example: Inspector, material, handling equipment, inspection equipment, inspection area, inspection manual

5. Determine the Activity Drivers

What are the factors external to the activity that cause more or less of the resources to be used? What drives the need for the activity and the level of resources required? Consider both efficiency and effectiveness, as follows:

1. Efficiency: Doing things right.

2. Effectiveness: Doing the right things

Example: bad weather, poor product quality, automated equipment, workplace layout

6. Determine the Output of the Activity

What units can be used to measure the output of the activity? This will be a measure of production level such as pieces produced, lots produced, invoices processed , checks written, or standard hours earned.

Example: Lots of raw material inspected, pieces inspected, or material acceptance forms completed

7. Determine the Activity Performance Measure

Identify that output measure that most closely controls the level of resources required. For example, when looking at clerical activities, the number of invoices is more significant than the dollar volume of the invoices. When moving material, the tons moved is more significant than the number of invoices represented. In general, the activity measure will be a resource input per unit of an output measure.

Examples:

• Cost/lot

• Pieces/ hour

• Cost/unit

• Square foot per person

• Patents per engineer

• Drawings per engineer

• Lines of code per programmer

• Contact labor/company labor

• Sales dollars/sales manager

• Machine changeover -% total

Model the Activity

Modeling an activity involves the following:

• Define the process

• Define the cost or resource requirements

• Define the output variables

• Determine the metric or resource per unit of output (This may require the use of regression analysis or the design of experiments.)

Critical considerations are:

• What is the relationship between fixed and variable costs?

• What determines the capacity limitations of the process?

• How much does overhead change with a change in the volume of business?

It is important to distinguish between the metric (resource per unit of output) and the cost drivers.

The metric or activity measure for inserting pins might be cost per pin inserted. However, the cost drivers might be the product design and the technology used. A different design might require fewer insertions, and a different technology might avoid the need for any insertions.

Examples of Modeling

The modeling of raw material cost per unit produced might consider the following variables:

• The number of parts to be produced

• The standard raw material per part

• The percent scrap produced

• Raw material unit price

• Raw material quantity discounts

• Exchange rates

Note that a simple comparison of raw material cost as a percentage of sales dollars provides little real basis for comparing costs and cost improvement.

The number of units sold of an item could be modeled as the number of potential buyers times the percentage who become aware of the product if they can get it times the percentage of potential buyers who can get the product times the percentage of triers who will be repeat buyers times the number of units purchased by a repeat buyer.

When working with salaries and wages , it is necessary to take into consideration factors such as headcount, rate by grade, straight time/overtime ratios, benefits, skill level, age, education, union vs. non-union, and incentives. Salary and wage ratios that can be benchmarked are:

• Skilled/unskilled labor

• Direct/indirect labor

• Training cost per employee

• Overtime hours/straight time hours

Flow Chart the Process

To determine the sales dollars from a new account, start by flow charting the steps required to sell a new account. Start with cold calls and work through to a close. Use of symbols in flow charting:

• Start or stop

• Flow lines

• Activity

• Document

• Decision

• Connector

Then ask some key questions:

• What are the major activities?

• What are the ratios required to forecast sales?

• What factors affect the selling cost per rep or the revenue per rep? Does looking at these ratios tell you very much? What would you benchmark?

Here is an example of activity performance measures for warehouse operations:

Picking operations

• Orders filled per person per day

• Line items per person per day

• Pieces per person per day

• Number of picks per order

• Standard hours earned per day

• Line items per order

Receiving operations

• Number of trucks unloaded per shift

• Number of pallets received per day

• Number of cases received per day

• Number of errors per day

• Direct labor hours unloading trucks

Incoming QC operations

• Number of inspections per period

• Number of rejects per period

• Direct inspection labor hours

Putaway/storage operations

• Number of full pallet putaways per period

• Number of loose case putaways per period

• Direct labor hours putaway or storage

• Cube utilization

Truck loading

• Number of units loaded per truck per period

• Number of trucks per period

• Time per trailer

Customer service operations

• Fill rate

• Elapsed time between order and shipment

• Error rate

• Customer calls taken per day

• Number of problems solved per call

• Number requiring multiple calls

• Number of credits issued

• Number of backorders

At this stage we are ready to identify information required when meeting with the benchmark partner. The following information is typical and may be used to focus the meeting with the benchmark partner and to highlight information requirements:

1. Description of company activity and results:

2. Alternative ways of performing the activity:

   • Alternative 1:

   • Alternative 2:

   • Alternative 3:

3. The pros and cons of the alternatives are:

   	Pros	Cons
   Alternative 1:
   Alternative 2:
   Alternative 3:

4. Information required to reach a conclusion as to the best approach:

Review the assumptions for the study to make sure that the outcomes are correlated to what you were studying . (At this stage, it is not unusual to find surprises . That is, you may find items that you overlooked or you thought were unimportant and so on.)

ACTIVITIES DURING THE VISIT

By far the most important characteristic of the visit is to:

Observe, question, analyze and learn

Make sure to notice:

• What are they doing?

• How is it different from what we are doing?

• Why are they doing it that way?

• How can the results be measured?

Ask open-ended questions, just as you did when observing your own operations. For example, for "who":

• Who does it per the job description?

• Who is actually doing it?

• Who else could do it?

• Who should be doing it?

Ask similar questions for what, where, when, why, and how.

Understand the Benchmark Partner's Activities

Follow the procedures described above for analyzing the company activities. You may encounter some analytical difficulties because of the following factors.

Accounting differences

• Account definitions vary in terms of what is included in the account. For example, does the cost of raw material include the cost of freight in and insurance? Where is scrap accounted for?

• Cost allocations .

• Identification of all multi-department costs.

Different economies of scale/learning curve

• Specialization

• Automation

• Time/unit

Identification of all of the Factors Required for Success

Factors to consider when trying to determine if you have identified all the factors required for success include the following:

Analysis and intuition

• MRP and inventory cycle count

• Salary and wage comparisons ” are the jobs really comparable?

• The use of manufacturing work cells (This may require a change in socialization .)

• Level of advertising per dollar of sales (Just knowing this may not be very helpful. The relevant question is, "How effectively are the advertising dollars spent?")

Regression analysis

Warehouse study

Design of experiments

ACTIVITIES AFTER THE VISIT

Key activities after the visit include the following:

• Be sure to send a thank you note promptly.

• Document findings for each visit.

• Summarize all findings ” analysis and synthesis.

• Compare current operations with findings.

• Gather more specific data if required.

• Identify opportunities for improvement ” combine, eliminate, change order, etc.

• Develop team recommendation.

• Distribute benchmark report.

Benchmarking Examples

1. Functional Analysis

Hours/1000 pcs
Functions	Company	Best Company	Cap
Primary machining	.75	.50	.25
Heat training
Grinding
Assembly
Packing

2. Cost Analysis

Cost Item	% Total Cost	Cum % Total	Company	Cost per Unit Best
Raw material	40	40	17.50	15.50
Direct labor	20	60	7.50	5.50

3. Technology Forecasting

The benchmarking of competitive technologies can be very critical. This is particularly true when the product or technical life cycle is very short. Keys are:

• Knowing the current technology and its limitations

• Identifying the emerging technologies that become the new benchmarks.

• Knowing what customers really buy and relating this to the emerging technology.

• Having the courage and foresight to change.

4. Financial Benchmarking

Financial benchmarking compares a company (or the major segments of a company) relative to the financial performance of other companies. The modified Du Pont chart provides a convenient way to do this. The idea of the modified Du Pont plan is to start with the return on equity and progressively calculate the return on assets, profit margin, gross margin, sales, cost of goods sold (COGS), sales per day, cost of goods sold per day, days inventory (COGS), days receivable (COGS), and days payable (COGS). Company results can be compared with data provided by:

• Dun and Bradstreet Industry Norms and Key Business Ratios

• Robert Morris Associates Annual Statement Summary

• Prentice Hall Almanac of Business and Industrial Financial Ratios

5. Sales Promotion and Advertising

The comparison of company strategy versus industry strategy can lead to the need for more specific benchmarking studies.

6. Warehouse Operations

The performance of units engaged in essentially the same type of activity can be compared using statistical regression analysis. This technique can be used to determine the significant independent variables and their impact on costs. Exceptionally good and bad performance can be identified and this provides the basis for further benchmarking studies.

7. PIMS Analysis

The PIMS analysis is a further application of multiple regression analysis. It can be used to identify the major determinants of company profitability.

8. Purchasing Performance Benchmarks

The Center for Advanced Purchasing Studies (Tempe, Arizona) has benchmarked the purchasing activity for the petroleum, banking, pharmaceutical , food service, telecommunication services, computer, semiconductor, chemical, and transportation industries. For a wide variety of activity measures, the reports provide the average value, the maximum, the minimum, and the median value.

Motorola Example

Perhaps one of the most famous examples of benchmarking in recent history is the Motorola example. Motorola, through "Operation Bandit," was able to cut the product development time for a new pager in half to 18 months based on traveling the world and looking for "islands of excellence." These companies were in various industries: cars , watches , cameras , and other technically intensive products. The solution required a variety of actions:

• Automated factories

• Removing barriers in the workplace

• Training of 100,000 employees

• Technical sharing alliance with Toshiba

Motorola was particularly impressed by the P200 program of a Hitachi plant. This stands for a 200% increase in productivity by year end. The plant set immutable deadlines for the solutions to problems. All departments had six sigma goals.