An Executive Guide to Performance Benchmarking

Transcription

1 Inspiring Business Excellence An Executive Guide to Performance Benchmarking How to provide best-in-class service and reduce, by half, supply chain costs.

2 Measure to improve A healthy supply chain is fundamental for business success. If not a revelation, it has become a realization for companies of the recession generation. While the world has certainly become much smaller, it has also become more complex, which means a real understanding of your supply chain is ever more critical. Making big decisions without a full understanding of your supply chain is obviously very risky business. Performance benchmarking allows you to identify precisely where you are in absolute terms, and in relation to your competitors and peers so you can then plan where you want to be and how to get there. The benefits need little explanation: improved customer service; increased productivity and efficiency; reduced cost, inventory, and waste; lower capital requirement; enhanced portfolio development and management; reduced environmental impact; and improved competitive advantage. Understanding the opportunity is the first stage of realizing the potential. Whatever the industry, an optimized supply chain can be the difference between those organizations that succeed and those that do not. But if you don t know how well you are performing, or what best-in-class performance looks like, how do you know where you can improve or by how much? Ignorance is not bliss; in fact, it s a very dangerous practice. If your competitor s supply chain is delivering better service than yours, you ll find out eventually, but unless you take the initiative, it might be the hard way. Critically, benchmarking your supply chain performance will allow you to identify performance gaps and provide a financial evaluation of the gains that can be made off the back of improvement action. You can expect the potential savings to be many times the cost of benchmarking itself; gains typically run into millions of dollars. 1

3 What is Performance Benchmarking? Oliver Wight Performance Benchmarking provides both a quantitative and qualitative assessment of your supply chain performance; it isn t just a set of numbers. It allows you to identify opportunities for improving customer service while dramatically reducing supply chain costs. By quantifying your current supply chain performance and comparing it to best in class, you will see precisely where and how big the improvement opportunities are. With recommendations for short-, medium-, and long-term improvement actions, you can chart your journey to supply chain excellence. These are the things you should expect to be able to do: Improve customer service Reduce supply chain costs Optimize your supply chain Identify performance gaps Quantify the size of the prize - the real financial benefits you can gain Identify how to deliver the perfect order - the ultimate measure of customer service Shorten your cash cycle Track your improvement over time Oliver Wight Performance Benchmarking is an integrated component of the Oliver Wight Proven Path methodology. You can measure your performance at the very start of your journey to performance excellence and use it to validate your progress against the Oliver Wight Class A milestones along the way. What s more, you can continue to monitor your performance long after you ve achieved the coveted Oliver Wight Class A standard, to ensure you continue to retain your competitive edge. 2

4 Why do it? There are a number of very good reasons to benchmark yourself against the competition, but chief among them is establishing where the bar really is. Of course, if you aspire to be the best, you need to know what the best looks like. To use a simple sporting analogy, if you intend to be the fastest man in the world, you know you have to beat Usain Bolt s 100m time of 9.58 seconds. It is an unambiguous goal. Benchmarking your performance is critical if you want to defend or improve your competitive position. Of course, once you have made gains, it then becomes a useful sales tool - being able to demonstrate you are one of the top performers in your sector has to be good for business. If you define your key measures of business performance without benchmarking, how will you know what targets to set against these measures? Many organizations operate comfortably on the basis they are improving year after year, but it s no use settling for 10 percent growth if your competitors are expanding at 25 percent, or they are operating with a lower cost base and will eventually surpass you. Oliver Wight Performance Benchmarking places a different lens on your organization from an external perspective. Business leaders typically ask their people, What can we do to improve? But with benchmarking, the question becomes, What will it take to become best in class? That establishes a very different organizational motivation, and your people are inspired to come up with initiatives that may well take you by surprise. Supply chain costs as % of gross sales FIG 1. Supply chain costs as % of gross sales Industry sector This chart shows that regardless of industry sector, organizations providing best-in-class service have half the average supply chain costs. 3

5 Achieving excellent customer service is an imperative in all organizations, so to improve supply chain performance, the focus has to be on service rather than cost reduction; the former will lead to the latter. This may seem counterintuitive as it is often assumed you have to increase costs in order to improve customer service. However, the evidence is indisputable - supply chain costs in bestin-class companies are half the average. What s more, if you provide better service than your competition, you can charge more for that service, so it becomes a virtuous circle. Providing bestin-class service can cut your supply chain costs in half. 4

6 How does it work? The Oliver Wight team will work with you to establish a data set of organizations which match the profile of your supply chain by industry, supply chain structure, company size and location, and so on. They can be your direct competitors and/or those with similar supply chains, whether or not they are in the same industry sector. Then, using your own data, you record your performance against the 128 criteria in our unique on-line assessment tool, the Oliver Wight Customer Order Fulfilment Survey or COFS. This allows us to create a deep-dive evaluation of your supply chain performance relative to your specified data set. The 128 criteria, against which your supply chain is assessed, provide the information to determine your performance relative to the global standards established by the Supply Chain Council s SCOR model, and using the principle of delivering the perfect order, the Oliver Wight COFS tool evaluates your performance for order accuracy, inventory availability, delivered in full, on time (DIFOT), customer acceptance, and accuracy of invoicing. Your supply chain benchmarked against the world s best-known organizations Your performance compared to your peers and best in class Analysis tailored to your industry sector and/or supply chain type Cost and service analyzed by individual supply chain functions Hard data and demonstrable metrics Improvement plan with key recommendations for short-, medium-, and long-term action The size of the prize quantified You record your performance against the 128 criteria in our unique on-line assessment tool. 5

7 Once the results of your Customer Order Fulfilment Survey have been assessed and validated by the Oliver Wight team, you will receive your Performance Improvement Report (PIR) - a detailed 50- to 100-page analysis of your end-to-end supply chain performance compared to your peers and the best in class from your chosen data set. On top of the hard data, your PIR will indicate areas for improvement action for the short, medium, and long term. The report will calculate the size of the prize ; the financial gains you can make through the performance improvement will be identified. The report will be presented to you by an Oliver Wight consultant, so the findings can be openly debated and an informed roadmap to improvement can be developed. 6

8 What is the source of the data? Oliver Wight is recognized globally as the pioneers of Sales and Operations Planning and thought leaders for Integrated Business Planning (advanced S&OP). Over the past 40 years, we have worked with hundreds of companies - including some of the world s bestknown brands - helping them integrate their business processes and optimize their supply chains. We have an unrivalled database of organizations for you to benchmark your supply chain performance against. This means you can compare your own supply chain with those in your industry sector and/ or with similar supply chain structures. Our database is growing every day and refreshed regularly, so your performance is measured only against supply chains operating in the latest economic and market conditions. 1. The data used has been collected over many years; it is comprehensive, robust, and regularly refreshed. 2. The Oliver Wight database includes nearly 1,000 organizations from across the globe. 3. Performance Benchmarking is tailored to your organization - the analysis is made against organizations with comparable supply chains to your own, and you can specify which types of organizations you want to be benchmarked against although, of course, we never reveal the names of the companies in the data set you have selected. 4. You enter your own data, so the results are based on your supply chain and current information. Example of supply chain data sets Automotive and machinery Building Distribution Food and beverage 3PL Exporters Importers Utilities General manufacturing Engineering Retail suppliers Computers and electronics Office equipment Industrial suppliers Retailers Pharmaceuticals and hospitals Chemicals and plastics Clothing 7

9 Who is it for? Oliver Wight Performance Benchmarking is mandatory for any organization that wants to improve its supply chain performance. It is suitable for any business in any sector, as long as it has a complete end-to-end supply chain system, from order to delivery. It is most useful for mid- to large-sized companies. What do I get? The Performance Improvement Report (PIR) Your Performance Improvement Report (PIR) provides a detailed evaluation of your supply chain performance relative to those in your chosen data set. The following pages show examples of what it includes. 8

10 1. Strategic cost and service relationship At the center of your PIR report is an analysis of the relationship between your supply chain costs (your cash-to-cash cycle, supply chain management cost as a percentage of sales, stock turns etc.) and level of service to customers (DIFOT, inventory accuracy, and perfect order ratio). This is mapped against all the other organizations in your selected supply chain group, so you see not only your own performance but also how it compares to your competitors (i.e. those in your chosen data set). Dark blue area outlines the spread of other supply chains positions on the chart. FIG 2. Strategic cost and service relationship This chart shows the performance of Company X relative to the organizations within its chosen data set. The dotted line denotes the trajectory of best-fit performance of service related to supply chain costs for the group data set. For Company X, there is improvement potential for both service and cost. X-axis: Service driven by SIFOT; DIFOT, inventory accuracy; perfect order ratio etc. Y-axis: Cost driven by cash-to-cash cycle; supply chain cost silos; stock turns etc. 9.

11 2. Functional cost benchmarking This compares your performance against your chosen data set in the six key functional cost areas of: Purchasing administration Inventory management Inventory holding Warehousing Outbound transportation Customer service FIG 3. Functional cost benchmarking This example shows the warehouse function performance of company X in terms of the cost of the warehouse function as a percentage of gross sales. Gross sales includes the revenue earned by the business. Some of these costs are listed below. Warehouse fixed costs including insurance, depreciation, rent, rates, outside storage cost, etc. Material handling equipment (maintenance, leasing costs) Variable costs including management staff, overtime and casual labor, postage, telephone, fax, and power etc. All information technology costs; costs of third-party provider, if relevant The performance of Company X is shown by the blue bar (3- <4%). Eighty-five percent of supply chains in the comparison group have lower costs than Company X for the warehouse function, and only six percent have higher costs. 10

12 3. Perfect order analysis Perfect order analysis is the ultimate measure of customer satisfaction. Using your own data, your Perfect Order Probability score factors order accuracy, inventory availability, warehouse service, transportation, customer order acceptance, and invoice accuracy to provide a real statistical measurement of your customer service compared to your peers. FIG 4. Perfect order analysis The grey arrows show where Company X achieves parity, or close to parity, with its peer group, and the yellow arrows indicate where there is a significant improvement opportunity. For Company X, Perfect Order Probability is below the average ( Parity ) for its peer group and well below best in class ( Advantage ) in its group. The company has a particular weakness in inventory availability, which is recorded at just 80 percent. 4. Gross margin and turn/earn index Business profitability is determined by many factors. One critical trade-off is the margin earned by each SKU and how often that SKU turns over. For example, an antique dealer traditionally has very low stock turns, requiring high-margin products to be profitable. In contrast, a grocery retailer has very fast stock turnover and can be profitable with low product margins. The turn/earn index (T&E) is a gross measure of profitability and can be for an item, line, category, or the business as a whole; it measures the combined effects of gross margin profitability and the quantity of inventory being held/turned through the business so, if an exporter targets a T&E of 1,000, this equates to 25 stock turns with an average gross margin of 40 percent, or 40 stock turns with gross margin of 25 percent. T&E allows you to identify stock that is not covering its cost, so you can either increase margin - or if that s not possible, reduce inventory - to ensure profitability. As a general rule: the larger the T&E, the better, and a low T&E indicates a problem. On the other hand, if T&E is too high, the item, line, category, or business could well be vulnerable to competition. 11

13 5. Supply chain metrics Oliver Wight Performance Benchmarking provides a forensic analysis of your key supply chain metrics compared to all the other supply chains in your selected data set delivery in full; delivery on time; DIFOT (in full x on time); total supply chain management costs; cash-to-cash cycle time; and stock turns. Stock Turns FIG 5. Supply chain metrics The blue flags denote the performance of Company X. It has an excellent in-full delivery performance of 99 percent, but on-time delivery and stock turns are only average ( Parity ) compared to its competitors. 12

14 6. Recommendations for improvement On top of the hard data analysis, the improvement report makes vital recommendations on how and where to make gains in the short, medium, and long term. These are not hypothetical activities but real actionable proposals, identifying the priorities for process and behavior change and the training requirements, as well as the opportunity for quick wins. 7. Size of the prize Your PIR report will show the financial gains which can be made by improving performance by one or two deciles relative to your peers, against each of the key supply chain metrics - from purchasing administration through to customer service. By definition, the gains will depend on the business demographics of your organization and its current performance, but typically the potential gains run into millions of dollars. This financialization makes performance benchmarking a powerful tool in justifying the cost of any improvement activity. Financial people always want to know what the return will be from any investment, and Oliver Wight Performance Benchmarking makes that very clear from the outset. Client: International food company FIG 6. Size of the prize In this real-life example of a food manufacturing company, Oliver Wight Performance Benchmarking has identified a potential gain of 8.79 million in supply chain costs, plus a further 2.70 million in other costs, for a single decile improvement in overall supply chain performance. 13

15 What happens next? If you would like to know more about Oliver Wight Performance Benchmarking, please contact us at: T E info@oliverwight.com The potential gains run into millions of dollars. 14

16 Inspiring Business Excellence Oliver Wight has a 40-year track record of delivering business improvement to some of the world s best-known organizations. We believe that sustainable improvement can only be made through your own people. So, unlike other consultancy firms, we transfer our knowledge to you, which means you can achieve performance levels and financial results that last. At the leading edge of management thinking and practice, our Integrated Business Planning (IBP) model lies at the heart of our clients journey to outstanding business performance. Oliver Wight originated Sales and Operations Planning in the 1970s, and IBP can most simply be described as advanced S&OP; evolving from its production planning roots over 40 years into the fully integrated management and supply chain collaboration process it is today. IBP allows the senior executive to plan and manage the entire organization over a 24-month horizon, aligning tactical and strategic plans each month and allocating critical resources to satisfy customers in the most profitable way. Oliver Wight Americas, Inc. PO Box 368, 292 Main Street New London, NH USA T: info@oliverwight.com Oliver Wight Asia/Pacific 131 Martin Street, Brighton Victoria 3186, Australia Oliver Wight EAME The Willows The Steadings Business Centre Maisemore, Gloucester, GL2 8EY United Kingdom The information contained is proprietary to Oliver Wight International and may not be modified, reproduced, distributed, or utilized in any manner in whole or in part, without the express prior written permission of Oliver Wight International.