We've all heard the horror stories: The multi-billion-dollar company that couldn't ship goods because it ran out of pallets. The automaker forced to offer financial incentives and rebates because it couldn't accurately measure performance in the distribution channel.
Product cycles have accelerated and consumers expect delivery in days, not weeks. If companies can't meet the needs of the new consumer and the demand-driven supply network, they will soon be out of business. In order to keep pace, companies must implement stringent benchmarking procedures to ensure they can catch weak areas in their supply chain and weed them out.
It's hard enough for companies to speed up their operations and weed out the bad processes within their four walls. But companies' operations have become highly dependent on the performance of their outsourced suppliers and distributors — along with the performance of all the other partners in their supply network.
While benchmarking has been used extensively within the enterprise, it's still largely conceptual for cross-company processes. Yet, according to analyst firm Aberdeen Group, "The biggest single indicator of superior performance is how closely a company monitors its suppliers' events."
These efficiencies will never fully be realized until measurements can be made across a networked supply system, continuously in real-time. Further, all metrics must flow directly from end-user demand — not enterprise-centered measures.
Benchmarking's big challenge has always been determining what to measure and how to measure it. With terminology varying from trading partner to trading partner, even the simple stuff can get frustrating. So, for instance, an obvious measure of performance might be on-time delivery of goods. But what constitutes "on-time"? If an organization meets a promise date, it might think it has hit its goal.
Did you really meet a promise date if the shipping deadline has passed, and you're unable to move freight off the dock? More important, did your promise fulfillment bear any relation to the customer's request date?
Industry groups such as the Council of Supply Chain Management Professionals (CSCMP) are now striving to answer the "what to measure" question by drafting standards for cross-company process terminology.
Back in 1992, Robert Kaplan and David Norton introduced the now-famous "balanced scorecard" approach to performance management in Harvard Business Review. Kaplan and Norton sought to create a methodology for scoring more than just financial measures of performance. Their work defined four areas of concern that should be encompassed by all benchmarking initiatives:
- Financial performance
- Customer knowledge
- Internal business processes
- Learning and growth.
Since then, the balanced scorecard approach has been extended beyond the core enterprise. In fact, it adapts well to partner benchmarking.
In the end, there's a larger universe of things that could be benchmarked than those that should be benchmarked. Look to the end customer — not to syndicated research or enterprise standards — for meaningful measures of performance. Then, hold all supply network players accountable to those end-user careabouts.
Typical distribution benchmarks include metrics on customer perception, various time measurements and the quality of the delivered goods. These benchmarks will involve reaching one or more levels further down in the network. With this in mind, benchmark criteria should include customer analysis. Specifically, managers should obtain metrics to measure satisfaction levels not just between the enterprise and its distribution channels but also between distributors and end customers.
Further metrics include warehouse times, transit times, damage reports and customer complaint rates. With benchmark levels in place, there can be potential for cost savings and increased profit margins.
What about the "how to measure" side of the equation? Naturally, the core manufacturing enterprise is comparing its performance against peer companies. It's also looking for laggard and outperforming suppliers within its own network.
Measurement has limited effectiveness, however, when it's undertaken only periodically. To create a truly responsive network, measurement must be ubiquitous and continuous, with realtimedashboards to support rapid decisionmaking.
This obsoletes the old notion of a linear supply chain. The modern supply network is a networked system in every sense — with networked cross-company infrastructure, networked communication and networked, collaborative benchmarking.
This vision of supply networks is a revolutionary change in business processes. Getting there won't be easy, but results from even modest initiatives hint at the immense efficiencies to be gained.
For instance, in 2000, after nearly a decade of failed products and poor results, automaker Nissan Motors undertook an initiative to achieve an 8% profit on each vehicle sold. Through data collected in its supplier benchmarking program, Nissan discovered that suppliers were consistently producing inferior products at higher than average prices. In effect, Nissan was giving away $2,000 on every car sold. Further, Nissan's distribution costs were the highest among automakers.
Once aware of the problem, Nissan quickly acted to improve its supply base. Today, Nissan employs sophisticated benchmarks for every partner doing business with them. Any partner that fails to meet established standards is notified of corrective action that needs to be taken.
As a result of these initiatives, along with globalization of manufacturing and other standardization and quality initiatives, Nissan itself has become a benchmark for the automotive industry. Since 2000, the company's stock price has nearly doubled. And in the past year, vehicle sales are up more than 10%.
In a customer demand-driven economy, then, if companies want to succeed they must get past the notion of being a self-contained company. Companies who will succeed are those that virtually integrate with their partners, suppliers and distributors.
An important part of virtual integration is measuring processes that can zero in on who are the performers and the nonperformers. When company executives make benchmarking a key process throughout the product's life cycle, from raw materials to recycling, they will achieve critical end-to-end supply network gains.
David W. Morgan is president and CEO of D.W. Morgan Company (www.dwmorgan.com), a logistics, transportation and responsive supply chain consulting firm.