The "Best Practice" Company and Other Benchmarking Myths:

Five Lessons from Real Data

By Dr. Edith A. Wiarda & Dr. Daniel D. Luria

 

Introduction

SMM (small to medium-sized manufacturer), isolated too long, seeks Benchmarking Partnership. Interests: trading Performance Metrics, discovering Best Practices. Object: Continuous Improvement, World Class Performance.

Benchmarking has been around long enough to have developed its own mythology.

We hear time and again impressive tales of Xerox’s lead time reductions, Kodak’s machine reliability gains, Motorola’s reengineered business processes, Ford’s design-for-manufacturability turn-around. With the right measures and the right partners, any company can strive for world class status.

Despite the hype, benchmarking remains a common-sense proposition. Don’t reinvent the wheel. Learn from what others do right. Look outside your own firm for good ideas.

Unfortunately, the mythology often gets in the way of common sense. This is especially true for smaller firms – and for the independently-operated branch plants of large corporations -- who quickly find that benchmarking approaches meant for the Fortune 100 have little to do with them. Told by customers or quality auditors to "do benchmarking", smaller shops plunge in gamely. But they soon get bogged down in the search for potential partners, none of whom seems to be the sought-after keeper of Best Practice. The shining Factory on a Hill can’t be found -- and even if it could, there’d be a two-year wait for a plant tour.

 

Reality Check: Data on Smaller Manufacturer Performance

In 1992, the authors launched the Performance Benchmarking Service, a business unit of the Industrial Technology Institute of Ann Arbor, Michigan. Since then, the Service has provided over 4100 customized benchmarking reports to nearly 2800 manufacturing plants. Participants complete a questionnaire, and receive a report comparing them to similar plants on as many as 80 different measures: productivity, sales growth, schedule integrity, delivery, scrap and rejects, computer use, and many others. The Service is designed with smaller manufacturers in mind. Virtually all participants have fewer than 500 employees. Over 90 percent belong to firms with companywide employment under 500. Analysis of the data collected from those plants suggests five lessons.

 

Lesson 1 You’re probably not as good as you think you are.

Manufacturers almost universally overrate their performance. We have asked participants to provide self-rankings along with their initial questionnaires. That is, before receiving any feedback from us, participants indicated in which category they felt they belonged, relative to their industry:

They provided these ratings separately for the areas of quality, scheduling and delivery, workforce management, design, and production.

Until confronted with hard data, fully 81% of the shops we’ve served thought they ranked in the top quarter of their industry; 96% believed themselves in the top half. (See Figure 1.)

 

One of our clients, a maker of automotive stampings, was incredulous when presented with data showing that their labor productivity (measured as value-added per employee, defined below) was only about half that achieved by the top 10% of plants in their industry. The client’s first reaction was, "This has to be wrong. They’re giving you bad data. Nobody can be that high." After doing some informal validation independently, the client’s second reaction was, "How do they do it?"

Thus, benchmarking is invaluable for its shock value. Time and again, we have seen managers react with disbelief at feedback that tells them their plants are merely mediocre -- or worse -- at activities they view as strengths. So, if you have never taken a systematic look at other businesses, do it. Expect some disappointing news. And be prepared to use it to motivate change in your organization.

 

Lesson 2  Standard benchmarking "how-to’s" are poorly suited to smaller manufacturers.

A variety of outlines and flowcharts have been used to describe the tasks in a benchmarking study. Typical among them is this seven-step process:

        1. Determine what functions to benchmark           

        2. Define appropriate metrics                                 

        3. Identify best practice companies                            

        4. Measure own and best practice performance

        5. Estimate performance gaps; set goals

        6. Implement improvement plan

        7. Monitor results

 

The problem isn’t with the task list itself; this is a useful and broadly applicable overview of what it means to benchmark.

Rather, what’s wrong with most benchmarking manuals is that they implicitly address a Fortune 100, corporate-level audience. They emphasize steps 4-7: the whys and hows of lining up plant visits, conducting interviews, plotting charts, and gaining buy-in on implementation. Finding appropriate partners is assumed to be a straightforward matter of electronic literature searches, combined with structured networking in benchmarking circles.

In contrast, our experience suggests that it’s in steps 1-3 that smaller manufacturers need practical guidance. With little prior knowledge of how they compare, they are unsure in which areas they should focus their benchmarking efforts. Standard searches for best practice operations yield few "hits", and almost none from among smaller-plant peers. This leaves managers to mine their personal contacts, with no way to validate whether the firms they find are truly best practice operations. The all-too-common result? The exchange of mediocrity on a poorly-defined topic.

 

Lesson 3  Any quest for an "all-around best practice" partner is a misguided waste of time.

A lot of disillusionment with benchmarking stems from misconceptions about what it means to be a good performer. The truth is, there is no such thing as THE best practice organization. No company or plant is good at everything.

Figure 2 illustrates this point for a carefully selected set of 31 metalforming plants, but the pattern holds for virtually every industry.  These plants are in similar lines of business: all produce stamped parts to print, with typical piece price under $5, in volumes of at   least 1000 units per order. We ranked these shops on each of 10 critical performance measures: on-time percent, inventory turns, scrap rate, and the like. The result? None outshines the others across the board. Virtually all are near the top of the group on some measures, and near the bottom on others. Further, every firm looks mediocre on average. Even the firm with the best composite ranking scored no better than 15th out of 31 on some performance measures, with an average rank of 10th out of 31.                 

 

 

Figure 2 shows why benchmarking-as-industrial-tourism will always fail. You cannot simply line up plant visits to firms with reputations for being "good" and expect to see best practices across the board. So don’t view benchmarking as a chance to "see how Acme does things." First figure out the one or two measures you most want to target. Then zero in on the shops that are good at that.

Lesson 4  Use Value-Added per Employee for a quick, meaningful assessment of your overall performance.

Value-added is defined as sales less the cost of any purchased parts, materials and services. It measures the market value of the work done at the plant. We nominate Value-Added per Employee for four reasons:

        1. It measures labor productivity, a fundamental indicator of efficiency.

        2. It is strongly correlated with profitability, but unlike profitability is not subject to the vagaries of inconsistent             accounting.          

        3. It is an excellent predictor of a company’s technological and organizational sophistication.

        4. Variation on this measure is huge.

Figure 3 provides data on the distribution of Value-Added per Employee from selected industries. The wide range of performance is striking. In every industry, the worst company in the top 10 percent achieves Value-Added per Employee at least double that of the best company in the bottom quarter. These differences represent quantum leaps in performance. A plant can’t double its Value-Added per Employee just by updating some machines, or tweaking plant layout, or sending its employees to a quality course. It needs to make fundamental changes in what’s getting done, and how.

 

Figure 3.

(Of course, the definition of an "industry" can include many dissimilar plants servicing different markets. The top 10% level may not be a relevant target for all plants. A major emphasis of the Performance Benchmarking Service is the selection of a customized comparison group for each participant, so that its performance is rated against true peers.)

An excellent strategic planning exercise is to consider how your company could increase its Value-Added per Employee to the top 10% level for your industry. Most shops conclude – correctly – that simply tightening up labor standards (i.e., reducing the denominator) while maintaining current practices won’t get them there. What’s required is a combination of three approaches:

  1. Big changes in work organization and efficiency, to reduce the labor and purchases needed to achieve a given level of sales. For example, one of Performance Benchmarking’s clients, a sheet metal fabricator, has revamped its incentive and authority systems. All production workers are now organized into teams, with each team given responsibility – and being rewarded – for achieving ever-higher productivity on their assigned tasks. This firm has achieved roughly a 20% increase in its value-added per employee in the past three years.
  2. New technology, to reconfigure processes to be faster, more controlled, and less labor-intensive. Among our benchmarking participants, shops at the high end on Value-Added per Employee are far more likely than average to report widespread use of computers and keyboards by their workforce. The tie between computer use and higher value-added per employee is compelling. Just over 50 Performance Benchmarking clients increased employee computer use by more than 35% from 1993 to 1995. These shops reported an average increase in value-added per employee of 19.7% over the same period. In contrast, a similar number of firms reported that employee computer use actually fell from 1993-95. Their average value-added per employee went up by only 7%.
  3. More distinctive, higher-margin products or services, to increase the dollar value of sales for a given level of purchases and labor costs. Companies unable to protect themselves from price pressures can be forced to pass through their efficiency gains to their customers. Making big moves on Value-Added per Employee requires shielding yourself from this sort of price-squeezing. One Performance Benchmarking client is a provider of electric-discharge machining (EDM) services. They typically offered turn-around time of two weeks, but realized they could often do it much faster. They polled their customers and found many were willing to pay a significant premium for one or two-day turnaround. The bottom line: a 25% growth in annual sales, with little increase in labor or material requirements.

In crafting your list of success factors, give careful consideration to your bargaining power in customer relationships. Does "listening to the customer" translate into following their price, quality, and delivery directives? Or can you improve your position by providing valued services or products that they can not get elsewhere?

 

Lesson 5  Be prepared to mount a resourceful, committed search for best practice partners.

To be sure, managers now have several benchmarking "dating services" available to them – services that attempt to link firms with complementary interests. But don’t expect that finding the partners you really want – plant-level technical experts at small-to-medium-sized firms – will be easy. Most members of benchmarking organizations are Fortune 500 firms. As many as half are not even manufacturers. So the more your critical success factors relate to shop floor operations, the less likely you are to form useful partnerships via that route.

Here are some resources to consider:

  1. Field Engineer’s Newsgroup, Manufacturing Extension Program (MEP), National Institute for Standards and Technology (NIST). MEP is a nationwide network of hundreds of field agents providing assistance to smaller manufacturers. Their clients and contacts number well into the thousands. (MEP is also the primary customer of the Performance Benchmarking Service.) The Newsgroup allows field agents to pose questions to the entire network; others with knowledge in that area reply back. You can have a field agent access the network on your behalf, polling others to nominate best practice candidates. (To learn more about MEP, call 800-MEP-4MFG or see the MEP Source website at www.mep.nist.gov.)
  2. Best Manufacturing Practices Program (BMP), U.S. Navy (301-403-8179 or www.bmpcoe.org). A publicly-available database, with emphasis on defense-related industries (e.g., machining, electronics). You can search the database directly from the web site.
  3. Your Customers. Your customers may be willing to connect you with their top performers in non-competing product lines.
  4. Your Suppliers. Ask your suppliers – especially those serving a broad industrial clientele, and with good technical capability – to nominate other firms with whom they do business.
  5. The International Benchmarking Clearinghouse of the American Productivity and Quality Center (800-776-9676; www.apqc.org). A benchmarking membership organization; IBC also offers extensive publications and workshops.
  6. Benchmarking Exchange (800-662-9800; www.benchnet.com). A benchmarking membership organization.
  7. Performance Benchmarking Service. We thought we would be remiss not to mention ourselves. You can reach us at (800)292-4484, fax (313)769-4651, e-mail pbs@iti.org, or http://www.iti.org/pbs.

 

The Five Lessons Reviewed

1. You’re probably not as good as you think you are. But when armed with hard data, you can shock your                  organization out of complacency and into action.

2. Standard benchmarking "how-to’s" are poorly suited to smaller manufacturers. If yours is a smaller firm – or if you     don’t receive much managerial or technical support from your corporate parent – you’ll have to craft a   benchmarking   approach that will work for you.

3. Any quest for an "all-around best practice" partner is a misguided waste of time. No one plant is good at everything.

4. Use Value-Added per Employee for a quick, meaningful assessment of your overall performance. Focus your improvement efforts by considering what stands in the way of large gains on this measure.

5. Be prepared to mount a resourceful, committed search for best practice partners. Many excellent firms never get a write-up in the trade press. So look beyond the usual electronic literature searches.

By keeping these in mind, you can formulate a benchmarking strategy that is both realistic and cost-effective. Excellence worth emulating is out there. But like most things worthwhile, it takes discipline, tenacity and focus to find it.

 

Reference

    

     1.  These data are derived from the Performance Benchmarking Service database. You can also get value-added per employee,            by industry, from the U.S. Census Bureau.  See  www.census.gov/econ/www/manumenu.html , or contact the Information             Services Center at (301)457-4673 or  mcd@census.gov.

 

Edith A. Wiarda is a research scientist with the Industrial Technology Institute in Ann Arbor, MI. She has a doctorate in economics from the University of Michigan in Ann Arbor.

Daniel D. Luria is director of evaluation and benchmarking at the Industrial Technology Institute in Ann Arbor, MI. He has a doctorate in economics from the University of Massachusetts in Amherst.

Performance Benchmarking Service, Industrial Technology Institute: P.O. Box 1485, Ann Arbor, MI 48106

(313)769-4650 (phone) (313)769-4651 (fax)  pbs@iti.org  (e-mail)  http://www.iti.org/pbs

 

©    1997 American Society for Quality

 Reprinted with permission