Benchmarking
Another approach to standard setting that is used to help identify opportunities for activity improvement is called benchmarking. Benchmarking uses best practices as the standard for evaluating activity performance. Within an organization, different units (for example, different plant sites) that perform the same activities are com-pared. The unit with the best performance for a given activity sets the standard.
Other units then have a target to meet or exceed. Furthermore, the best practices unit can share information with other units on how it has achieved its superior results. For this process to work, it is necessary to ensure that activity definition and activity output measures are consistent across units. Such things as activity rates, the cost per unit of activity output, or the amount of activity output per unit of process output can be used to rank activity performance and identify the best performer.
For example, assume the output of the purchasing activity is measured by the number of purchase orders. Suppose further that the cost of the purchasing activity for one plant is $90,000, and activity output is 4,500 purchase orders. Dividing the cost of the purchasing activity by the number of purchase orders prepared gives a unit cost of $20 per order. Now, if the best unit cost is $15 per purchase order, then the plant with the $20 per-unit cost knows it has the ability to improve activity efficiency by at least $5 per unit. By studying the purchasing practices of the best plant, activity efficiency should increase.
Internal benchmarking does not have to be restricted to cost management. For example, Rank Xerox, an 80-percent-owned subsidiary of Xerox operating mostly in Europe, used internal benchmarking to boost revenues. The benchmarking project was assigned to a team. This team studied the sales data and made country-by-country comparisons. It discovered that the French Division sold five times mare color copiers than its sister divisions and that the Swiss Division’s sales of the top-of-the-line DocuPrint machines were 10 times greater than those of any other country. Try team identified the best practices of the top performers and had other divisions implement them. By copying France’s best practices, the Swiss Division
Increased sales of color copiers by 328 percent, Holland by 300 percent, and Norway by 152 percent. At the end of the first year, Rank Xerox determined that overall sales increased by $65 million because of internal benchmarking. By the end of the second year, this figure increased to $200 million.
The objective of benchmarking is to become the best at performing activities and processes. Thus, benchmarking should also involve comparisons with competitors or other industries. However, it is often difficult to obtain the necessary data for external benchmarking to work. In some cases, it may be possible to study best practices of noncompetitors. There are certain activities and processes that are common to all organizations. If superior external best practices can be identified, then they can be used as standards to motivate internal improvements. The federal government has used best practices of private sector companies to improve its services. The U.S. Department of Agriculture (USDA), for example, sent a team to Citicorp to study how Citicorp serviced mortgages. As a result, the USDA consolidated its loan-servicing activities from 2,000 field offices into one central unit in St. Louis. This action, along with other changes, cut the cost of servicing the USDA’s loan portfolio by $250 million over five years.
Benchmarking
Another approach to standard setting that is used to help identify opportunities for activity improvement is called benchmarking. Benchmarking uses best practices as the standard for evaluating activity performance. Within an organization, different units (for example, different plant sites) that perform the same activities are com-pared. The unit with the best performance for a given activity sets the standard.
Other units then have a target to meet or exceed. Furthermore, the best practices unit can share information with other units on how it has achieved its superior results. For this process to work, it is necessary to ensure that activity definition and activity output measures are consistent across units. Such things as activity rates, the cost per unit of activity output, or the amount of activity output per unit of process output can be used to rank activity performance and identify the best performer.
For example, assume the output of the purchasing activity is measured by the number of purchase orders. Suppose further that the cost of the purchasing activity for one plant is $90,000, and activity output is 4,500 purchase orders. Dividing the cost of the purchasing activity by the number of purchase orders prepared gives a unit cost of $20 per order. Now, if the best unit cost is $15 per purchase order, then the plant with the $20 per-unit cost knows it has the ability to improve activity efficiency by at least $5 per unit. By studying the purchasing practices of the best plant, activity efficiency should increase.
Internal benchmarking does not have to be restricted to cost management. For example, Rank Xerox, an 80-percent-owned subsidiary of Xerox operating mostly in Europe, used internal benchmarking to boost revenues. The benchmarking project was assigned to a team. This team studied the sales data and made country-by-country comparisons. It discovered that the French Division sold five times mare color copiers than its sister divisions and that the Swiss Division’s sales of the top-of-the-line DocuPrint machines were 10 times greater than those of any other country. Try team identified the best practices of the top performers and had other divisions implement them. By copying France’s best practices, the Swiss Division
Increased sales of color copiers by 328 percent, Holland by 300 percent, and Norway by 152 percent. At the end of the first year, Rank Xerox determined that overall sales increased by $65 million because of internal benchmarking. By the end of the second year, this figure increased to $200 million.
The objective of benchmarking is to become the best at performing activities and processes. Thus, benchmarking should also involve comparisons with competitors or other industries. However, it is often difficult to obtain the necessary data for external benchmarking to work. In some cases, it may be possible to study best practices of noncompetitors. There are certain activities and processes that are common to all organizations. If superior external best practices can be identified, then they can be used as standards to motivate internal improvements. The federal government has used best practices of private sector companies to improve its services. The U.S. Department of Agriculture (USDA), for example, sent a team to Citicorp to study how Citicorp serviced mortgages. As a result, the USDA consolidated its loan-servicing activities from 2,000 field offices into one central unit in St. Louis. This action, along with other changes, cut the cost of servicing the USDA’s loan portfolio by $250 million over five years.
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