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Benchmarking

W. DALE COMPTON

Achieving and maintaining a competitive position in the worldwide marketplace demands an awareness of the capabilities of one's competitors and the ability to continuously improve one's relationship to the leaders. To measure oneself against the world leaders of the competitive race is an essential element of good management. As Camp (1989) notes, the Japanese describe this by the word dantotsu—“striving to be the ‘best-of-the-best.'” Camp observes that “We in America have no such word, perhaps because we always assumed we were the best.” The quantitative comparison of one's current performance against the world leader is the essence of “benchmarking.”

The metrics that are useful for benchmarking are numerous and varied. In some industries it is common to emphasize a few operating characteristics, while in others the focus will be on a wide range of parameters. In some cases the parameters that describe system performance will be highlighted. In others, it may be more common to examine the performance of subelements of the system. Some metrics may be reasonably easy to obtain. Others may need to be estimated based on limited available data. However it is accomplished, benchmarking is a critical foundation for the successful operation of a manufacturing enterprise.

We will enumerate several of the metrics that are commonly used in making financial, operational, and system-oriented comparisons. Each measures a characteristic that is important to an operation. When properly ag-



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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE Benchmarking W. DALE COMPTON Achieving and maintaining a competitive position in the worldwide marketplace demands an awareness of the capabilities of one's competitors and the ability to continuously improve one's relationship to the leaders. To measure oneself against the world leaders of the competitive race is an essential element of good management. As Camp (1989) notes, the Japanese describe this by the word dantotsu—“striving to be the ‘best-of-the-best.'” Camp observes that “We in America have no such word, perhaps because we always assumed we were the best.” The quantitative comparison of one's current performance against the world leader is the essence of “benchmarking.” The metrics that are useful for benchmarking are numerous and varied. In some industries it is common to emphasize a few operating characteristics, while in others the focus will be on a wide range of parameters. In some cases the parameters that describe system performance will be highlighted. In others, it may be more common to examine the performance of subelements of the system. Some metrics may be reasonably easy to obtain. Others may need to be estimated based on limited available data. However it is accomplished, benchmarking is a critical foundation for the successful operation of a manufacturing enterprise. We will enumerate several of the metrics that are commonly used in making financial, operational, and system-oriented comparisons. Each measures a characteristic that is important to an operation. When properly ag-

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE gregated, they offer a means of assessing one's overall competitive strengths and weaknesses. FINANCIAL METRICS A wide variety of financial metrics are commonly used in assessing the competitive performance of an enterprise. Although many of these can be obtained, or estimated, from the annual financial reports of the enterprise, the lack of disaggregation of data on the part of many firms often prevents a detailed analysis of the individual business operations. In the United States, the Securities and Exchange Commission requires certain reports that are much more detailed than are found in most annual corporate reports. The “10K” report, for example, contains a variety of information that can be used to derive comparisons with domestic competitors. Even though reports by foreign competitors are often less detailed than are those of U.S. firms, privately held firms often publish no details. Assessing the performance of such companies is often difficult. The following metrics are useful in comparing the financial performance of enterprises: Return on assets Return on sales Return on investment Unit cost of product Fraction of unit cost of product resulting from: Labor Materials Capital investment, etc. Profit per unit product (Averaged over all products offered by the firm) Profit per unit for each product type Number of employees Average sales per employee Average hourly wage of each employee Average hourly benefit cost for each employee Cash flow Equity ratio Annual volume at which the break-even point occurs PRODUCT PERFORMANCE METRICS The performance of the product in the hands of the consumer is a key indicator of the capability of the development, production, and marketing

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE system. The successful manufacturing enterprise does not, however, simply wait to see emerging trends in market share and then respond. A constant assessment of the relative merits of competing products and the continuous incorporation of the appropriate responses into one's products are a mark of the successful firm. The “appropriate response” must be determined, of course, within the context of the needs and wants of the customer. The following are some of the actions that successful enterprises have institutionalized to obtain this information: Evaluation of competing products under conditions similar to those used to test your products Tear down analysis of competing products Reverse engineering of competing products Customer surveys of competing products From tests and evaluations of the type described above, one obtains information on the following important metrics: Part counts Material types used Material utilization in each component Processes used in production, e.g., assembly techniques Product costs Service capability, e.g., field repair versus field replacement FMEA (failure modes effects analysis) From customer surveys undertaken either directly or through industry-wide surveys carried out on behalf of the industry, one can assess: Quality of the product as experienced by the customer Long-term durability of the product Fraction of sales to repeat customers Responsiveness of the producer to service requests UNIT OPERATION METRICS A manufacturing enterprise must be concerned with performance at many levels: the unit operations employed in producing the product; the consolidated operations as a manufacturing system; and the relationship between the manufacturing enterprise and the other elements of the firm, such as engineering and marketing. Whether achieving continuous improvement in an existing operation or planning for upgrading or replacing a facility, the choice of the unit operations, their arrangements, their interactions, and their controls is critical to determining the overall competitive position of a manufacturing operation. A variety of metrics can be useful in making these assessments:

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE Time required to accomplish a unit process Time a product spends in a process versus nonproductive time spent in waiting and setup Buffer sizes used for each unit process Machine reliability Yield and quality of unit processes Machine utilization rate Amount of material scrap Labor hours per unit process Energy use per unit process Time required to change a process, e.g., a die change Determining these metrics for a competitor may be very difficult. Companies have used a variety of methods to obtain these data. Vendors who supply facilities to both you and your competitors can often provide insight into the efficiency with which others use particular machinery or processes. Trade associations can be enlisted to provide surveys in which all members of an industry can participate (Textile World, 1989). Foreign partners and subsidiaries often can provide information on the state of operations in other countries. Professional society meetings and conferences provide valuable opportunities to exchange timely information in a neutral environment, to the benefit of all parties. SYSTEM OPERATIONAL METRICS While one must be concerned with the metrics of the product and with those that describe the unit operations, a clear vision of the operation of the total enterprise cannot be obtained until the analysis is broadened to assess the operation of the total system. It is in this context that one can begin to understand overall performance relative to world-class producers. The following are typical of the metrics needed to determine system operation: System productivity Units produced per hour of labor Units produced per total investment Hours of direct labor per unit versus total system hours (management, staffs, etc.) of labor per unit Quality of the operations Rejects during processing Field repairs per units delivered Returns by customers Inventory turns Total work-in-process Value of work-in-process

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE Fraction of time facilities are used Fraction of production facilities that are new or fully depreciated Extent of uniform use of all unit operations Time required to respond to a changing market demand Time required to introduce a new product or service Extent to which just-in-time methods are employed Extent to which concurrent/simultaneous engineering is practiced AGGREGATED MEASURES OF PERFORMANCE In addition to the above metrics, the successful competitor must be concerned with some aggregate characteristics of the enterprise. Many of these are useful in characterizing the dynamic response of the system to changes in the environment. The following list of some of these characteristics includes a brief indication of a few of the common definitions of these measures. Obviously, various metrics will be needed to measure the performance for the alternative definitions of the following characteristics: Flexibility—(i) the capability of the system to respond to a changing marketplace, (ii) to accommodate new technology, or (iii) to reflect changing workplace practices. Complexity—an aggregate property resulting from the separate decisions of the functional departments of the enterprise. Variability—can be interpreted as (i) random variations in processes, (ii) the temporal variations of a demand, or (iii) the “variety” in the products or processes. Reliability—used in the sense that a product, process, or system that is subject to failure can be expected to perform as required. Quality—(i) a transcendent property, (ii) a product-based property, (iii) a user-based property, (iv) a manufacturing-based property, or (v) a value-based property (Garvin, 1984). Availability—(i) the fraction of time that an item is in inventory and is available for shipment on demand or (ii) the mean fraction of time a machine is available for operation. MEASURES OF LONG-TERM COMPETITIVE CAPABILITY The above metrics are generally viewed as describing the current status of an enterprise. As important as these are for comparing a firm's current capabilities with those of a competitor, they do not offer a clear view of the future capabilities of the firm. Two areas are particularly important for a firm that is competing in the world marketplace—its technological capability and the quality of its personnel.

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE Technological Capability Recognizing that the variety and breadth of technology that most enterprises employ is so great that they cannot hope to develop it entirely within their own organization, it is essential that they maintain mechanisms for identifying promising technological developments and for adapting them to their particular needs. Means of accomplishing this include the following actions: Support of R&D projects within the organization Development of pilot lines for investigating new processes Joint investigations of technological opportunities with vendors Participation in industry consortia that are developing new technologies Involvement with selected university research activities Regular attendance by personnel at professional and technical meetings The metrics by which an organization should judge itself against its competitors include the following: Level of support for internal R&D. Fraction of R&D budgets devoted to long-term projects; level of investment in exploratory opportunities, including pilot lines, new product concepts, and technological innovations. Support provided personnel to participate in worldwide technical meetings and forums. Level of support for technical libraries and information systems. Technical Personnel The capability of an organization to monitor and identify technological opportunities depends critically on the presence of well-trained, technically astute personnel. Some of the metrics that are useful in assessing one's capability relative to competition are Fraction of technical work force with professional degrees Fraction of technical work force regularly involved in continuing Fraction of technical work force with advanced degrees education Level of recognition that has been afforded technical personnel by outside organizations, e.g., honors, membership on national committees, officers of professional societies, invited lectures Level of involvement of technical personnel in assessment of opportunities for new products, processes, or services

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MANUFACTURING SYSTEMS: FOUNDATIONS OF WORLD-CLASS PRACTICE INTERACTIONS It must be recognized that many of the metrics identified above are not independent. For example, it is clear that the performance measured by financial metrics depends directly on many of the product, process, and system metrics. Similarly, the actions that determine the quality metric (depending on which property one is measuring, of course) have an impact on a host of other metrics, for example, process yield, product costs, use of facilities, levels of employment, material scrappage, labor hours per process, and fraction of repeat sales to customers. It is evident that care must be taken in interpreting a combined list of metrics. Perhaps of more concern are the indirect relationships that may exist but are not easily quantified. For example, how does one express the relationship between the quality of the operations or the level of system productivity on flexibility and complexity of the operation? The absence of a clear understanding of these relationships—beyond some general rules of thumb—presents a serious barrier to understanding the likely impact of actions that may affect more than one part of an enterprise. CONCLUSION The conclusion that is to be drawn from the above discussion is that there is a wide variety of metrics—many more than those listed here —that need to be regularly and consistently measured before firms can assure themselves that they are performing competitively. Benchmarking is an important element of the foundations of manufacturing. Without good benchmarks a firm cannot be assured that its current level of performance is appropriate. Neither can it be assured that the objectives established for future improvement will be adequate. Good data are essential to good decisions. A well-established practice of benchmarking offers the best opportunity for generating those data.