TQM Chapter 6

Principles of the Benchmarking Code of Conduct

-Principle of legality -Principle of exchange -Principle of confidentiality -Principle of use -Principle of first-party contact -Principle of third-party contact -Principle of preparetion -Principle of completion -Principle of understanding and action

7 Purposes of Benchmarking

1. Learning from success 2. Borrowing ideas 3. Best-in-firm 4. Beating industry standards 5. Best-in-class 6. National leadership 7. Best-in-world

4 Problems of Benchmakring

1. There may be substantial difficulty obtaining cooperation from other firms in your own industry—unless you happen to be a Fortune 100 firm. 2.The predominance of functional benchmarking with firms in noncompeting industries makes it difficult to benchmark with these firms. 3. Your efforts will be wasted unless you fully understand your own processes before you benchmark someone else. 4. Benchmarking is time-consuming and costly. A recent benchmarking project between two firms took nearly two years to complete and cost each of the firms more than $250,000. Of course, this was a major benchmarking project; other projects have been completed at lower costs, but some have been much more expensive.

Steps in Benchmarking

1. document current performance.

Principle of legality

Avoid discussions or actions that might lead to or imply an interest in restraint of trade: market or customer allocation schemes, price fixing, dealing arrangements, bid rigging, bribery, or misappropriation. Do not discuss costs with competitors if costs are an element of pricing.

Principle of exchange

Be willing to provide the same level of information that you request in any benchmarking exchange.

2 feedback loops in the conversion process

Control process loop customer feedback loop A third feedback loop can be added by gathering information from competitors through benchmarking

Principle of preparation

Demonstrate commitment to the efficiency and effectiveness of the benchmarking process with adequate preparation at each process step, especially at the initial partnering contact.

Principle of understanding and action

Follow the golden rule with benchmarking partners. Strive to understand how your benchmarking partner wants to have information handled

Principle of use

Information obtained through benchmarking partnering should be used only for the purpose of improving operations within the partnering companies. External use or communication of a benchmarking partner's name with its data or observed practices requires permission of that partner. Do not, as a consultant or client, extend one company's benchmarking study findings to another without the first company's permission.

Principle of first-party contact

Initiate contacts, whenever possible, through a benchmarking contact designated by the partner company. Obtain the permission of the contact before relaying any information or delegating any responsibility to other parties.

Principle of completion

Keep your commitments with your benchmarking partner in a timely fashion and keep your agreements.

Principle of third-party contact

Obtain an individual's permission before providing his or her name in response to a contact request.

Robert Camp's Business Process Benchmarking Process

Step 1: Decide what to benchmark Step 2: Identify whom to benchmark Step 3: Plan and conduct the investigation Step 4: Determine the current performance gap. Step 5: Project future performance levels Step 6: Communicate benchmarking findings and gain acceptance Step 7: Revise performance goals Step 8: Develop action plans Step 9: Implement specific actions and monitor progress Step 10: Recalibrate the benchmarks

Two rationales explain why benchmarking is good business:

The first originates from Deming's thought that "the worst thing for a business is a weak competitor." Therefore, strengthening the com- petition forces everyone to improve in order to maintain a competitive edge. As such, openness pro- vides an impetus to continual improvement. Another view is that openness can create a competitive advantage through creating psychological barriers to competition. A manager of a high-technology firm marketing a new product once said, "We do not mind if the others come to see how we produce our product. Once they see what we can do, they will not want to compete against us."

Key Business Factors (KBFs)

These key business factors are factors significantly related to the business success of the firm.

Principle of confidentiality

Treat benchmarking interchange as something confidential to the in-dividual and organizations involved. Information obtained must not be communicated outside the partnering organizations without prior consent of participating benchmarking partners. An organization's participation in a study should not be communicated externally without its permission.

To be a benchmark...

a company must be willing to open its doors and allow others to view its operations and tour its facilities.

Performance Benchmarking

allows initiator firms to assess their competitive position by comparing products and services with those of target firms. Performance issues may include cost structures, various types of productivity performance, speed of concept to market, quality measures, and other performance evaluations. For example, an initiator firm may be interested in identifying other firms that have implemented effective cost accounting practices such as activity-based costing systems to observe and compare the performance of various cost drivers.

There are two parties to each benchmarking relationship:

an initiator firm and a target firm.

A benchmark is...

an organization recognized for its exemplary operational performance.

Market share data

are an essential indicator of business success, resulting from the change in competition because of increased global competition. However, market share does not encompass only a single measure. Because markets are segmented, market share includes shares in the different markets served by the firm. Market share comparisons also are made to determine where the initiator firm ranks in the market

Operating results

are important for monitoring and tracking the effectiveness of company operations. They might relate to cycle times, waste-reduction measures, value-added measures, lead times, time from concept to market, setup times, percent reduction in setup times, and myriad other operating results.

Performance measures or indicators

are measurable characteristics of products, services, processes, and operations that the company uses to track and improve performance. The measures or indicators should be selected to best represent the factors that lead to improved customer, operational, and financial performance.

Quality Measures

are often compared between firms. They can include conformance-based quality information such as reject rates, capability analysis, performance information, or other measures. These quality measures also can include scrap and rework measures, percentage of defectives, field repairs, costs of quality, and many other metrics. The quality measures also may include data concerning the performance of processes and time-related statistics.

Productivity Ratios

are useful for measuring the extent to which a firm effectively uses the scarce resources that are available to the firm. As we have previously discussed, they include single-factor, multifactor, and total-factor productivity measures.

Most important type of benchmarking

business process benchmarking

5w2h

developed by Alan Robinson.5 The 5w2h concept is labeled as such because a business process benchmarking project should result in the answers to seven questions. Five of these questions begin with the letter w (who, what, when, where, why), and the remaining two questions begin with the letter h (how and how much).

Management by fact

dictates that decisions are made based on the sound collection and analysis of data.

Reverse Engineering

dismantling competitors' products to understand the strengths and weaknesses of their designs.

Managing the benchmarking process involves...

establishing, supporting, and sustaining the benchmarking program. To begin the management process, a strategy statement outlining the goals and strategies to be used is developed

Critical success factors

factors that help to determine the success of the firm

Process redsign

fundamental rethinking and redesign of business processes. Such change is often accompanied by the automation of business processes. Two factors are critical to achieving success through process redesign: breadth and depth.

Functional Benchmarking

happens when a company focuses its benchmarking efforts on a single function to improve the operation of that function. An example of functional benchmarking occurs in purchasing. Often, purchasing managers use their networks to share information about the purchasing function in many different organizations.

The marketplace includes...

immediate customers as well as competitors, the customers of competitors, potential competitors, and potential customers.

Customer-related results

include customer satisfaction, customer dissatisfaction, and com- parisons of customer satisfaction relative to competitors. These measures may be in the form of retention, gains, losses, customer-perceived value, competitive awards, competitive customer ratings, and independent organization evaluations. Customer satisfaction measures are important for gauging the effectiveness of quality improvement because they are good indicators of financial performance.

The initiator firm

initiates contact and studies another firm.

Strategic Benchmarking

involves observing how others compete. It often is not industry-specific because firms go outside their own industries to learn lessons from companies and organizations in different industries. Strategic benchmarking typically involves target firms that have won prestigious honors such as the Malcolm Baldrige award, the Shingo Prize, or the Deming Prize. The focus of this type of benchmarking is to identify the mix of strategies that makes these firms successful competitors. Such benchmarking can be very time-consuming and costly.

The target firm

is the firm being studied (also called a benchmarking partner). These are not static roles. Often the target firm enters into a reciprocal agreement to observe the initiator firm.

One of the most significant problems stems from...

limitations of accounting systems. Often, companies have variations in the way they compute their measures that affect the results.

Single-Factor Productivity

output/(a single input)

Total Factor Productivity

output/(sum of all inputs to production)

Multiple factor productivity

output/(the sum of multiple inputs)

Human resources measures

provide important insights into how effectively the business is being run. Employee satisfaction is significantly related to business performance in many firms. Therefore, employee satisfaction measures, training expenditures, training hours per year, work system performance, employee effectiveness measures, turnover, safety statistics, absenteeism, and many other data might be important measures for benchmarking.

Other activities for management include...

providing management awareness train- ing, establishing a benchmarking competency center, developing guidelines for information sharing, and overseeing the development of a visit protocol.

Depth (Process Redesign)

refers to organizational elements such as responsibilities, measurements, information technology, and skills.

Breadth (Process Redesign)

refers to the impact of the pro- cess redesign process to the entire organization.

Baselining (Process Redesign Methodology)

requires the monitoring of key internal firm performance measures over time to identify trends such as improvement (or decline) to inform managerial decision making. The baselining process involves identifying measures, establishing timeframes for future data collection, gathering data, and analyzing data on an ongoing basis to identify performance trends and changes

Structural Measures

s include the objectives, policies, and procedures followed by a firm. They may include safety, production, accounting, financial, engineering, and other types of structural measures that are used in determining competitiveness.

Financial Ratios

such as return on assets (ROA) or return on investments (ROI) are probably the easiest to obtain and compare. For many financial ratios, all that is needed is an income statement of a firm and a balance sheet. Many of these statistics are available in annual reports and on the Internet. Generally, senior management is keenly interested in these measures to guide their decision making.

Process Benchmarking

the initiator firm focuses its observation and investigation on business processes. This focus can involve studying process flows, operating systems, process technologies, and the operations of target firms or departments. The goal is to identify and to observe the best practices from one or more benchmark firms. By improving core processes, overall business performance is enhanced.

Key Measures

the metrics that need to be monitored to gauge the health of the business

Benchmarking is...

the sharing of information between companies so that both can improve.

Distinguishing feature of benchmarks is...

their amazing openness to other firms.

Financial Benchmarking

to perform financial analysis and to compare the results in an effort to assess your overall competitiveness. This type of benchmarking need not involve direct interaction between the initiator firm and the target firms. There is, however, interaction between the initiator and a third party that gathers this information. Usually the information can be gathered using on-line databases such as Lexis/Nexis or Compact D/SEC.

Strategy formation results from...

understanding customers and the marketplace

Conversion Process

we align the inputs together to form the product or service. Conversion processes might include turning sheet steel into chimney pipes or turning wood pulp into paper, or moving materials from point A to point B for a shipping service.

Product Benchmarking

when designing new products or upgrades to current products. Product benchmarking often includes reverse engineering, or dismantling competitors' products to understand the strengths and weaknesses of their designs. By observing the designs of others, the initiator firm can develop new ideas for product and service de- sign.

Remember (Benchmarking Code of Conduct)

•Keep it legal. •Be willing to give what you get. •Respect confidentiality. •Keep information internal. •Use benchmarking contacts. •Don't refer without permission. •Be prepared at the initial contact.