The Benefits of Benchmarking Your Manufacturing Operation
When was the last time you benchmarked your manufacturing operation against your competition? Are you aware of how your revenue stacks up against your peers? If you have not used benchmarking, it can be difficult to know how to price your products.
We all read a lot about “big data” and analytics, as well as lean manufacturing (lean). But how do these concepts apply to the key role that benchmarking – internal and external – plays for manufacturing and distribution businesses?
In the manufacturing and distribution sector, business owners, investors, executives and stakeholders are driven by results as they relate to operations, finances, human capital, invested capital, and other critical business elements. To address operating improvements and efficiencies, for example, manufacturers employ Lean Six Sigma concepts in production to create velocity and improve quality. One of the main tenets of Lean Six Sigma is to make it measurable—or simply put, to keep score. To improve something, we need to measure past, present and future prospects.
Benchmarking is not a new practice. In fact, one could argue that the history of internal benchmarking in the manufacturing and distribution sphere dates back to the days of the Egyptian Pyramids. After all, accurate measurements of raw materials and finished goods, and analysis of productivity and finances, were all key to successfully constructing one of the Seven Wonders of the World. In modern times, benchmarking really took off during the 1980s, led by pioneering companies like Toyota that integrated Lean Six Sigma (via the Toyota Production System) into the DNA of their business models.
Today, manufacturing and distribution businesses use internal benchmarking tools and techniques to evaluate their performance relative to internal expectations—i.e., “Are we on track to meet this year’s budget projections?” “How does that compare to last year’s performance?” “How does this month shape up compared to last month…or the same month last year?”
External benchmarking asks many of the same questions and employs similar tools and techniques to measure performance—yet as the name suggests, the focus is on business performance relative to competitors, peer groups and broad industries.
For your business, insights gained through external benchmarking can be worth their weight in gold. Well designed and implemented external benchmarking can help your business understand how it performs in numerous ways relative to competitors and industry peers. Those insights, in turn, can deliver competitive advantages that may help you gain market share and boost profits.
It seems like a no-brainer; yet, few manufacturing and distribution businesses really execute proper benchmarking – internal or external – despite its many benefits.
The reasons for this are varied; but if your business could benefit from benchmarking – and chances are, it could – here are five strategies to help you ensure success:
Define business success, then set your benchmarking goals accordingly. Business goals should propel your business toward a quantifiable end. To understand what victory looks like, it’s essential to define your business’ key performance indicators—then, understand what you want to measure, why you’re measuring it and how you plan to use the insights you gain.
Identify the internal resources you can apply toward your benchmarking efforts, and explore options for outside expertise where tangible gaps may exist. Do you have people in place with the necessary skills to undertake business or financial analyses? Do they have the time and/or capacity to do that? Are they committed to that effort? And will they alone get the job done?
Use the best data that’s available. Benchmarking insights are only as good as the data that drives them—and not all data is created equal. Avoid the “garbage in, garbage out” quagmire by accessing up-to-date and relevant data from reputable sources.
Unfortunately, that’s easier said than done for many middle-market businesses. These businesses – and yours may be one of them – don’t have access to certain databases, or just don’t have the time and resources to undertake the required analyses. Well-known subscription-based repositories like Hoovers and Dunn & Bradstreet offer an array of industry and company-specific information that can be used for benchmarking.
SVA Certified Public Accountants utilizes resources that go considerably deeper by tapping the expertise and efforts of banking professionals who input financial statement information, including balance sheet data that provides tangible evidence of peer performance.
Establish timelines, and keep all parties accountable for completing their assignments on schedule.
Evaluate and recalibrate as needed. Things change, both inside your business and beyond its walls. A relevant success metric one year, or one quarter, may be upstaged by a newer, more significant metric the next. Similarly, the competitive landscape may change to the extent that different benchmarking metrics take on greater importance. Keep your benchmarking program nimble, and adjust it as needed to accomplish your business objectives, and help you achieve victory.
Norm is a Principal at SVA Certified Public Accountants and works with a wide array of clients including manufacturers, distributors, and contractors. This experience gives Norm a diverse background for consulting and support services.