ABSTRACT BENCHMARKING DISTRIBUTION

Pawar K S (Ed), Proceedings of the 2nd International Symposium on Logistics, University of Nottingham, Nottingham, UK, 1995 (pp 267-274).

BENCHMARKING DISTRIBUTION, LOGISTICS AND THE SUPPLY CHAIN PROCESS

F Hewitt, D Bennett and S Robinson Aston Business School , Aston University, Birmingham, UK ABSTRACT

Early benchmarking efforts were focused on discrete, easily measured "Distribution and Warehousing" task components, such as cubic capacity utilisation of warehouses and the cost of the movement of goods per tonne/kilometre of cargo. As the "Integrated Logistics" concept took hold, however, the established cost comparison approach to benchmarking was supplemented or replaced by a focus on service level comparisons. The focus can be said to have changed from "lowest cost" as benchmark to "best value for money" as benchmark. With the recent emergence of intra-company and inter-company "Supply Chain Management", the focus of benchmarking activities has moved on again . Process efficiency, effectiveness and reliability are now seen as the keys to competitiveness, and it therefore follows that supply chain process performance should be the comparator in benchmarking exercises . In an attempt to achieve world class levels of supply chain management, the most advanced companies now see process improvement as the key. A combination of process related output measures such as customer satisfaction results and in-process measures such as schedule flexibility are therefore emerging as the likely foci for future benchmarking activity in logistics. Since these process metrics relate very closely to the input factors used in modelling exercises, and the possibility is emerging of creating a "theoretical benchmark" of performance beyond the level of even the best current practitioners . INTRODUCTION

The origins of modern benchmarking as a performance improvement tool can be traced back to a visit to Japan in 1979 by a group of Xerox executives. The visit was instigated by Charles Christ, the president of the company's Reprographics Manufacturing Group (McNair and Leibfried 1992). In keeping with the , then , prevalent belief that the attainment of functional excellence would hold the key to marketplace competitiveness , this pioneering benchmarking trip was undertaken by a group of functional specialists from manufacturing. They focused upon a small set of manufacturing performance metrics and a restricted set of mutually competitive companies. In this case, since the issue at hand was the cost of manufacturing copiers, the companies studied were Japanese office equipment producers and the key performance metrics included defects per thousand machines made, faulty parts per million used and unit manufacturing costs. In the subsequent sixteen years , benchmarking has spread to many other functions , including logistics. The scope of the exercises has also been extended to include the identification of world class functional performance in companies

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Pawar K S (Ed), Proceedings of the 2nd International Symposium on Logistics, University of Nottingham, Nottingham, UK, 1995 (pp 267-274).

which are not necessarily in direct competition with each other and may not even be part of the same commercial or industrial sector. One of the earliest cross-sectoral studies was undertaken by Robert Camp and his team of logisticians when they visited L.L. Bean , the sports goods mail order retailer in 1982. By studying this retailer's approach to warehouse management, levels of performance were identified in respect of picking and packing which were well beyond those attained by even the best manufacturing companies. L.L. Bean's performance was, however, based upon methods which could be adapted for use in a manufacturing environment, such as the segregation of high demand items into specific fast pick areas (CAMP 1989; Watson 1993). Now that more than a decade has elapsed since this study, it is perhaps time to reassess whether traditional approaches to the benchmarking of logistics, even if cross-sectoral , are still able to provide relevant insights into best practice. STUDY APPROACH

A literature search in the area of logistics benchmarking benefits greatly from the existence of two well established and regularly updated bibliographies. The Council of Logistics Management based in Oak Brook, Illinois has produced annual bibliographies of both academic and practitioner output in the area of logistics practice since 1967. The International Benchmarking Clearing House, which is part of The American Productivity and Quality Center based in Houston produced a comprehensive bibliography of benchmarking literature in 1992 ~nd has subsequently produced supplements . These compilations average almost two hundred references each per year, predominantly in English . Of particular interest to the present study are publications which appear on both lists. These references have also proven to be a prime source of further, more specialist sources. Whilst it is not claimed that they provide a totally comprehensive history of benchmarking in logistics, analysis of these publications has provided significant insight into how logistics benchmarking has evolved since the early 1980s, and this in turn has provided a starting point from which to discuss the past trends with practitioners and to solicit their opinions concerning current and possible future developments. From the literature a summary description of benchmarking practice was developed for discussion with practitioners . Mapping this against the stages of logistics evolution identified by the A.T.Kearney consulting group (SEGAR and Best 1986) provided a useful framewor~ for the discussions. Discussants included presenters who took part in the American Productivity and Quality Center's "Benchmarking Logistics Breakthrough Strategies" symposium in Dallas in 1994, members of the Conference Board Europe's "Quality Council" and "Logistics Council", and other individuals recommended by members of these groups. In total forty practitioners representing thirty six companies took part in the discussions, some of which were conducted as individual telephone interviews whilst others involved informal roundtable brainstorming by focus groups. Participants were asked to critically review the development of logistics benchmarking on the basis of their own

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Pawar K S (Ed), Proceedings of the 2nd International Symposium on Logistics, University of Nottingham, Nottingham, UK, 1995 (pp 267-274).

experiences, and also to suggest possible future directions which logistics benchmarking might take. The research output can therefore be best categorised as a consensus interpretation of the past and future evolution of logistics benchmarking, reflecting the shared views of those actors who have been , and will continue to be, at the leading edge of logistics practice. BENCHMARKING DISTRIBUTION AS A COST CENTRE

Those companies which view their distribution and warehousing activities as identifiable cost centres find it easy to determine performance criteria for use in benchmarking . The physical and discrete nature of most of the tasks within this area allows for easy measurement. Such metrics usually combine physical factors with their associated cost elements, and time has a role to play in many performance data sets. The Xerox/L.L. Bean logistics benchmarking exercise of 1982 followed this approach . Having decided to concentrate primarily on order picking , the companies exchanged information on orders per day, lines picked per day and pieces picked per day. Costs were attributed to these activity factors , thus enabling efficiency comparisons to be made. Another commonly used activity and cost-oriented criterion is space utilisation, often expressed in terms of density utilisation of cubic capacity. Where inventory control falls within the distribution function this is usually measured in terms of asset turns and assigned an imputed cost of cash borrowing. A typical set of cost-oriented benchmark measurement criteria is shown in Table I. Table 1: Typical Distribution CosVBenchmarking Elements (A)

GoODS INWARD TRANSPORTATION CoSTS (Labour costs; none labour; operating cost; depreciation) .

(B)

STORAGE CosTs (Labour costs; rent and rates; energy and materials ; depreciation) .

(C)

ADMINISTRATION AND MANAGEMENT COSTS (Labour costs; systems support costs) .

(D)

fiNISHED GoODS OUTWARD TRANSPORTATION CosTS (Labour costs; none labour; operating costs; depreciation) .

(E)

INVENTORY HoLDING CosTs (Imputed cost of borrowing cash equivalent to average inventory value) .

N. B. Individual elements and total costs are normalised in terms of value and/or volume of goods sold. "Benchmark" level is seen as lowest normalised cost.

In order to normalise these cost data for company size, and thus facilitate comparisons of inter-company performance , benchmarking studies usually collect information on the total value of goods sold by each participating company. The results of large sample benchmarking studies may also be segregated by company type, separating for example distributors from manufacturers in order to further facilitate interpretation. Logistics cost benchmarking studies which have been run annually for a number of years by leading consultancy groups in both Europe and

269 2nd International Symposium on Logistics 11-12 July 1995 Nottingham UK

Pawar K S (Ed), Proceedings of the 2nd International Symposium on Logistics, University of Nottingham, Nottingham, UK, 1995 (pp 267-274).

North America continue to form an important element of the benchmarking activities of many logistics departments. Indeed, in companies providing transportation and storage for others, distribution and warehousing cost reduction remains the key focus of their benchmarking activities. Many logistics professionals, however, no longer accept cost as the only relevant benchmark comparator. For these practitioners the question of "effectiveness of provision" in terms of service levels is as important as, and inseparable from, that of cost minimisation. BENCHMARKING LOGISTICS VALUE FOR MONEY

As part of the 1980s TQM movement, with its strong emphasis on customer satisfaction, many companies revised their views concerning the role of their logistics functions. As customer awareness increased, an extreme emphasis on cost control without any tie to the impact of cost cuts on service level was recognised as inappropriate in many companies. At about the same time , the crucial importance of on-time order satisfaction as a determinant of customer satisfaction became recognised . Fragmentation of responsibility along the value chain was seen as a significant cost driver and also a cause of failures in the order delivery process. Many companies, therefore, moved to a more integrated management structure; combining responsibility for inward transportation , warehousing and outward transportation into a single "Integrated Logistics" group, which was in some cases also given responsibility for procurement and inventory planning . Underlying these moves was a fundamental change of philosophy. Instead of having a cost centre mentality, companies were in effect adopting a value added approach to assessing logistics performance. Service levels are generally measured against a commitment to internal or external customers . In the case of logistics the measures reflect the traditional commitment to deliver "the right product, in the right quantity, at the right time, to the right place". A typical set of service-oriented performance criteria is shown in Table 11. They are not mutually exclusive with the cost-oriented criteria in Table I, and are usually combined with cost measures in order to give a balanced view of performance. Table /1: Typical Logistics Value for Money Benchmarking Elements (A)

COST ELEMENTS- AS PER TABLE

(8)

SERVICE LEVEL ELEMENTS :

(i) (ii) (iii) (iv) (v)

1.-

First-time stock availability . Delivery against requested date. Delivery against committed date. Percentage of orders complete in one delivery. Customer reported defects.

N.B. Study participants are rated in terms of both cost performance and service level attained. "Benchmark" is seen as best value for money in trade-off between cost and service level.

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Pawar K S (Ed), Proceedings of the 2nd International Symposium on Logistics, University of Nottingham, Nottingham, UK, 1995 (pp 267-274).

Implicit in the inclusion of service level criteria in logistics benchmarking exercises is the idea of a trade-off between service level and cost. A company which achieves very high service levels but is carrying high levels of stock and/or incurring high distribution costs may not be the company which others wish to emulate. Conversely, the lowest cost provider may only truly claim best-in-class status if its results are normalised against others in terms of service levels. The relative weighting given to the two aspects of performance varies across industrial sectors, and is in itself of interest to benchmark exercise participants. Many companies are shown by these benchmarking exercises to be poor performers in terms of both cost and service level. Few companies emerge as high performers in both factors , but those that do are the ones whose practices are most carefully scrutinised by others. These are the true leading edge practitioners of integrated logistics. Some of these same companies are already further refining their approach to logistics management. They are challenging the need for a trade-off between service levels and costs, and are investigating ways in which supply chain process redesign might improve service levels without increasing either cost or inventory, thus leading to new levels of performance on both axes. Under this "Process Management Approach" the very appropriateness of managing a company as a set of separate functions , however well integrated, is being questioned (Davenport and Short 1990; Davenport 1993 ). And nowhere is this more true than in the logistics arena with the emergence of "Supply Chain Process Management" (Hewitt 1994 ). The key to competitiveness is now seen as viewing the supply chain as a continuous process, and in managing the process in an holistic way BENCHMARKING THE SUPPLY CHAIN PROCESS

From a process management perspective, the supply chain can be thought of as a transformation process , using resources to convert selected inputs into required outputs. The process can be delineated either as an intra-company multi-functional chain, connecting one company's suppliers to its customers through a series of internal sub-processes, or as an interconnected multi-company chain which transforms base raw materials into consumable end products. Within the physical sciences the concept of process efficiency has long been associated with energy utilisation. The less energy that is required to accomplish the transformation of inputs into the required outputs , the more efficient the process is deemed to be. A related concept is that of process effectiveness . The more consistently a process is able to produce outputs to the required specification , the more effective it is. Logisticians wishing to adopt supply chain process management, whilst at the same time continuing to gain benefits from benchmarking, must review their benchmarking measurement criteria against these concepts.

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Pawar K S (Ed), Proceedings of the 2nd International Symposium on Logistics, University of Nottingham, Nottingham, UK, 1995 (pp 267-274).

Two possible surrogates for the physical effect of energy utilisation which are now being used to assess effectiveness in supply chain benchmarking are cost and time. The cost factor tends to be a direct extension of the cost centre metrics used in earlier benchmarking studies . The difference is that the supply process view ter)ds to be reflected in a more comprehensive list of cost elements. Materials acquisition costs such as labour expenses within the purchasing department are often included. Materials handling within the manufacturing function may also be regarded as a supply chain cost item. Some companies include the cost of after sales support in supply chain costs. The most expansive definition of the process encompasses all of the administrative costs of supplier and customer management as well as the activities related to the physical movement of goods. As there is not yet consensus on the most appropriate boundaries of the supply chain process, any benchmarking of the process must begin with a clear agreement between benchmarking participants as to what will, and will not, be included in the exercise. Time, as a way of measuring process efficiency, is often used as an alternative or supplement to cost criteria . In the case of the supply chain the most comprehensive definition, adopted by those companies which include all administrative and support functions from supplier engagement to customer support, is the elapsed time of the "cash to cash" cycle. This measures the total time taken from paying a supplier for an item to recovering the cash related to the sale of the end product of which that item is a part. More commonly, the efficiency of the supply chain is measured as the time taken from the receipt of input material to the sale or delivery of the finished product. Closely related to this measure is the amount of inventory in the supply chain , and a link is often formed between the cost and time metrics by translating the value of pipeline inventory into a time-based metric such as days of supply. With the increasing introduction of activity based costing (Cooper and Kaplan 1990; Pohlen 1993), it is likely that the two sets of measures will in fact merge , but at present supply chain benchmarking exercises tend to measure both cost and time. A typical set of which are included in Table Ill. Table Ill: Typical Supply Chain Process Bencl1mark Elements (A)

IN PROCESS MEASURES

(i) (ii) (iii) (iv) (B)

Costs per Table I, extended to the full supply chain . Process flexibility for demand volume changes . Supply chain cycle time (order taken to product delivered) . Cash to cash cycle time .

OUTPUT MEASURES

(i) (ii)

Service level attainment as per Table 11. Customer Satisfaction Survey results.

N.B. Processes are compared in terms of their effectiveness m achieving customer satisfaction, and their efficiency in terms of cost at a variety of throughput levels. "Benchmark" is seen as the most effective and efficient process across the widest range of conditions.

Pawar K S (Ed), Proceedings of the 2nd International Symposium on Logistics, University of Nottingham, Nottingham, UK, 1995 (pp 267-274).

Process effectiveness, according to the definition given earlier, must be measured against the specification of the required outputs. Supply chain process managers have followed two approaches to this matter. Firstly, most performance analyses include statistics of percentage achievement of on-time delivery of product to customers. The base line is usually the delivery commitment made by the company, but sometimes a more stringent standard of the customer requested date is used. Other aspects of the delivery, such as the availability of all ordered items in undamaged condition are included in the specification and used in calculating performance and process effectiveness. A second, more radical approach to assessing supply chain process effectiveness is to measure the number of customers fully satisfied with delivery performance. This approach is based on the proposition that the most appropriate performance specification for any supply chain is to always meet the end customer's needs. In practice only a few companies have yet adopted this approach , and in all cases they combine this analysis with more direct measurement of performance against time and cost targets . CONCLUSIONS AND DIRECTIONS

According to McNair and Leibfreid (p.182): "The value of the benchmarking exercise lies in its ability to ask the right questions" The corollary to this statement is that benchmarking questions must be updated as functions evolve. In the case of logistics benchmarking this has meant that as some companies have moved from a predominantly cost centred view of the function to a value adding , customer oriented view, and on again to a process orientation, they have needed to reflect this in the content of their benchmarking exercises. The overriding opinion of those involved, however, is that the fundamental principles and techniques have proven to be remarkably robust and adaptable at all stages of logistics organisational evolution . In all benchmarking exercises the collection and analysis of the data are precursors to gaining better understanding of the practices through which superior performance is achieved . The nature of the data, however, affects the direction which further questioning is likely to follow. Cost data collection leads to further questions on cost planning and control methods , and service level data point the way to a better understanding of service practices and procedures. Collecting data concerning both cost and service levels leads to questions concerning corporate priorities. Similarly, process oriented metrics lead naturally to further questions concerning process management techniques. Many of the companies involved in process oriented benchmarking are also involved in major Business Process Reengineering initiatives. They are also realising that these process oriented metrics are readily adaptable as a basis for modelling exercises. Some companies are therefore beginning to develop models of their supply chains in which

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Pawar K S (Ed), Proceedings of the 2nd International Symposium on Logistics, University of Nottingham, Nottingham, UK, 1995 (pp 267-274).

benchmarking data can be used to assess total chain impacts of changes to parts of the chain. The more sophisticated models can also be used to postulate theoretical or ideal performance levels well beyond those attained by even the best current practitioners. Hammer and Champy (p . 132) have stated: "The problem with benchmarking is that it can restrict the reengineering team's thinking to the framework of what is already being done in its company's own industry. By aspiring only to be as good as the best in the industry, the team sets a cap on its own ambitions. Used this way benchmarking is a tool for catching up, not for jumping way ahead ." On the basis of the present study, it appears that the more advanced proponents of logistics benchmarking have avoided these potential pitfalls and are now using benchmarking alongside reengineering with relative ease.

REFERENCES Camp RC (1989) Benchmarking , Milwaukee: ASQC Press. Cooper R and Kaplan RS (1990) Profit Priorities from Activity Based Costing , Harvard Business Review, Vol. 68, No.3. Davenport TH (1993) Process Innovation, Boston : Harvard Business School Press. Davenport TH and Short JE (1990) The New Industrial Engineering , Sloan Management Review. Summer. McNair CJ and Leibfried KHJ (1992) Benchmarking , New York: Harper Coli ins Inc. Hewitt F ( 1994) Supply Chain Redesign , The International Journal of Logistics Management, Vol. 5, No.2. Pohlen TL (1993) Applications of ABC within Logistics, Annual Proceedings, Council of Logistics Management, Oak Brook, Illinois. Seger RE and Best WJ (1986) Integrated Logistics Management, Chicago: Kearney. Watson GH (1993) Strategic Benchmarking , New York: Wiley.

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