“If you want your company to be known as the best in its industry, commercial sector, or even in its niche, you must gain awareness of the only goal that matters – the one which none of your competitors have yet surpassed.” - Rob O’Byrne, Logistics Bureau
What is Inventory Management Benchmarking?
“If you can’t measure it, you can’t improve it” - Peter Drucker.
Benchmark your inventory management processes to see your success skyrocket.
In a previous post, we took a look at inventory management pain points and bad practices. If your system lets any of those bad practices slide, we know you want to fix them. However, before you dive in ready to straighten out the problems in your inventory management system, you need to benchmark your current performance levels.
According to BusinessDictionary.com, “The objectives of benchmarking are (1) to determine what and where improvements are called for, (2) to analyze how other organizations achieve their high-performance levels, and (3) to use this information to improve performance.”
Every successful business benchmarks their performance. Benchmarking is a way to measure and record performance levels and/or best practices. When done within a company, you may be looking to establish a measurement to understand your progress throughout the year. Within an industry, companies work together to discover best practices.
Benchmarking helps reveal bad practices as well. So you’ll know where to focus your remediation efforts. Nothing is ever perfect, and you must always strive for improvement. Best-in-class companies benchmark their performance because they know they will not stay “best-in-class” if they don’t continuously improve their processes.
Types of Benchmarking
Internal benchmarking is when companies try to learn about and from their systems and processes. They don’t look on the outside. They objectively compare methods across various processes in order to determine which areas have high or low efficiency. Or your company may compare the same process across multiple facilities. Once you have this measurement, you can make practical plans to improve or change the way your inventory system operates.
In the case of external benchmarking, you look outside at the practices of other companies in your industry. You’ll need to pick points of comparison before attempting external benchmarking. We believe it worthy to note that Six Sigma differentiates between external benchmarking and competitive analysis.
Differences Between Benchmarking and Competitor Research
Focuses on best practices
Focuses on performance measures
Strives for continuous improvement
Bandage or quick fix
Partnering to share information
Considered corporate spying by some
Needed to maintain a competitive edge
Simply a “nice to have”
Adapting based on customer needs after examination of the best
Attempting to mirror another company/process
With strategic benchmarking, you look at other companies outside of your industry. Many companies find this form of benchmarking most difficult. Take care which key performance indicators (KPI’s) you select for comparison. If your company is in the automotive industry, there are still points of comparison to be found when comparing with a company in the food industry. However, there will also be obvious points that you can’t compare in a valuable way.
The business world’s ability to process and analyze data has caused us to dig into certain performance trends and examine them. It could be that a best practice in the agricultural industry could be applied in some way to your automotive company’s process.
Benefits of Benchmarking
Lower Labor and Operating Costs:
Once you know what your baseline performance is, you can work on improving it. This usually leads to cost-reduction, either through measures specifically for lowering cost or through best practices that naturally lower expenditures.
Improved Product or Service Quality:
Improving your processes generally leads to more orders fulfilled, less out-of-stock items, lower product wastage, and the list goes on. Your ability to satisfy customer orders on time with minimal backorders leads to happy customers. Happy customers lead to more repeat business and new business.
How to Benchmark Your Inventory Management Processes
Benchmarking processes differ from company to company. Within companies, the process will differ based on which type of benchmarking you’re doing. Some steps seem to almost always be used:
- Set your priorities
- Decide which processes and KPI’s you’ll evaluate
- Gather the necessary data
- Research internal and industry standards
- Pinpoint low-performance areas
- Create an improvement plan
- Execute the improvement plan and assess performance regularly
Each step should be broken down into tasks, and your assessment team needs to agree before moving onto the next step. If you’re externally or strategically benchmarking, there will be additional steps. You’ll also need to determine sources for your external data.
Inventory Management Key Performance Indicators
Here are some KPI’s that you might use in your benchmarking process. This isn’t an all-inclusive list!
- Inventory Turnover: also called inventory churn. The number of times inventory is sold and repurchased in a given period.
- Inventory Write-off: refers to the portion of inventory that doesn’t have value. This amount may be deducted from the company’s profits or the write-off allowance
- Holding Costs: the costs you incur from housing unsold inventory. This includes costs such as insurance, labor costs, and associated warehouse expenses.
- Average Inventory: a comparison of an amount of a product over designated points in time (at least two). The average inventory levels out fluctuations in product amounts and any notable fluctuations could indicate a problem.
- Average Days to Sell Inventory: the number of days in a year (365 or 360 days) divided by the inventory turnover ratio. If your company’s inventory turnover ratio was 8, then you’d divide that by 360 (representative of the year). This means that on average, your company had 45 days worth of on-hand inventory.
- Sales Velocity: how quickly your inventory sells from the moment you stock it.
- Inventory Visibility Level: your knowledge of all amounts of inventory at every location. Excellent inventory visibility requires that inventory systems be integrated. This can help with inventory backorders since shipments can be routed from other locations to satisfy an order.
Is Inventory Management Benchmarking Really That Important?
Benchmarking your inventory management processes gives you a starting point for improvement.
We understand. The entire process sounds resource intensive, and it can be. BenchmarkingSuccess.com shows that best-in-class companies operate at half the cost of their peers. The one practice they all have in common? Benchmarking.
Most companies have an idea of where they want to go. They want to be the best in their geographic location, their country, or maybe their industry. How can you effectively plan to get there if you don’t know where you are? In order to achieve your goals, you need a specific plan with built-in goals.
If you planned to run a marathon faster than your father, what is the first thing you would have to know? Your father’s best time. His best time would be your benchmark, and now you can create your training plan. Don’t underestimate the value of knowing where you are. It’s the key to planning where you’re going.
Do you think benchmarking could increase your company’s success? Why? Do you already incorporate benchmarking into your continuous improvement process? How has that impacted your business?