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The Process Of Benchmarking Supply Chain & Ocean Freight Rates
Aug 24, 2017
To make sure we are all on the same page, let me define benchmarking from our perspective.
Benchmarking is “a measurement of the quality of an organization's policies, products, programs, strategies, etc., and their comparison with standard measurements, or similar measurements of its peers.”
Benchmarking as a Process
Benchmarking as a process is thought to have originated with Xerox in 1979. The document company used benchmarking to take a look at unit production costs in manufacturing. Xerox management compared their unit costs with certain competitors in Japan who were selling copiers at extremely low prices.
What were the relative costs of their competitors? Xerox wondered.
Staff discovered that indeed, the competitors’ production costs were much lower. This allowed the Japanese competitors to offer their customers such low-priced items.
Such an awareness led US manufacturing executives at Xerox to re-adjust their targets in keeping with Japanese costs. They made changes to their manufacturing process to meet those targets. (Inevitably, other changes were made in other areas, as well, not just manufacturing).
The results were so phenomenal that a “benchmarking movement” sprung up in business process management circles. The benchmarking approach and process became “an essential element of the business performance management (BPM) toolkit and a key input to financial and business improvement efforts”.
By the early 1990’s, many Fortune 500 companies such as Goodyear Tire and Rubber, AT&T and Chrysler began to implement benchmarking process steps as standard practice. This practice of benchmarking, particularly with respect to technology, continues today.
Benchmarking Process Steps in Your Supply Chain
Benchmarking comes in all shapes and sizes with little to many steps. The complexity of supply chain management/logistics and shipping procurement call for a well thought out plan for tackling the process.
In general, the steps of the benchmarking process are as follows (with some variation in benchmarking process steps as companies adapt their own methodologies to meet their corporate needs).
The following 12 steps are:
- Choose an area to improve.
- Define the benchmarking process/scope that will be undertaken.
- Isolate potential partners for comparison
- Identify possible data sources -where you will get your information.
- Collect your data.
- Isolate discrepancies in the data.
- Establish process differences
- Set goals for change.
- Communicate internally and externally.
- Align goals.
- Review results and adjust.
Shipping Needs Benchmarking for Efficiency & Optimization
Many companies in the shipping industry involved with benchmarking process steps have had to sidestep one significant area in their cost analyses. Market transparency. A frustratingly murky area.
Whether for companies directly inside the shipping/freight industry or those companies simply relying on shipping/freight for their operations, market transparency has been sorely lacking. How ocean container rates compare to the market and to peers has been a “black hole” or mystery.
Shipping costs as a data source are integral to the benchmarking process in supply chain planning and benchmarking. Without knowledge of the costs, it has been challenging to engage in benchmarking the logistics process properly. RFQ’s are difficult to manage, KPIs for sourcing teams are unmeasurable without a neutral data source and market intelligence.
Freight cost control is a critical element in evaluating and seeking improvement for many companies, big or small. For example, close to 10% of logistics costs for home appliance giant Electrolux is container shipping costs.
Few in ocean freight logistics thought greater visibility could be achieved, outside of ad hoc, unreliable or unwieldy methods of tapping into the much-desired data. (Some of the methods included meeting informally with other members of the industry to “exchange notes”, using outdated static historical data…)
Market conditions were too volatile, the data was too opaque/fragmented, and too many vested interests existed in not making this information transparent.
Who would have thought that crowdsourcing contracted price data would be the “disrupting” answer?
A New Era for Benchmarking, Ocean Freight and Performance
With transparency comes better decision-making and negotiating power.
Understanding benchmarked freight rates assists you in negotiating better rates from your supplier. It can also underscore standards that you need to maintain for your customers in order to stay competitive in today’s fast-changing world.
For Electrolux, having a “dynamic snapshot” of the market and pricing provided by Xeneta’s technology helped them identify situations “where they might be leaving money on the table.” Following the benchmarking steps and crowdsourced data acted “as confirmation of the strength of their position compared to the current market,” said Mr. Vang Jensen Vice President, Global Logistics at Electrolux
The benefits of benchmarking can expand from comparative costs to expense-to-revenue ratios, service calls, levels of customer satisfaction and other metrics that need to be improved.
Ultimately, “when executed correctly, benchmarking can be a powerful focus for change, driving home sometimes uncomfortable facts and convincing leaders of the need to embark upon improvement efforts. Benchmarking is a tool that enables the investigation and ultimately the achievement of excellence, based on the realities of the business environment, rather than on internal standards and historical trends.”