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BENCHMARKING BEST PRACTICES


By Larry Lapide

(This is an ongoing column in The necessarily best for everyone else. In understand why it is beneficial to the
Journal, which is intended to give addition, while they may be best for a company using it. An important question
a brief view on a potential topic of company using them today, they may not to address is: How does the best business
be best for the same company in the practice add value to the company using
interest to practitioners of business future, as its competitive business it? In this regard, as will be discussed
forecasting. Suggestions on topics environment changes. later, this means identifying the
that you would like to see covered underlying operating principles being
should be sent via email to That said, this does not mean that leveraged by the best business practice.
llapide@mit.edu). benchmarking best business practices is The underlying principles may prove
not useful. The key to learning something effective in another business environ-
from a best business process is to ment; however, the business practices or
y advice to those contemplating processes used to enable these principles

M benchmarking is to make sure


they dont automatically
assume that a simple apples-to-apples
might be drastically different from those
used at the benchmarked company.

comparison can be made among MIT SUPPLY CHAIN


organizations. Results from a bench- 2020 PROJECT
marking exercise require careful analysis
to understand fully what can be gleaned At MIT we are engaged in Supply
from the information. This is especially Chain 2020 (SC2020), a multi-year
the case when it comes to Business project to identify the underlying factors
Process Benchmarking. (See my column and principles that can lead to successful
in the Fall 2002 issue of the Journal of supply chains out to the year 2020. We
Business Forecasting that discusses this recently completed Phase I (http:
and the two others forms of benchmarking //www.supplychain2020.net), which was
internal and external benchmarking). focused largely on understanding what
makes supply chains tick. This project
Business Process Benchmarking also has started to identify the underlying
entails managers visiting other companies principles that are being leveraged by
LARRY LAPIDE
for extended site visits to get an in-depth successful or excellent supply chains run
look at how they are doing things. In this Dr. Lapide is a Research Director at by companies such as Dell, Wal-Mart, and
way, they can learn about the best MITs Center for Transportation and LimitedBrands to gain competitive
business processes that are in place at the Logistics, where he manages its Supply advantage. Twenty-one (21) company
other companies, with the intent of Chain 2020 Project, which is focused on supply chains in nine (9) industries were
replicating them in some way. However, supply chain management of the future. researched qualitatively, and twenty-five
when it comes to trying to replicate He has extensive business experience in (25) quantitative studies were analyzed to
another companys best practice, you industry, consulting, and research, and assess how company performance is
have to be careful and evaluate whether it has a broad range of forecasting impacted by Supply Chain Management
is really right for your company. Many experiences. He was a forecaster in (SCM).
have visited supply chain leader industry for many years, has led
companies, such as Dell and Toyota, only forecasting-related consulting projects The qualitative research delved into
to find that the best business practices at for clients across a variety of industries, each industry's drivers and challenges,
these lead companies will not make sense and has taught forecasting in a college and the various supply chain responses to
for their firm nor can such practices be setting. In addition, for seven years he them. Supply chains of successful
replicated in their companys business was a leading market analyst in the companies were profiled to identify the
environment. This is because so-called research of forecasting and supply important linkages that exist among
best business processes are not chain software. competitive strategies, operating models,

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operational performance objectives, and by providing cost-conscious retail anies. In the mid-1990s, the Supply Chain
business practices. shoppers with everyday low prices. But it Council was founded to develop a Supply
took several decades to accomplish it. Chain Operations Reference (SCOR)
While excellence is a very subjective Furthermore, Wal-Mart did this by model for the emerging discipline that
term, the research supported the premise creating and executing with a passion for depicted the paradigm shift. The message
that an excellent supply chain must do continual improvement in the efficiency was that integrating one's procurement,
four things: of its logistics and distribution operations, manufacturing, and logistics operations
relying heavily on technology along the across departments and trading partners
1. Support, enhance, and be an integral way. The Toyota Production System could provide huge benefits. Leading
part of a companys competitive (TPS), which has been the lynchpin of companies adopted various innovative
business strategy Toyota's successful supply chain over a practices to integrate their supply chain
couple of decades, has helped it grow into processes, which proved very successful.
2. Leverage a distinctive supply chain a global automotive powerhouse by In addition, a number of studies were
operating model to sustain a keeping quality high and costs low. conducted that showed that various SCM
competitive edge concepts implemented by adopting
BEST PRACTICES ARE NOT companies yielded significant benefits.
3. Execute well against a balanced set of NECESSARILY BEST
competitive operational performance As these companies were successful,
objectives (That is, in which all The elements of the Dell, Wal-Mart, the innovative practices they espoused
customer-facing and internal Key and Toyota supply chains are well-known, especially at increasingly popular supply
Performance Indicators or KPIs are so why can't competitors and others chain events were labeled as 'best' by
aligned to achieve the competitive replicate them and achieve the same others in the industry, especially
positioning desired e.g., to support success? Haven't their successes proven consultants and software providers. In
a lowest cost, highest quality, or that the practices they use are best? The pursuit of what new practices might work
fastest delivery strategy) answers are generally no. for them, many supply chain managers
attended these shows and read numerous
4. Focus on a limited number of tailored As described earlier, a successful stories about successful supply chain
business practices that reinforce each supply chains practices need to tie to a processes in business publications.
other to support the operating model companys competitive strategy, oper- However, many were disappointed to find
and best achieve the operational ating model, and performance objectives; that most of these best practices did not
objectives (For example, a few truly and the practices themselves must fit work for them or did not even make sense
innovative practices such as together by being consistent and in their business environment.
customer segmentation and demand reinforcing in order to yield performance
shaping that are surgically-focused that is more than the sum of the parts (that Over the past decade or so, process
on achieving KPI targets) is, 1+1 =3 rather than 1+1=2). The innovation by leading companies has
practices used by the above successful involved the piloting, prototyping, and
While these four characteristics of companies give them their competitive successful implementation of new SCM
excellent supply chain companies sound edge, so if a competing company were to business processes. These provided the
relatively straightforward and easy to put merely implement the same strategies, industry with proof that SCM as a concept
in place, they are not. It takes companies that company would not gain a worked and resulted in a laundry list of
years to mesh the elements together, as competitive edge. Moreover, it is highly so-called best practices that worked for
well as a great deal of effort to evolve unlikely that these practices would leading companies (such as Dell and Wal-
them as the competitive landscape provide a competitive advantage to a Mart), which used them to gain
changes over time. company in an industry outside those of competitive advantage. However, real-
these supply chain leaders. istically the best practice concept is
Dell's leading supply chain is the largely a myth, since 'best' connotes the
product of many years of work as Dell has EVOLUTION OF THE BEST most superior in all cases.
become the leading low-cost provider of PRACTICES LABEL
commoditized PC and other electronic PRINCIPLES RATHER
components by focusing on operational The term best practices appears to THAN PRACTICES
efficiency in a build-to-order model and have evolved in SCM because it is a
speed in a direct-to-customer operating relatively recent discipline that deals with Even though there are no best
model. Wal-Mart's successful supply new paradigm shifts in integrating practices, one can still learn from delving
chain helped it overtake Sears and others operations at adopting product comp- into the so-called best practices of another

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company via Business Process managed using a different business optimize operations, and minimize wasted
Benchmarking. One needs to avoid the process tailored specifically for it. The resources.
first impulse of exactly copying the underlying operating principle being
business practice. Instead, conduct a leveraged by this practice is the '80-20 Under an S&OP process, a companys
thorough analysis to identify the Rule.' sales and marketing plans are aligned with
underlying reasons why the practice is the plans of operations, logistics,
working well for the benchmarked In forecasting, A/B/C Segmentation manufacturing, and procurement in order
company. This means identifying the involves segmenting the product line into to jointly optimize future demand-supply
operating principles of the business three segments based on product sales operations. It is a process from which the
practices and how the benefits from those where A items are the high sellers, B final constrained and unconstrained
principles align to the four characteristics items are the medium sellers, and C demand forecasts are developed and then
of a successful supply chain (as discussed items are the slow sellers. Under an A/B/C used to drive operational planning
earlier). forecasting process, each segment is activities.
managed in a different way to help make
A basic premise of the SC2020 the forecasting process most efficient. A When benchmarking a companys
research is that there is a set of immutable great deal of effort and resources are S&OP process, managers need to
operating principles that underlie the best placed on forecasting the A items, some understand that various elements of the
practices espoused in SCM. These on the B items, and a negligible amount benchmarked companys process cannot
operating principles or business models on the C items. be taken at face value as best for them.
often involve tradeoffs that need to be This includes decision-making as well as
made among competing resources, The 80-20 Rule is an operating the frequency, length, agenda, and
objectives, and other factors. It is these principle or model that represents the fact functional participation in S&OP
principles that need to be leveraged over that in most businesses a small fraction of meetings. Since the underlying operating
time and across industries to develop the all items makes up a large portion of the principle involves balancing supply and
innovative practices that companies need total value. Using sales as an example of a demand over time, each S&OP
to enable their competitive strategies, value-based criterion, 80-20 figuratively implementation is unique and based on a
operating models, and operational means that 20% of all items make up 80% companys business environment coupled
objectives. of total sales. However, the principle often with its intended strategies, operating
is leveraged in segmentations in which models, and operational performance
So rather than trying to replicate the more than two segments are used and the objectives.
best practices of organizations being percentage breakouts could be very
benchmarked, managers should evaluate different than the 20% and 80%. A/B/C Demand Shaping: This is a best business
whether to take advantage of the Segmentation leverages the 80-20 Rule practice that is mentioned often when
underlying principles being leveraged by using a three-segment business process discussing Dells formulas for success.
them. approach. Demand shaping is an execution (in
contrast to a planning) process that
FORECASTING-RELATED Thus, when benchmarking a seg- involves creating and shaping demand in
BEST PRACTICES AND mented forecasting process, one needs to the short-run based on currently available
PRINCIPLES realize that the benchmarked companys supply. It is forecasting-related in that it
exact process may not be effective in impacts short-term demand forecasts.
There are various best practices another business environment. The Similar to S&OP, the practice leverages
espoused in the forecasting discipline. number of segments and percentages used the Supply-Demand Matching operating
Below several examples are discussed to divide them most likely will be very principle, except that it is being done
along with their corresponding underlying different, as will the management effort essentially on a real-time basis.
operating principles. and resources needed for each segment.
Under Dells Demand Shaping prac-
A/B/C Segmentation: Used in forecast- Sales and Operations Planning: Sales tice, each day a team of Dell workers meet
ing, A/B/C Segmentation is often termed a and Operations Planning (S&OP) is a to see what is available in the warehouses
best practice. As a form of Value-Based process used in operational/tactical that feed a manufacturing plant. Based on
Segmentation, it divides various elements planning and is considered a supply chain the inventory levels, the team will change
within a supply chain (such as customers best practice. It leverages Supply-Demand immediately what is promoted on the web
and products) using value-based criteria Matching, an operating principle that site as well as the prices and deliveries
(such as sales and margin contribution). involves balancing supply and demand times of products in order to steer
Each segment in the supply chain is over time in order to satisfy demand, customers towards what is currently

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available and away from what is not. often from improved forecast accuracy. leveraged by the companys practice
While this best practice resembles daily and how does it fit it with the other
S&OP process, it is not, because Demand Since one or two operating principles tailored practices that support its
Shaping is an execution process in which might be leveraged through a competitive strategy, operating
Dell is acting in the short-term to recover Collaborative Forecasting and Planning models, and operational performance
from excess and short inventory positions. practice, it is important to understand objectives?
It is similar to what retailers do when they which ones are leveraged when
mark down prices to rid themselves of benchmarking this best business process. 2. What new business practice would
surplus store inventories. For example, one Wal-Mart best practice best leverage the principle in your
is its sharing of RetailLink POS data and supply chain? (Determining this will
As noted by the difference between a forecasts with its suppliers. In doing this, require an extensive business case
retailers markdown process and Dells Wal-Mart is trying to increase its Sphere analysis that compares all the costs
Demand Shaping practice, companies of Influence to help optimize future and benefits of implementing and
cannot replicate the practice just as Dell supply chain operations. Meanwhile, operating the business practice/
does it. Much of what Dell does, for when its suppliers use the data for principle.)
example, is possible because its web- planning purposes, they are taking
based merchandizing can be changed advantage of Increased Transparency to 3. Does the new practice improve the
virtually instantaneously. To enable the optimize their own supply chain. When competitiveness of the operating
Supply-Demand Matching operating joint collaborative planning is being model aligned to the strategy?
principle in an effective way in another practiced, such as under a Collaborative
business setting will most likely require Planning, Forecasting, and Replenish- 4. Does it improve your most important
very different business practices. ment (CPFR) program, both parties operational performance metrics
potentially are increasing their Sphere of without distorting the competitive
Collaborative Forecasting and Plan- Influence and Transparency. balance you are trying to achieve?
ning: Collaborative Forecasting and
Planning is one type of supply chain LEARNING FROM A 5. Does the practice fit in among the set
collaboration and often is touted as a best BENCHMARKED PRACTICE of tailored practices that are
business practice. Under this practice, a responsible for driving competitive
customer might provide a variety of As shown by these examples, it is advantage?
information to help its supplier forecast important to identify the underlying
and prepare for the customers future principles being leveraged by a 6. Does it reinforce those tailored
demand. This information might include benchmarked best practice. It is the practices?
downstream information about the principles that are responsible for the
customer, such as Point-of-Sale (POS) benefits being accrued by the practice. If you address all these questions
and consumption data, as well as Thus, rather than replicating another before you act, youre apt to get the
warehouse inventory levels and companys best practice, one should greatest value out of Business Process
withdrawals. Other information might assess whether the principle can be Benchmarking. Trying to exactly replicate
include a forecast of consumer demand leveraged with a practice that makes more the best business practices of known
that is made by the customer or is sense in ones own business environment. supply chain leaders is not likely to do
developed jointly with the supplier. In addition, one also needs to ensure that your supply chain much good. However,
Depending upon how the information is the principle and practice provide the type implementing the operating principles
used by the supplier and/or customer, up of benefit that is dictated by a companys they leverage stands a very good chance
to two operating principles might be strategies, operating models, and of improving your performance. 
leveraged with these collaborative operational performance objectives, while
practices: Sphere of Influence and at the same time fitting with and REFERENCES
Increased Transparency. The former reinforcing the other tailored business
principle involves the fact that increasing practices and enabled principles. 1. Lapide, Larry. Benchmarking and Its Value.
ones sphere of (management) influence Journal of Business Forecasting. Volume 21,
along a greater portion of a supply chain Here are key questions you should Number 3, Fall 2002, p. 6.
can result in improving its performance. address to help you evaluate whether
The latter principle deals with the fact that another companys best business practice 2. Lapide, Larry. The Four Habits of Highly
increased supply chain visibility can lead can help you achieve supply chain Effective Supply Chains. Harvard Business
to improved performance because it helps excellence: Review Supply Chain Strategy Newsletter.
to reduce demand and supply uncertainty, 1. What is the operating principle being Volume 1, Number 3, May 2005, pp. 1-4.

32 THE JOURNAL OF BUSINESS FORECASTING , Winter 2005 - 06