CH-6 The Voice of the Market – Managing Quality: Integrating the Supply Chain : Book Guide

Chapter 6: The Voice of the Market Chapter Outline •Gaining Insight through Benchmarking •Purposes of Benchmarking •Difficulties in Monitoring and Measuring Performance •Commonly Benchmarked Performance Measures •Business Process Benchmarking •Leading and Managing the Benchmarking Effort •Base Lining and Re-engineering •Problems with Benchmarking Overview Chapter 5 focused on the voice of the customer. Chapter 6 focuses on the voice of the market. The market, or the marketplace, includes not only the customer, but also includes the competitors, the customers of competitors, potential competitors, and potential customers. A major topic of this chapter is benchmarking. A benchmark is an organization recognized for its exemplary operational performance. Figure 6-1 presents the driving forces that affect the strategic quality plan. Benchmarking provides a way to evaluate the success of the process. The goal of benchmarking is to become best-in-class. Benchmarking is more effective for firms that have been pursuing quality and process improvement over time. This is certainly not a starting point for quality improvement efforts. Remember that the use of data and measures can result in undesired outcomes as individuals attempt to exploit the measurement system to reflect well on them. Baselines and other measures should be implemented carefully with attention to the possibility of unintended outcomes. The chapter outlines a number of benchmarking types: Discussion Questions 1. Describe the concept of benchmarking. Provide an example of how a restaurant that you are familiar with could use benchmarking to improve its performance. Benchmarking is the process of finding a company that is very good at a particular activity, studying what it does, and gathering ideas for improving your own operation in this area. The second part of this question provides your students the opportunity to apply a personal experience to a textbook concept. For example, a restaurant that I am familiar with has great food and a great atmosphere, but does a clumsy job of seating people when it is particularly busy. This place should find another restaurant that does an excellent job of seating people when it is busy, study how they do it, and improve its own operations. The text describes benchmarking types in table 6-1. Proper benchmarking allows the firm to evaluate the entire corporate process. 2. What is a benchmark firm? Why is it good practice for a benchmark firm to open its doors and allow others to view its operations and tour its facilities? On page 131, the text tells us: Deming’s thought, “The worst thing for a business is a weak competitor.” Therefore, strengthening the competition forces everyone to improve in order to maintain a competitive edge. As such, openness provides an impetus to continual improvement. A benchmark firm is a firm that is recognized for the effectiveness of some aspects of its process. The text identifies Toyota for processes, Intel for design, Motorola for training, Scandinavian Airlines for service, and Honda for rapid product development. The text identifies two reasons for benchmark firms to open their doors. As the Deming quote above indicates, openness is a driving force behind ongoing improvement. A second reason is expressed on page 131: A manager of a high-technology firm marketing a new product once said, “We do not mind if the others come to see how we produce our product. Once they see what we can do, they will not want to compete against us.” 3. What are the pros and cons of becoming a benchmark firm? If you were the manager of a highly successful company, would you want other companies benchmarking against your firm? Why or why not? The text makes the point that being a benchmark firm encourages continuing improvement. Figure 6-2 illustrates this point: As a company advances through the steps of the benchmark purpose continuum, the level of quality improves immensely. However on page 139, the text also makes the point that: To concentrate too much on comparative measures might focus managers on results and not causes. This could result in the unfortunate development of numerical goals that ignore the necessity of improving the system of production. 4. In the context of benchmarking, describe the distinction between an initiator firm and a target firm. On page 132, the text defines the difference clearly: There are two parties to each benchmarking relationship: an initiator firm and a target firm. The initiator firm is the firm that initiates contact and studies another firm. The target firm is the firm that is being studied (also called a benchmarking partner). 5. Describe how benchmarking can be used by a firm to externally validate the value of its present business practices. Benchmarking allows the firm to compare its processes against other, successful firms. The various benchmarking types allow a firm to identify the area where there are weaknesses and to concentrate on resolving them. Table 6-1 lists the benchmarking types and the areas of business that they address. 6. Describe the concept of process benchmarking. How does process benchmarking improve a company’s overall business performance? A process benchmark allows the initiator firm to validate and improve its core business processes. These processes might include process flows, operating systems, and process technologies. These processes are then validated against the target firm. 7. Is the growing popularity of the Internet a positive development or a negative development for the future of benchmarking? Please explain your answer. The Internet has vastly empowered communication. Research that used to involve creating company libraries or spending days in public or school libraries can now be performed in a few hours at a desktop computer. Most companies place an inordinate amount of information on their corporate websites. This information usually includes all of the financial information that the corporate financial statements include. In addition, search engines such as Google can allow a manager to review all of the current published information. 8. Compare and contrast process benchmarking, product benchmarking, and strategic benchmarking. Process benchmarking compares process between the initiator and target firms. These processes might include process flows, operating systems, and process technologies. Product benchmarking looks at the product itself, not the process. This form of benchmarking allows the initiating firm to analyze the strengths and weaknesses of the product against the opposing product. Reverse engineering is a tool that is often used to dismantle the target firm’s product and analyze the detail differences. The focus of this type of benchmarking is to identify the mix of strategies that makes these firms successful competitors. Such benchmarking can be very time-consuming and costly. Strategic benchmarking cuts across boundaries and looks at the entire firm’s processes. Strategic benchmarking can be non-industry specific. This allows the initiator to look at the inter-relationship between the various systems. Frequently, the target firm has won major awards such as the Baldrige Award or the Deming Prize. 9. When benchmarking, what is the primary hazard in comparing measures across companies to gauge performance differences? Different firms will have different methods of doing business, and different goals and strategies. This can make the comparisons invalid. If done incorrectly, benchmarking can be illegal. Insure that you are conducting the benchmark ethically. Benchmarking can be very expensive as well. The primary hazard in benchmarking across companies is the risk of comparing measures that are not standardized or consistent. Differences in metrics, definitions, and data collection methods can lead to inaccurate or misleading comparisons, affecting the reliability of performance assessments. 10. How does a firm’s key business factors help direct its benchmarking program? Different firms in different industries use many different factors to evaluate their performance. Table 6-2 presents some of these factors. The factors that are chosen for benchmarking must relate closely to the business’ identity. The chapter emphasizes that care must be taken to identify the factors that are identifiable to your business. The example is made on page 137 that “In a given firm, customer satisfaction might be significantly related to market share. If this is the case, then a company would be very interested in keeping score of its customer satisfaction.” 11. Provide several examples of the types of measures that are often gathered in benchmarking studies. How does a firm determine which measures should be included in its benchmarking program? Table 6-2, shown above in question 10, shows the categories of measures that are often gathered in benchmarking studies. Examples include financial ratios, productivity ratios, customer-related results, operating results, human resource measures, quality measures, and market share. The choice of measures for a firm depends upon the key business factors of the particular firm. 12. Imagine yourself in the role of the CEO of a medium-sized auto parts company. Briefly describe how you would set up a benchmarking program. Include in your description an analysis of how you would determine “what” to benchmark and how you would determine “whom” to benchmark against. The chapter describes a procedure for benchmarking that Robert Camp established for Xerox. The procedure is presented in ten steps, comprising five phases. Steps one and two answer this question: Step 1: Decide what to benchmark. There are innumerable areas for improvement in every company. Obviously, not all of these can be tackled at once. Too many simultaneous changes can result in a confused organization and actually can hurt performance. Therefore, one must prioritize those processes that offer the greatest potential for improvement. To do this, you must have identified your key processes and charted those processes for future analysis. Step 2: Identify whom to benchmark. This involves identifying those competitors in your industry and those firms outside your industry that have outstanding results and processes for study. Those companies that have developed best practices are prime candidates for benchmarking. 13. Consider the following: “Despite its many advantages, benchmarking is not an appropriate technique for all firms. Some firms are so unique that it is impossible for them to find benchmark firms that experience the same challenges they do. As a result, it is impractical for these firms to participate in benchmarking.” Do you agree or disagree? Please explain your answer. One of the greatest impediments to seeking a benchmarking relationship is the belief that an initiating company or firm is so unique that it cannot learn from other firms because they are different. However, employees entrenched in a process may have trouble envisioning another way to perform work. Therefore, process improvement may be based on the same old ingrained philosophy of production for the particular firm. This can easily lead to statements like “We’ve always done it that way.” Therefore, firms should seek out to benchmark any company to see how its process is performed and take from that analysis what will work in their own company. 14. Many scholars believe that business process benchmarking is the most important type of benchmarking. Do you agree with this particular belief? Why or why not? Most students will agree with this statement. The example that is provided in the chapter to support this position is as follows. Suppose that you do a comparison of your customer service with that of the competitor. You find out that your competitor is using a standard survey instrument to gauge customer satisfaction. You then administer the survey yourself to your customers and find out that on a five-point scale, your company rates a 4.3 and your chief competitor rates a 4.7. Now what do you do with this information? The fact that your score differs from your competitor tells you nothing about how the competitor is achieving these higher scores. To understand how your competitor has achieved these scores, business process benchmarking is necessary. Yes, business process benchmarking is often considered the most important because it focuses on comparing specific processes and practices to identify best practices and improve efficiency. This type of benchmarking directly impacts operational effectiveness and competitive advantage by providing actionable insights for process improvements. 15. Describe the concept of 5w2h. The 5w2h concept is taken from work done by Alan Robinson (see page 139). The concept states that a business benchmark must answer seven questions, five of which start with the letter “w”: •Who •What •When •Where •Why And two start with the letter “h”: •How •How Much The advantage of the 5w2h method is that it provides a structure to the process, giving the manager a solid point at which to start. 16. What management activities can be undertaken to support a firm’s benchmarking activities? Please make your answer as substantive as possible. The chapter lists the following steps: •Establishing, supporting, and sustaining the benchmarking program •Developing a strategy statement that outlines the goals and strategies to be used to complete the benchmarking process •Setting expectations for performance relating to the benchmarking process •Providing management awareness training •Establishing a benchmarking competency center •Developing guidelines for information sharing •Overseeing the development of a visit protocol 17. What are some of the pluses and minuses of the benchmarking code of conduct? Would you add any other points to the code? If so, what? There are many pluses to the benchmarking code of conduct. The primary advantage is that using a carefully crafted benchmarking code of conduct should help a firm maintain smooth benchmarking practices and avoid legal problems. However, when a firm gets involved in benchmarking, it makes a commitment to provide the same information that it has requested. If the code is not followed, the firm can be liable for a lawsuit. 18. Although benchmarking is a popular management technique, many firms are not engaged in the benchmarking process. Why do you think that some firms avoid benchmarking? Are any of the reasons valid? Why or why not? Benchmarking is expensive both in employee time and potential travel costs. •Benchmarking is time consuming. •Benchmarking may expose weaknesses in management procedures or style. •Benchmarking exposes the firm to potential liability. On the other hand, •Benchmarking is an investment in continuing quality improvement. •Benchmarking exposes your firm to concepts and ideas generated by companies that have been designated best-of-the-best. •Benchmarking provides a structured manner for growth. Case 6.1: Amgen Corporation: Using Benchmarking as a Means of Coping with Rapid Growth Discussion Questions 1. Why was benchmarking so important for Amgen at the point in the company's history when benchmarking was initiated? Do you believe that benchmarking will contribute to Amgen's long-term success? Although Amgen was excelling in the development of pharmaceutical products, the company needed help in some basic areas of management. Although the case does not specifically say this, it gives the impression that Amgen "headed off" some potentially serious management problems by admitting its weaknesses and shoring up those weaknesses through benchmarking. If those weaknesses would have been allowed to linger, it might have affected the company's ability to remain cutting-edge in the development of pharmaceutical products. 2. Was it a good idea for Amgen to solicit the help of the American Productivity and Quality Center? Do you think that Amgen would have been successful without the APQC's involvement? Most students will argue that it was a good idea for Amgen to solicit the help of the American Productivity and Quality Center (APQC). The center provided Amgen benchmarking training and helped the firm locate businesses to benchmark against. It is pure speculation to guess whether Amgen would have been successful without APQC's help. It would have been much harder for Amgen without APQC, particularly in the area of selecting appropriate firms to benchmark against. Yes, it was a good idea for Amgen to solicit the help of the American Productivity and Quality Center (APQC). APQC's expertise and benchmarking tools likely provided valuable insights and best practices that helped Amgen improve its processes. While Amgen might have achieved success without APQC, the involvement likely accelerated the improvement process and offered a more structured approach. Case 6.2: AT&T Teleholdings: Making Benchmarking A Part of the Process Improvement Toolkit Discussion Questions 1. Is AT&T Teleholding's Benchmarking Code of Conduct a good idea? What types of ethical abuses could potentially occur in benchmarking if a firm did not follow a strict code of conduct? Most students will argue that AT&T Teleholding's Benchmarking Code of Conduct is a good idea. As mentioned in the case, the code provides a measure of continuity across the company's benchmarking efforts that are very helpful in developing a consistent set of benchmarking behavior. The code also helps the company stay legal (and ethical) in its benchmarking efforts. A number of ethical abuses could potentially occur if a firm did not follow a strict benchmarking code of conduct. For example, a firm could obtain confidential information from a benchmarking partner, and then release that information to a third party (without the benchmark partner's permission). That could ruin a good benchmarking relationship. The possibility of this happening could be greatly reduced if it were strictly prohibited in a written benchmarking code of conduct. Yes, AT&T Teleholding's Benchmarking Code of Conduct is a good idea as it establishes ethical guidelines and promotes integrity in benchmarking practices. Without a strict code, potential ethical abuses could include data manipulation, misrepresentation of benchmarks, unfairly comparing metrics, or using proprietary information without permission. These issues can lead to misleading results, damage relationships, and undermine the credibility of benchmarking efforts. 2. This case describes benchmarking as an important part of the company's "tools" of quality. What other tools of quality does benchmarking complement? AT&T Teleholding is clearly a learning organization. Benchmarking facilitates learning by providing the employees of a firm the opportunity to be updated on leading management practices. In addition, it is quite evident that the company is very quality-minded. Benchmarking helps a firm remain quality-conscious by focusing it on constant improvement. 3. Telecommunications is a fast-paced, rapidly changing industry. Do you believe that benchmarking is particularly important in a fast-paced industry? Why or why not? Most students will argue that benchmarking is particularly important in fast-paced industries. Firms in fast-paced industries simply don't have the time to learn through trial and error in every area of their operations. As a result, benchmarking is a tool that firms can use to achieve substantial process improvement quickly, by emulating the successful practices of others. Yes, benchmarking is particularly important in a fast-paced industry like telecommunications because it helps companies stay competitive by continuously measuring performance against industry standards and best practices. It allows for timely identification of gaps, adoption of innovations, and improvement of processes to adapt quickly to changes and maintain a competitive edge. Suggested Answers to End of Chapter Problems 1. A company has gathered the following financial information for itself and a competing firm. They wish to compare productivity for the two firms (all numbers in 000s). a. Compute partial and total factor productivity measures for Firms A and B. Sales First, total Labor Plant & Equipment, Energy, and Materials Thus 1,200,000/447500 = 2.68 900,000/366,500 = 2.46 b. What is the picture you get of the two firms? If you focus on partial quality productivity measures, Firm B has better labor productivity. The two firms have equal plant and equipment productivity. Firm A uses energy and materials more productively. Firm A has better overall productivity (using the Total Factor measure). C. What would you suggest to the management of Firm B? Be careful in your productivity enhancement efforts to ensure that improvements in using energy and materials don’t result in worsening productivity in labor productivity. 2. For the firms in problem 1, you have been asked to make a report to the management of Firm A. What are some of the caveats relating to accounting practices that you would include in the report? Which numbers should be interpreted cautiously? It is important to note that firms book different categories of costs differently. You should make sure that, for example, Firms A and B account for material costs in a consistent manner since that is a major component of costs of goods sold. If management focuses more on overall productivity ratios, the comparisons are more robust. 3. For the data in problem 1, suppose that Firm B is a foreign firm. What additional caveats would you place on interpretation of the data? In this case, differences in exchange rates and generally accepted accounting practices must be considered in any conclusions made from this data. Also, there may be other costs of doing business that are not included in these tables. 4. A domestic company operating a subsidiary in an LDC (less-developed country) has shown the following financial results: a. Calculate partial labor and capital productivity numbers for the parent and subsidiary. Interpret the results. Analysis indicates a significant difference between the partial labor productivity of the parent and subsidiary. This indicates that the parent company does a lot better in its utilization of labor. However, the difference reverses with regard to capital productivity. b. Compute total labor productivity figures. Does your interpretation change? If practices utilized by the parent company relative to labor productivity were implemented into the subsidiary, overall total productivity would be improved. Similarly, the parent company should adopt practice of the subsidiary relative to capital utilization. c. If $1 = 10 FC units, calculate materials productivity figures. Explain your finding. The subsidiary far exceeds the parent company in utilization of materials. 5. Below are industry comparisons of the percent of sales spent on salaries for marketing employees, manufacturing engineering employees, and supply chain employees for several different industries. Rank these industries by the amount spent in each of the areas and report your findings to management. What can you infer from your findings about each of the industries? The above data shows rankings for each of the different companies and areas we are evaluating. For this analysis, we consider a lower percentage of sales spent in a particular area to be better. This is debatable, as it does not consider effectiveness of the money spent. This is a limitation of this type of analysis. The final table gives the relative total rankings. It appears that Light Assembly is the least labor intensive as a percent of sales. Alternatively, Communications is the most labor intensive, overall. 6. Using the data from Problem 5, suppose you are a computer company who spends 9% on marketing staff, 6% on manufacturing engineering, and 8% on supply chain staff. Comparing your expenditures with the above averages, what would you recommend to management? What more information would you want? It appears that you spend more on marketing as a percent of sales. You spend less than the industry average on manufacturing engineering as a percent of sales and much less on supply chain activities as a percent of sales. It appears that when you sum these percentages, you are below the industry average in total expenditures on salaries as a percent of sales. It is possible that the greatest savings can be had in marketing. However, given your overall picture, you should use caution in proceeding, as the expenditures in marketing may be creating supply chain savings. Additional helpful information would be to understand the effectiveness of expenditures and how the costs are booked for the different industries and firms. 7. Following is an announcement from a study for the Benchmarking Network, Inc. The Benchmarking Network and the Shared Service Benchmarking Association announced they will be kicking off the fifth Annual Shared Services Measures Benchmarking study. Now is the time to join and become involved in setting the focus and direction of the study by attending the kickoff meeting. The study will review Shared Services Measures including research into: Accounting Finance and Treasury Human Resources Information Technology Procurement and Supply Chain Legal Regulatory Auditing Corporate communications/External Affairs Facilities, Real Estate, Security Environment Fleet, and Other Shared Service Measures Put yourself in the place of the Benchmarking Network researchers. How would you design this study? What would you have to consider in undertaking such a study? This question is designed to get the students to think about how to enter into a benchmarking study. This is an actual case of a real organization. You would have to decide which subjects you would want to participate in the study. Is this a representative sample? What is the objective of the benchmarking? What is the benchmarking process that should be followed? How will the sessions be facilitated? Once the study is completed, how would the data be disseminated and used. As a Benchmarking Network researcher designing the study, I would: 1. Define Objectives: Clearly outline the goals of the study and the specific insights we aim to gain from benchmarking each shared service area. 2. Select Metrics: Identify relevant and standardized metrics for each area (e.g., cost per transaction, processing time) to ensure comparability. 3. Recruit Participants: Engage a diverse group of organizations to ensure a representative sample and rich data. 4. Develop Methodology: Establish a consistent methodology for data collection and analysis to ensure reliability and validity. 5. Ensure Confidentiality: Implement measures to protect sensitive information and maintain participant confidentiality. 6. Analyze Data: Compare performance across participants to identify best practices, trends, and areas for improvement. 7. Report Findings: Provide actionable insights and recommendations based on the analysis. Considerations: Ensuring data accuracy, addressing potential biases, maintaining participant engagement, and adapting to industry changes are critical for the study's success. 8. Below are enrollment data from several British universities: Compare the data from these schools and present them in a way that is useful for the administrators from these schools. Here is an example spreadsheet by a student who focused on average rates of growth and wanted to compare the rates of growth with the averages. This is just one example of a possible analysis. This is quite simple. 9. Suppose the Chancellor from Bedford College asks you to infer meaning from the data in Problem 8. Put together a report for the chancellor explaining how Bedford is performing relative to the other schools. Beverly College is the best-in-class in terms of having high growth rates. By focusing on comparisons with Beverly, Bedford can further study how Beverly has achieved these growth rates. This is just one approach that can be taken. 10. Choose a company in your local area. Develop a list of five companies among the best in class in their industry and the best of the best. Explain how you chose the benchmarking targets you chose. Identify a list of 20 benchmarking questions. What kind of data would you select? How would you contact the target firms? Answers will vary for this problem. We are just trying to give the students some real experience in thinking through these questions. Company Example: A local retail chain. Benchmarking Targets: 1. Walmart - Leading in global retail operations and supply chain efficiency. 2. Amazon - Notable for e-commerce innovation and customer experience. 3. Costco - Known for effective inventory management and membership-based retailing. 4. Target - Recognized for strong brand and merchandising strategies. 5. Best Buy - Excellent in customer service and technology retailing. Selection Criteria: Chosen for their industry leadership, innovative practices, and strong performance metrics. Benchmarking Questions: 1. What are your key performance indicators (KPIs) for customer satisfaction? 2. How do you measure inventory turnover rates? 3. What strategies do you use to manage supply chain efficiency? 4. How do you handle returns and exchanges? 5. What are your average sales per square foot? 6. How do you track and improve employee performance? 7. What technology platforms do you use for e-commerce? 8. How do you ensure consistency across store locations? 9. What is your approach to pricing and promotions? 10. How do you manage supplier relationships? 11. What metrics do you use to evaluate store performance? 12. How do you handle in-store customer service training? 13. What are your procedures for managing seasonal inventory? 14. How do you integrate customer feedback into product offerings? 15. What is your approach to sustainability in operations? 16. How do you measure and improve operational efficiency? 17. What strategies do you use for market research and analysis? 18. How do you manage employee turnover and retention? 19. What are your best practices for maintaining store layout and design? 20. How do you handle cross-channel marketing and sales integration? Data Selection: Collect quantitative data (KPIs, sales figures, turnover rates) and qualitative data (strategies, practices, policies). Contact Method: Reach out via professional networks, industry conferences, or direct contact through email or phone to request participation in benchmarking discussions or data sharing. 11. Following are financial statements from American Ecology. Studying these figures, what are some possible financial benchmarks this firms might want to develop? American Ecology Corporation Consolidated Statements of Operations: Proforma and Unaudited ($ in 000s except per share amounts) Students should consult a finance text and compute financial ratios for the three periods. These will show that the firm has struggled recently. Based on the financial statements from American Ecology, the firm might develop the following financial benchmarks: 1. Gross Profit Margin: Measures the percentage of revenue remaining after operating costs, indicating profitability before other expenses. 2. Operating Expense Ratio: Compares selling, general, and administrative expenses to revenues to assess cost management efficiency. 3. Net Profit Margin: Evaluates the percentage of net income relative to revenue, highlighting overall profitability. 4. Return on Assets (ROA): Measures how effectively assets are being used to generate profit. 5. Earnings Per Share (EPS): Tracks profitability on a per-share basis, providing insights into shareholder value. These benchmarks will help analyze profitability, cost control, and overall financial health. 12. Baseline the data from problem 11. Is the company's performance improving or worsening? Several indicators would suggest declining performance. Consider the following decline in ratios: Also consider the following trends: loss from operations, loss before taxes, net income, and loss available to shareholders. Solution Manual for Managing Quality: Integrating the Supply Chain Thomas S. Foster 9780133798258