An In-Depth Analysis of Performance Benchmarking and Cost-Based Supplier Evaluation in Purchasing

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An In-Depth Analysis of Performance Benchmarking and Cost-BasedSupplier Evaluation in Purchasing1.What are the three types of performance benchmarking? Which type is mostcommonly used by the purchasing function?Benchmarking is the process ofcomparing one’s business processes and performance metricsto industry bests or best practices from other companies. Dimensions measured are quality,time and cost. In the process of best practice benchmarking, management identifies best firmsin their industry or in another industry where similar processes exist and compares results andprocesses of the targets to one’s own results and processes. In this way, they learn how welltargets perform and business processes which explain why these firms are successful.Performance benchmarking allows initiator firm to assess their competitive position bycomparing products and services with those of target firms. Corporate benchmarking hasmoved beyond product-oriented comparisons to include comparisons of process with those ofcompetitors.There are two primary types of benchmarking:Internal benchmarking: comparison of practices and performance between teams,individuals or groups within an organizationExternal benchmarking: comparison of organizational performance to industry peersor across industriesThese can be further distilled as follows:Process Benchmarking:Demonstrate how top performing companies accomplish thespecific process in question. Such benchmarking is collected via research,surveys/interviews, and site visits. By identifying how others perform the samefunctional task or objective, people gain insight and ideas they may not otherwiseachieve. Such information affirms and supports decision-making by executives.Performance Metrics:“Performance metrics” give numerical standard against whicha client’s own processes can be compared. These metrics are usually determined via adetailed and carefully analyzed survey or interviews. Clients can then identifyperformance gaps, prioritize action items, and then conduct follow-on studies todetermine methods of improvement.Strategic Benchmarking:Identify the fundamental lessons and winning strategiesthat have enabled high performing companies to be successful in their marketplaces.Strategic benchmarking examines how companies compete and is ideal forcorporations with a long-term perspective.Benchmarking is #1 most used global management tool, yet most companies fail touse benchmarking to their full advantage.Benchmarking can be internal (comparing performance between different groups or teamswithin an organization) or external (comparing performance with companies in a specificindustry or across industries). Within these broader categories, there are three specifictypes of benchmarking: 1) Process benchmarking, 2) Performance benchmarking and 3)Strategic benchmarking. These can be further detailed as follows:

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Process benchmarking-the initiating firm focuses its observation and investigation ofbusiness processes with a goal ofidentifying and observing the best practices fromone or more benchmark firms. Activity analysis will be required where the objectiveis to benchmark cost and efficiency; increasingly applied to back-office processeswhere outsourcing may be a consideration. Benchmarking is appropriate in nearlyevery case where process redesign or improvement is to be undertaking so long as thecost of the study does not exceed the expected benefit.Financial benchmarking-performing a financial analysis and comparing the results inan effort to assess your overall competitiveness and productivity.Benchmarking from an investor perspective-extending the benchmarking universe toalso compare to peer companies that can be considered alternative investmentopportunities from the perspective of an investor.Benchmarking in the public sector-functions as a tool for improvement andinnovation in public administration, where state organizations invest efforts andresources to achieve quality, efficiency and effectiveness of the services they provide.Performance benchmarking-allows the initiator firm to assess their competitiveposition by comparing products and services with those of target firms.Product benchmarking-the process of designing new products orupgrades to currentones. This process can sometimes involve reverse engineering which is taking apartcompetitors products to find strengths and weaknesses.Strategic benchmarking-involves observing how others compete. This type is usuallynot industry specific, meaning it is best to look at other industries.Functional benchmarking-a company will focus its benchmarking on a singlefunction to improve the operation of that particular function. Complex functions suchas Human Resources, Finance and Accounting and Information and CommunicationTechnology are unlikely to be directly comparable in cost and efficiency terms andmay need to be disaggregated into processes to make valid comparison.Best-in-class benchmarking-involves studying the leading competitor or thecompany that best carries out a specific function.Operational benchmarking embraces everything from staffing and productivity tooffice flow and analysis of procedures performed.Energy benchmarking-process of collecting, analysing and relating energyperformance data of comparable activities with the purpose of evaluating andcomparing performance between or within entities.Entities can include processes,buildings or companies. Benchmarking may be internal between entities within asingle organization, or-subject to confidentiality restrictions-external betweencompeting entities.2.What is the benefit of developing performance measures that focus on cost versuspurchase price?Using the cost-based system, a buyer is able to quantify additional costs if a supplier fails toperform as expected. Total cost of doing business with supplier can be calculated by supplierperformance index (SPI).This index is calculated for each item or commodity provided bythe supplier and has a base value of 1. It is represented by the following formula:SPI=(Purchase Price + Non-performance Cost) / (Purchase Price).The closerSPIis to 1, the betterthe supplier. Non-costs should include qualitative factors.Benefits a buyer can achieve by using this approach include:

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