PRODUCTIVITY

How to Measure Yourself Against the Best

by Frances Gaither Tucker, Seymour M. Zivan, and Robert C. Camp
FROM THE JANUARY 1987 ISSUE

Edited by Timothy B. Blodgett

Ideas for Action

ne way to judge the performance of an organization is, of course, to compare it with other units within the company. But these

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measurements often merely reinforce complacency or generate not invented here excuses. Comparisons with outsiders, however,
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highlight the best industry practices and promote their adoption. This technique is commonly called benchmarking, a term taken
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from the land-surveying practice of comparing elevations.

When Xerox started using benchmarking in 1979, managements aim was to analyze unit production costs in manufacturing operations.
Uncomfortably aware of the extremely low prices of Japanese plain-paper copiers, the manufacturing staff at Xerox wanted to determine whether
their Japanese counterparts relative costs were as low as their relative prices. The staff compared the operating capabilities and features of the
Japanese machines, including those made by Fuji-Xerox, and tore down their mechanical components for examination.

The investigation revealed that production costs in the United States were much higher. Discarding their standard budgeting processes, U.S.
manufacturing operations adopted the lower Japanese costs as targets for driving their own business plans. Top management, gratified with the
results, directed that all units and cost centers in the corporation use benchmarking.

But distribution, administration, service, and other support functions found it difficult to arrive at a convenient analogue to a product. These
nonmanufacturing units began to make internal comparisons, including worker productivity at different regional distribution centers and perpound transportation costs between regions. Next, they looked at competitors processes. In logistics that meant comparing the transportation,
warehousing, and inventory management of Xeroxs distribution function with those of the competition.

Benchmarking against the competition, however, poses problems. For one thing, comparisons with competitors may uncover practices that are
unworthy of emulation. For another, while competitive benchmarking may help you meet your competitors performance, it is unlikely to reveal
practices for beating them. Moreover, getting information about competitors is obviously difficult. Finally, we have observed that people are more
receptive to new ideas that come from outside their own industry. Noncompetitor benchmarking, then, is the method of choice.

A noncompetitor investigation can give management information about the best functional practices in any industry. These may include
technological advances unrecognized in your own industry (like bar coding, which originated in the grocery industry but has since been widely
applied). Adoption of these practices can help you achieve a competitive advantage.

The first step in the process is to identify what will be benchmarkedexpense-to-revenue ratios, inventory turns, service calls, customer
satisfactionwhatever the product of the particular function is. Then pinpoint the areas that need improvement.

In Xeroxs experience, managers tend to concentrate first on comparative costs. But as they become more knowledgeable about benchmarking,
managers discover that understanding practices, processes, and methods is more important because these define the changes necessary to reach
the benchmark costs. Moreover, as managers become more confident about benchmarking, they can readily extend it beyond cost reduction to
profit-producing factors like service levels and customer satisfaction.

L&D and L.L. Bean

Where do you find well-run noncompetitors for the purpose of comparison? Annual reports and other easily available publications can uncover
gross indicators of efficient operation. Universally recognized measures like ROA, revenue per employee, inventory turns, and percent SG&A
expenses will help identify the well-managed companies.

To identify superior performance in particular functions, Xerox relies especially on trade journals, consultants, annual reports and other company
publications in which statements of pride appear, and presentations at professional and other forums. The same well-run organizations keep
turning up.

Getting a noncompetitors cooperation in the venture is usually easier because professionals in a function are eager to compare notes. They want to
know how their system stacks up. Indeed, several non-competitors have agreed to share the expense of benchmarking studies with Xerox.

One of Xeroxs most valuable benchmarking experiences, with L.L. Bean, Inc., the outdoor sporting goods retailer and mail-order house, illustrates
well how these ventures work. It was carried out by the Xerox Logistics and Distribution unit, which is responsible for inventory management,
warehousing, and transport of machines, parts, and supplies.

Historically L&Ds productivity increases had been 3% to 5% per year. By 1981 it was clear that improvement was necessary to maintain profit
margins in the face of industry price cuts.

The inventory-control area had recently installed a new planning system, and the transportation function was capitalizing on opportunities
presented by deregulation. Warehousing was next in line for improvement, and the distribution-center managers wanted a change. They identified
the picking area as the worst bottleneck in the receiving-through-shipping sequence.

A new technology, automated storage and retrieval systems (ASRS) for materials handling, had appeared on the scene and was the subject of hot
debate in Xeroxs distribution function. The company had just erected a high-rise ASRS warehouse for raw materials and assembly parts in
Webster, New York, in the same complex as a large finished-goods distribution center. Internal benchmarking evaluations by L&D showed that
heavy investment in capital equipment for ASRS could not be cost justified for finished goods. They needed a different way to boost warehousing
and materials handling productivity, but what?

In January 1981 L&D assigned a staff member half time to come up with a suitable noncompetitor to benchmark in the warehousing and materials
handling areas. The staff member combed trade journals and conferred with professional associations and consultants to find the companies with
the best reputations in the distribution business. He then targeted those companies with generic product characteristics and service levels similar
to Xerox reprographic parts and supplies.

By November the staff member had singled out L.L. Bean as the best candidate for benchmarking. Of particular interest were Beans warehouse
operations. The staff member summed up his impressions in a memo to his boss:

I was particularly struck with the L.L. Bean warehouse system design. Although extremely manual in nature, the design minimized the labor
content, among other benefits. The operation also did not lend itself to automation [of handling and picking]. The design therefore relied on very
basic handling techniques, but it was carefully thought out and implemented. In addition, the design was selected with the full participation of the
hourly work force. It was the first warehouse operation designed by quality circles.

To the layperson, L.L. Bean products may bear no resemblance to Xerox parts and supplies. To the distribution professional, however, the analogy
was striking: both companies had to develop warehousing and distribution systems to handle products diverse in size, shape, and weight. This
diversity precluded the use of ASRS.

Three months later a Xerox team visited Beans operations in Freeport, Maine. Besides the person in charge of benchmarking in L&D, the team
consisted of a headquarters operations manager and a field distribution-center manager. These two people represented the line employees who
would ultimately make any changes.

Analysis of the findings back home in Rochester, New York revealed a broader range of computer-directed activities than Xerox had. These
activities included:

Arranging materials by velocitythat is, fast movers were stocked closest to the picking route. Storing incoming materials randomly to maximize
warehouse space utilization and minimize forklift travel distance.

Sorting and releasing incoming orders throughout the day to minimize picker travel distance (known as short-interval scheduling).

Basing incentive bonuses on picking productivity offset by error rates.

Automating outbound carrier manifesting by calculating transportation costs ahead of time.

Plans for implementing automated data capture through bar coding.

Exhibit I compares the prospective performance of Xeroxs most efficient warehouse then being planned with L.L. Beans performance as of
February 1982. Because of the nature of its operations, Xerox often picked several pieces per order, so Xerox had a higher figure for pieces per manday. But L.L. Bean could pick almost three times as many lines per man-day. (A line, which represents picker travel distance for one trip to a bin, is
the crucial measure of productivity.)

Exhibit I Comparison of Key Performance Criteria in Two Distribution Centers

The report documenting the findings attracted wide interest within Xeroxs L&D organization, particularly because Beans was a labor-intensive
system that could be adapted fairly easily to Xeroxs purposes. As a result, L&D incorporated some of L.L. Beans practices in a program to
modernize Xeroxs warehouses. These practices included materials location arranged by velocity, to speed the flow of materials and minimize
picker travel distance, as well as enhancing computer involvement in the picking operation. Xerox is now putting together a totally computermanaged warehouse.

Further Experience
Benchmarking has become an ongoing practice at Xerox Logistics and Distribution. The requirement to carry on the procedure has been pushed
down the organization to individual operations, which now do their own benchmarking rather than have a specialist perform it. Because the
process is well understood and because the people who undertake it are the ones who implement the findings, benchmarking is now much easier to
carry out than before. L&D has taken the noncompetitor approach to benchmarking many times. Exhibit II shows some of the practices Xerox
uncovered using this method.

Exhibit II Practices Uncovered Via Noncompetitive Benchmarking

From these efforts L&D has greatly increased its productivity. Before benchmarking, the organization was making annual productivity gains of 3%
to 5%; now it strives for, and reaches, improvements of 10%. Of that figure, some 3% to 5% is derived from L.L. Bean-type investigations, using
competitors as well as noncompetitors. In addition, the people involved in the benchmarking process often find that the work is broadening and
furthers their professional growth. They become more useful to the organization.

L.L. Bean, incidentally, has benefited too. After seeing Xeroxs success, the company adopted benchmarking as part of its own planning process.
A version of this article appeared in the January 1987 issue of Harvard Business Review.

Frances Gaither Tucker is assistant professor of marketing and logistics at the School of Management, Syracuse University.

Seymour M. Zivan is vice president for logistics and distribution in the Business Systems Group of Xerox Corporation.

Robert C. Camp is manager of business analysis in the business planning organization in that group. He was closely connected with the benchmarking activities described in this
article.

This article is about PRODUCTIVITY

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