The Bottom Line

Benchmarking for the Win

Posted by Jim Kurtz on Aug 27, 2019 10:26:16 AM

Does Experience Matter in Vendor Cost Benchmarking

Sports are one of America’s greatest pastimes, and anyone spending even half an hour watching them will likely exclaim, “How did that player do that?” 

It seems modern athletes are always achieving new heights, breaking records along the way.  Yes, science has helped today’s athletes to diet and train to have bodies “made” for their sport, but science alone does not guarantee the modern athlete’s success. 

Malcolm Gladwell’s proposed 10,000 hour rule in his book Outliers is straightforward – to be a true expert at anything requires 10,000 hours of commitment. Various sources have challenged Gladwell’s assertion, but it is hard to debate the facts. When we watch college and professional athletes, what we see them do is possible because of the thousands of hours they have committed to their sport.  

Along the same lines, benchmarking in the manufacturing sector requires commitment to the sport and “getting one’s head in the game”, namely with acquiring expertise across dozens of commodities, technologies, and services especially when evaluating vendor capabilities either domestically or from around the globe. 

As with athletes, there are differences between the various benchmarking methodologies available:

  • Internal subject matter experts: considers supplier options when an existing contract is due for renewal, but by then, markets and technology have changed dramatically. The supplier landscape constantly changes through mergers and acquisitions, and customers’ demands are also shifting at such a pace that the requirements from 3-5 years ago may no longer be relevant.
  • High-level comparative metrics and peer data: available through industry groups and associations, but the measures provided do not account for the highly specific needs of an individual manufacturer and often create doubt regarding a company’s place in the market. 
  • Anonymized benchmarks: another alternative that offers a layer of removal from these protected details, is possibly the best of these three options, but the “market rate” benchmarking is tough to rely on since, for manufacturers, this figure is always evolving.

Changes and product innovations in the manufacturing sector are constantly required by consumers at a faster rate than ever before.  The vendors to support these changes will keep multiplying too. What’s more, in the face of fluctuating market pricing and terms,  the burden of due diligence remains on the buyer. Meanwhile, the choices facing manufacturers in vendor selection (and their proposed pricing approaches) will continue to proliferate. 

As noted above, most options to build vendor benchmark comparisons are limited to a fixed point in time. For this reason, contracts are often mistaken as fixed costs, and benchmarking is done as the term of the contract with the vendor nears a close. Things change almost constantly – and certainly in weeks and months, not years. Regularly benchmarking vendor costs usually result in cost savings or new revenue for the institution. Continuous benchmarking is now a requirement to ensure a procurement organization is optimizing its vendor relationships for the benefit of its internal customers, shareholders, and consumers. 

As with other firms, among the many ways SRM helps clients add value is through vendor evaluation and contract negotiation. Unlike other vendor contract management tools, there is an automated vendor benchmarking component– embedded in our tracking, auditing and benchmarking (TAB) software platform to go beyond the limitation of methodologies used elsewhere. 

Within TAB, the software continuously compares an organization’s contract terms to what the market is seeing in that area, all the time. For its users, this continuous benchmarking is applied to the contract in question for the full term of that agreement. From our more than 10,000 hours of efforts, we have built into TAB the ability to track the cost and savings of major contracts, as well as programmed it to audit the vendor invoices associated with them, for two, five, or even 10+ years.  

Here again, lessons learned over years and years have revealed the error rate of manually entering contract details (5%) and the error rate in vendor invoices (10%).  Considering the amount of data entry still done by humans in a manufacturer’s back office and the number of complex vendor invoices with hundreds of line items, the value can absolutely be quantified monetarily. 

The Bottom Line: When the manager of a major league baseball team approaches the pitching mound in the bottom of the ninth with the game tied, he will bring in a relief pitcher, one that has been in similar situations. Relief pitchers have to be exceptional athletes, but their mental strength and composure must also be tried and tested. This is also true in business, often discussed under the label “fit for purpose.” Given the rate of change driven by consumer demands, make sure you choose partners and software tools made for the “game situation” your organization faces.

 

Topics: Manufacturing, Contract Management, Contract Tracking, Tracking, Vendor management, Benchmarking, Automation, SRM TAB, Auditing