Our retail landscape is changing at a rapid pace and competition has never been more intense. Consumers want cheaper, better, and faster products and services – and the only way to meet these demands is to continuously improve business practices. The problem businesses often face is that it can be difficult to determine what areas or processes need improvement, and further, exactly how they can be improved and by how much. Over the course of the next few articles I will discuss the role of
benchmarking in assessing best practice for businesses, the types of benchmarks available to retail businesses, and how they can be used to foster continuous improvement.
Benchmarking provides management with a tool for measuring, analysing, and comparing business processes and their performance. It is essentially a combination of a self assessment and a competitor analysis, which leads to the development of initiatives aimed at improving the benchmarked processes.
While benchmarking is a well established business practice for identifying improvement opportunities, there are some pitfalls to look out for.
Firstly, benchmarking is not a one off exercise. Benchmarking should be considered as a continuous improvement framework aimed at delivering ongoing business improvements.
Toyota, for example, has famously coined the Japanese term ‘Kaizen’. This refers to the continuous improvement they strive for in every aspect of the company’s activities, through closely measuring and reviewing processes and performance. The basic steps involved in benchmarking reiterate this idea:
Adapted from Lund University, 2011
Other pitfalls of benchmarking include adopting the wrong measures to assess performance and making inappropriate comparisons.
The measures that you adopt should be meaningful to whatever you are benchmarking. Just as importantly, comparison data must be available to make an apples to apples comparison.
Selecting an appropriate internal or external measure for comparison is also crucial. For instance, when benchmarking gross margin performance, a boutique fashion retailer in a regional shopping centre should not be comparing itself with an international vertically integrated fashion retailer such as Zara.
The vastly different sizes and structures of both businesses make comparing gross margins a less than meaningful exercise.
The key questions that should be asked when beginning a benchmarking exercise are:
What are we benchmarking?
Who are we benchmarking against?
These two answers will determine the type of benchmarking exercise to undertake.
The ‘what’ refers to whether the focus is on benchmarking an organisation’s performance, process or strategy. Comparing business outcomes is very different from comparing business practices and strategic decisions.
The ‘who’ determines whether we are making internal comparisons (e.g. comparing sales between stores of a retail chain) or external comparisons (e.g. comparing supply chain against your closest competitor).
Adapted from Lund University, 2011
As the table above illustrates, external benchmarking does not always mean comparing yourself against your closest competitors. For example, when assessing best practice for an internal process, it may be appropriate for a furniture maker to compare the effectiveness of its just in time inventory management process against a car manufacturer.
Benchmarking allows businesses to objectively compare themselves to pre-defined best practices. In some ways it provides an independent perspective on how they are performing against their peers. It is an invaluable tool for unlocking business improvements. After all, learning from the best is a sure path towards being the best.
In my next article I will take a look at sales per square metre benchmarking for retailers.
James Stewart is a partner and retail practice leader of Ferrier Hodgson and Azurium.