Getting Lean is all about identifying and getting rid of waste, where waste is defined as any non-value adding step that customers are unwilling to pay for. Benchmarking is a process of continuous improvement by comparing processes either internally, against industry peers or against other industries.
From these simple definitions, it is easily understood why these two methodologies are highly complimentary and often intertwined. In fact, in Lean’s toolbox, Kaizen exercises often invite pairs of outside eyes to participate – a method of informal benchmarking if you will.
Over the past year, Lytica has seen many users of our tools dedicate staff to cost benchmarking. While this is a nice validation of our analytics toolset, it is also indicative of a wider appreciation of the ROI associated with component benchmarking. In a recent blog (titled Disregard Price Benchmarking at your Own Risk) I discussed why the high tech industry is like none other and why it’s imperative to adopt a regular cost benchmarking process. To borrow from Ronald Regan, “Trust, but verify”.
I believe we’re seeing an increase in Operational and Supply Chain professionals combining these two potent disciplines. Curious, I conducted an admittedly unscientific poll of how LinkedIn members describe their own skills pertaining to Lean and Benchmarking. Starting with the keyword “Lean” within LinkedIn’s search engine, the chart below shows a variety of associated search combinations.
The adoption success we’ve seen for Lytica’s tools relies on our clients’ practice of component benchmarking. However, the practice isn’t nearly as pervasive as one might think – yet.
This is surprising given that COGS (Cost of Goods Sold) is a predominantly large portion of a product/manufacturing company’s income statement; it makes sense to constantly scour material cost for savings. An electronic OEM typically has a COGS ranging between 40 percent and 60 percent of revenue (depending on things like IP content, degree of commoditization, etc.). An EMS provider has a COGS in the 70 percent to 90 percent of revenue range (depending on things like size, services offered, vertical market focus, etc.). For both OEMs and EMSs, COGS often dwarfs expenditures such as R&D and SG&A – sometimes both combined. Put another way, often COGS is a much larger sandbox than other aspects of the income statement.
A 5 percent savings from COGS can automatically figure into the millions of dollars. Achieving similar income statement improvements from other operational aspects within an enterprise is typically a much larger challenge. I recently had a customer remind me that cost savings is an annuity. This quarter’s savings are compounded in each subsequent quarter and year – until the end of the product’s life. Another customer’s supply chain team have started translating cost savings into Net Full Time Equivalents. This captures the gravity of cost savings – either allowing further investment in human capital or saving jobs.
As more companies adopt a Benchmarking culture tempered with a healthy dose of pragmatic Lean, someone will soon post “Wanted – one Lean Benchmarking Sensei” – but hurry, there are only 108 in the world.
Mark Tayles is the President of Lytica Inc., a provider of supply chain and pricing analytics tools to the global electronics manufacturing industry.