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Composite Benchmark

Every company is interested in knowing what lies beneath the skin of competing products, so that it can make its own products even better and win over customers. However, many companies lack the resources and/or knowledge to perform the necessary analysis of a product and its components themselves. The idea of composite benchmark is to send a choice of competing products to several suppliers for expert examination. These analyses are often intensive, revealing information about a supplier’s production costs. The result is a cost model of “the best product from the best supplier with the best production processes.”

This approach is suitable for products consisting of a number of different (but not overly complex) components, insofar as a sufficient number of existing and potential suppliers can be recruited for the composite benchmark process.

A crucial factor for success is the make-up of the team, which should comprise specialists with both technical and commercial expertise. Composite benchmark is carried out in seven steps:

  1. Agree on the approach with suppliers: First of all, one must identify new potential suppliers (besides the existing ones) on the basis of their product portfolios, competencies and capacities. To motivate suppliers to take part in the composite benchmark procedure, incentives should be offered. These may include exchange of technical information, opportunities for more business or the establishment of new business relationships. The incentives should be individualized for each supplier. It is also crucial to talk with the suppliers in advance about methodology, allocation of tasks, and expectations.
  2. Identify appropriate competing products: An internal procedure should be used to identify competitors’ products suitable for composite benchmark. Based on functional comparability, the best products are selected and purchased.
  3. Produce standardized cost-calculation sheets: The various factors that go into cost calculations are materials, individual components and other processing steps.
  4. Have the questionnaires edited by suppliers: Send the cost-calculation sheets to participating suppliers along with the competitors’ products. Ask the suppliers to disassemble each product and evaluate the individual components along with the production steps needed to make them. At the end of this key phase, you will have questionnaires completed by the suppliers as well as offers for each product and its components.
  5. Evaluate the offers: Incoming offers must be carefully compared with one other. It is essential to clarify any discrepancy with suppliers right away. Only then will the offers be genuinely comparable.
  6. Identify potential savings: On the basis of the offers and the detailed cost calculation sheets provided by the suppliers, Purchasing can now identify potential savings on three levels:

  7. o Identification of the supplier with the lowest price for each of the products in the existing configuration.
    o Reconfiguration of a product using components with the lowest costs.
    o Identification of the lowest production costs. The optimum production costs for each combination of products are determined. To this end, the benchmark costs of the “best of the best” (with optimum functionalities and lowest manufacturing costs) are identified for the original product.
  8. Implement the target costs: As a last step, the target costs are implemented with the aid of suppliers. Each supplier is provided with individual feedback as to where it stands in terms of target costs. In addition, improvements at both the component/production-process level are identified and discussed in detail.

The outcome of composite benchmark is a reliable analysis of comparable competing products. It allows for ambitious but realizable cost savings to be identified and directly implemented in negotiations with suppliers.



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Supply power is driven by the following parameters:
  • How many credible suppliers are there?
  • What's the structure of market shares?
  • What is the merger and acquisition dynamics in the industry?
  • How easily can the market be entered by new companies?
  • How easily can suppliers be switched?
  • Are there substitutes and how easily are they available?
  • What about general availability of products?
Demand power is driven by the following parameters:
  • What is the market share in the relevant supply market in the relevant region?
  • What growth perspective can the company offer to its suppliers?
  • What opportunites for learning and knowledge increase does the company offer to suppliers?
  • What brand effect and image increase can the company offer to suppliers based on the cooperation?


 


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