Arguments in Favour of Benchmarking Tools

Arguments In Favour of Benchmarking Tools

BY: Chen Jinglin

Benchmarking is always of great significant in management of organization, with the core process of measurements of partners’ performance level, comparison of performance level, leaning from benchmarking partners to improve organization and realizing the ultimate improvement for organization, to give a comprehensive perspectives by comparison with others in the same industry. Among the benchmarking tools, frontier benchmarking is the common mentioned one which systematically defines the gap of performance by comparing multiple input and output units relative to the best-practice one through optimization methods. I propose the use of frontier benchmarking tools in either regulation or management of organization, and the detailed interpretation will be extended following.

First, when we seek into the appearance of frontier techniques, we could find some valuable points for this technique. In microeconomic field, a production function with firm’s inputs and outputs is always to depict firm’s productivity, and construct a production technology function to show the maximum output question (Sieford & Thrall 1990)^[1]. However, all possible combinations of inputs and outputs are not always available to be observed in practice. In that way, about thirty years ago, frontier technique was set out to answer this question as it converts inputs and outputs into a single measure of product efficiency without specifying a explicit production function.

Second, as generally mentioned in definition, frontier benchmarking considers multiple outputs provided by multiple inputs, which is also its main advantage and which actually counts more than literal meaning nowadays especially when transaction are more complex and diversified. On the one hand, avoiding the use of standard costs, frontier technique eliminates some inaccuracy compared with using performance ratio and provide new insight that bring substantial productivity gains (Sherman and Ladino 1995)^[2]. Sherman and Gold, for example, in their study indicated that a branch which is measured as having lower profits is not necessarily to be performing less efficiently than the more productive one, as the branch may process may non-fund generating transactions. On the other hand, it takes branch mixing into accounts. When apply this method, best-practice reference set, which indicates the branches that are most similar to less-productive branches in their mix of services and resources, would be digged out for better specifying which kind of operating characteristics that induce the less-productive one more costly (Share and Ladino 1995). It’s closer to reality that some branches may have higher operating costs and lower profitability because its mix of transaction requires greater resources.

Further, frontier benchmarking sets the best practice instead of average practice in terms of the relative performance. Utilizing well-founded efficiency and productivity criteria, managers can not only get to know how well their units are doing but also how much they could improve and where they can go to find out how by comparing the efficiency through the frontier. The results in this case have a direct economic interpretation related operation situations, allowing leaning process to be conducted among best and relatively inefficient units.