What is the difference between a baseline and a benchmark? The answer might seem obvious, but the distinction can get blurred or even lost in the frenetic pursuit of profit and loss goals. When this happens, the consequences go way beyond mere word play. Misconstruing these terms confuses the targeting and measurement of key performance indicators and that leads to poor decisions, sub-par networks, and ultimately disappointing P&L statements.
A baseline is a standard measure of past performance. A benchmark, on the other hand, is a comparative measure of how your current competitors (both within and outside your industry) are doing. Another commonly used term in the performance measurement space is entitlement. This refers to how well your processes are entitled to perform given the everyday constraints that impair the running of the network.
These terms are reference points that show the position of your network on the performance map in relation to the targets you have set for your operation. It is imperative that they are defined and interpreted correctly in order to give an accurate picture of where network performance is headed.
This can be a challenge particularly when the information appears to be counter-intuitive or inadvisable. For example, in a capacity-constrained market like the one the freight industry seems to be entering today, the most sensible overall target might be to undercut baseline and outperform benchmark measures. Dampening baseline expectations might cause some consternation at the senior management level, but there are sound reasons for lowering your sights in this way. The fact is that you are not going to be as cost-effective as you were in the past when the transportation market favored buyers. However, it is still possible to outrun competitors in an environment where the negotiating initiative is shifting back towards carriers.
Also, keep in mind that the way you judge performance depends to some extent on the relative maturity of the business. An immature enterprise tends to be graded against the baseline, but as it becomes established and more operational data is available benchmarks gain in importance as a measure of success.
A key takeaway is that when measuring performance transportation managers need to take an all-round view and not become fixated on any one metric. This is especially the case when it comes to freight rates, which, understandably, can overshadow all other performance measures when managers are under intense pressure to cut costs.
Undoubtedly, achieving lower freight rates is a high-priority goal for shippers, but when taken to an extreme can be counter-productive and even put you at a competitive disadvantage. A number of transportation managers find themselves in this position in the present market. Carriers are well aware of what shippers are paying relative to the latest industry benchmarks. And having forced providers to accept uneconomic rates when there was a surplus of capacity, these shippers can expect to pay much higher freight costs as the market turns and cargo space is at a premium. Moreover, service quality can suffer since the pool of trucking companies willing to take their loads is likely to shrink.
Still, in some cases transportation managers have little choice but to concentrate all their efforts on rate reduction strategies, because they are judged according to their P&L performance. While this is perfectly acceptable, managers should also be assessed according to industry benchmarks; how they stack up relative to the performance of competitors.
This comes back to the idea of entitlement. If your rates are not as competitive as those secured by rival companies, there may be constraints that are holding you back. Do you need to change your shipment times or bring another distribution facility into play? Have you burned bridges with key carriers by not giving them the number of loads you promised?
Perhaps the constraint is confusion over how operational performance is measured and evaluated, and how the yardsticks used are updated. Benchmarks move with the changing market environment, so transportation managers have to be constantly asking themselves whether they are managing the business effectively relative to these changing dynamics.
The task is like a chess game where transportation managers are moving the various performance pieces in anticipation of the market’s next move. If you do not have a clear picture of where you are on the board then your chances of winning the game are much reduced.