Performance Benchmarks
The Numbers on Page 6 of the Footwear Industry Report
This page of the Footwear Industry Report is especially important and should be reviewed each year without fail — it
tells you whether your company is competitive on a host of crucial cost components.
On this page you will find extremely valuable information about how your company’s materials costs, labor costs, reject
rates, manufacturing costs, overall costs of branded and private-label pairs sold, and assorted operating expenses
compare against the costs of rivals, region by region. If your company is pursuing a low-cost provider strategy, the
information here is invaluable in determining whether you have indeed achieved lower costs than rivals or whether your
strategy needs work to further reduce costs before you can claim low-cost leadership.
Note that on the right side of the page, there are two columns of numbers for your company and that there are numbers
for each of the last two years — which allows you to spot improvements or deterioration in your company’s cost
competitiveness, item by item and region by region.
Using the Plant and Production Benchmarking Data
It is strongly recommended that you go through this section line by line, perhaps highlighting those cost
components or regions where your company appears to be in good shape on costs and definitely flagging
those areas where costs are out-of-line and management’s attention is needed.
The purpose of your line-by-line assessment should be to draw conclusions about how each one of your company’s
plants stacks up on costs against the industry low, the industry average, and the industry high—not only against plants
in the same region as yours but also in other regions (rival plants in regions different from yours may well be shipping
pairs to the same regions as your plants, thus pitting your plant’s costs against the costs of plants in other regions).
Given that there are numbers here for materials costs, compensation, productivity, labor cost, TQM/Six Sigma, reject
rates, and total manufacturing costs, you have ample data from which to judge how the cost-efficiency at your plants
stacks up. A company driving hard to be the industry's low-cost leader should be at or close to the “industry low”
numbers in most all categories listed.
Of course, there are two good reasons why your total manufacturing costs might be higher/lower than for those of rivals
even though most other cost items appear to be in line — differences in S/Q ratings and differences in the number of
models/styles produced.
•
A company whose plants make footwear with a higher/lower than average S/Q rating might well have higher/lower
overall manufacturing costs.
•
A company whose plants are producing a higher/lower than average number of models/styles might well have
higher/lower overall manufacturing costs.
Hence there can be occasions when a company has “legitimate” cost justifications for its manufacturing costs being
higher/lower than the industry average. Where such is the case, the company may not really have a competitive
advantage if its costs are lower and it may not really be at a significant cost disadvantage if its costs are higher.
If your company's number in a particular row matches the industry low, then you are the low company in the industry on
that measure. If your company’s number in a particular row matches the industry high, then you are the high company
in the industry on that measure.
Some points to emphasize in interpreting the benchmark data and deciding whether your plants have a cost advantage
or disadvantage:
•
If your company's costs for materials at one or more plants were above average, this may reflect use of a higher
percentage of superior materials (usually because the S/Q ratings on your branded footwear are above the average
for rival companies—something you can determine from the Competitive Intelligence Reports). However, aboveaverage materials costs for your company could also signal that your company is at a materials cost disadvantage
due to the fact that rival companies, on average, have made greater use of best practices training and thus have
gained the benefits of lower materials waste and thus lower materials costs.
•
It is perfectly fine to have below-average material costs for branded footwear if your company's strategy is to
compete on the low-end S/Q end of the branded market. Indeed, your costs should be lower. There is always the
possibility that higher/lower materials costs are caused partly by the level of spending for best practices training —
expenditures above $0.30 per pair for best practices training begin to help reduce materials waste and thus net
costs per pair for materials.
•
The data showing the industry-low, industry-average, and industry-high values for total compensation should be
referred to when you get to the Compensation and Training section of the Branded Production screen in the
upcoming year and are trying to decide how much to alter your upcoming year's compensation package. How
competitive your company's compensation package is a major influence in determining worker productivity.
However, you should beware of raising compensation just to be more competitive if the result is to raise
labor costs per pair produced — low labor costs per pair are preferable to high compensation and high
productivity. It is not worth the costs to achieve higher productivity when the result is higher, rather than lower, labor
costs.
•
If your company's worker productivity at a plant is subpar and if, at the same time, your company’s labor costs at
that plant are above-average, you have solid reason for taking action to improve productivity at that plant (which
should act to bring your labor costs per pair down more in line with companies having lower labor costs).
•
If your company's reject rates at one or more plants are above the industry averages, then you should consider
actions at those plants to bring them down when you start making the upcoming year's decisions.
Using the Data on Operating Benchmarks
Again, it is strongly recommended that you go through this section line by line, perhaps highlighting those
cost categories or regions where your company appears to be in good shape on costs and definitely flagging
those areas where costs are out-of-line and management's attention is needed.
The purpose of your line-by-line assessment should be to draw conclusions about how your company's costs in each of
the four regional markets compare against the industry low, the industry average, and the industry high.
These comparisons establish whether your cost of branded pairs sold, warehouse expenses, marketing expenses, and
administrative costs per branded pair are sufficiently in line with those of rivals; if your costs are “out-of-line”—signaling
a possible cost disadvantage vis-à-vis rivals, then you should consider corrective actions in the upcoming decision
period.
Several comments about the operating benchmark data are in order:
•
High costs for branded pairs sold usually reflect a manufacturing cost disadvantage in one or more areas, an
above-average S/Q rating, and/or above-average numbers of models/styles.
•
High marketing expenses can mean (1) inefficient allocation of marketing dollars (such that the company is not
getting much return in the marketplace for the dollars it is spending), (2) a deliberate strategy to win sales and
market share by outspending rivals on marketing efforts, or (3) a small volume of sales such that the monies spent
for marketing were spread over a smaller number of pairs sold. Any corrective actions on your company’s part
depend on the diagnosis for the high marketing costs per branded pair sold.
•
High administrative costs per pair usually are an indication that your company did not have sufficient sales volume
in the report year to spread administrative costs out over more pairs, as compared to rivals.
•
Unless your company has a bigger-than-average market share in a region, smaller-than-average operating profit
margins should be a signal to pursue cost-cutting and/or perhaps raise prices somewhat to improve net profits,
EPS, and ROE.
•
The regions with the biggest operating profit margins should be candidates for greater strategic emphasis in the
upcoming year and the regions with smaller operating profit margins should be considered candidates for less
strategic emphasis in the upcoming year. As a general rule, your company should focus its sales and
marketing efforts on those regions/market segments where the operating profit margins are highest (or
where the margins over direct costs are biggest in the case of private-label footwear).
•
The production cost benchmarks for private-label footwear are quite important in revealing whether your company
has a significant cost advantage (and thus is potentially a low-cost provider of private-label footwear), a significant
cost disadvantage (and thus is potentially a high cost provider of private-label footwear and not well-equipped to
compete profitably in this market segment), or an average-cost provider of private-label footwear with no particular
cost advantage or disadvantage.
•
The sizes of the different margins over direct costs for private-label footwear in each of the regions send a strong
message about the attractiveness of competing in the private-label segment and using production capacity to make
private-label footwear for chain retailers. “Big” numbers say this segment has appeal and merits strategic
emphasis. Very small numbers suggest going after such business should be a last resort strategy—only if more
branded pairs cannot be profitably produced and marketed at margins higher than those for private-label footwear.
•
A company driving hard to be the industry’s low-cost leader should be at or close to the “industry low” numbers in
most all categories listed in the operating benchmarks section . If such is not the case, the benchmarking data is
sending a clear signal that the strategy needs work in order to drive costs down further and achieve low-cost
competitive advantage.