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Bench Marking

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Engineering, Construction and Architectural Management 1995 2 | 3,167-178 Improved business results through benchmarking* EDWARD W. MERROW* & WILLIAM H. CROKER† *Independent Project Analysis Inc., 1150 Sunset Hills Road, Suite 300, Reston, VA 22090, USA and †Chevron Research and Technology Company, Projects and Engineering Technology, 100 Chevron Way, PO Box 1627, Richmond, CA 94802-0627, USA Invited paper; discussion open until March 1996 INTRODUCTION Chevron has successfully used benchmarki
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  Engineering, Construction and Architectural Management 1995 2 | 3,167-178 Improved business results throughbenchmarking* EDWARD W. MERROW* & WILLIAM H. CROKER† *Independent Project Analysis Inc., 1150 Sunset Hills Road, Suite 300, Reston, VA 22090, USA and † Chevron Research and Technology Company, Projects and Engineering Technology, 100 Chevron Way, PO Box 1627, Richmond, CA 94802-0627, USA Invited paper; discussion open until March 1996 INTRODUCTION Chevron has successfully used benchmarking to improve the performance of ourproject management system.For many years, we at Chevron believed that we were managing our capitalprojects very well and that our performance was probably significantly aboveaverage for our industry. This perception was based solely on our internal comparison of projects. We routinely compared each project with the previous one wehad done and, if we met the cost, schedule and start-up requirements, we thoughtwe had performed our responsibilities with excellence. Even if we did not meet allthe requirements, we attributed the deviations to special causes that were uniqueto the project circumstances and were not caused by our project managementsystem. But when we analysed these assumptions carefully, we realized thatcompleting a project within the budget and the schedule was not very significantunless we compared our results with our best competitors. Internal comparisonsare based solely on how well our system performed compared to targets determined by the same system. A comparison was needed to tell us how our systemwas performing in relation to the best competitors in the industry.This revelation, coupled with our desire to contribute to our corporate goal ofbecoming 'Better than the Best', inspired us to benchmark the performance of ourproject management system against the best in the industry. In mid-1990 weconducted our first benchmarking studies.Before we describe Chevron's experience with benchmarking, let us understandwhether there is room for improvement in our industry and exactly what is benchmarking. The paper will then cover the results of the Chevron benchmarking, the changes to our project management system, our progress to date,and the requirements to achieve a step change in system performance. *Presented at the European Construction Institute Conference, Lisbon, Portugal, 18 November 1994by William H. Croker. © 1995 Blackwell Science Ltd 167  168 Merrow. E.W. & Croker. W.H. IS THERE MUCH ROOM FOR IMPROVEMENT? According to the Commerce Department, the United States process industriesspent just over 5100 billion on capital projects in the United States in 1993. Basedon an analysis of data from top process industry companies, Independent ProjectAnalysis Inc. (IPA) - a major project management benchmarking company in theUnited States and in Europe - concluded that at least $20 billion of that waswasted on rework, changes of direction, inefficiencies, and failure to follow bestengineering and construction practices. And this does not include the cases whereeither the wrong project was built or the project should not have been built at all!In addition to the cost savings, IPA found that at least a 20% improvement in cycletime is available and, as measured by operability, an even larger improvement inplant quality can be obtained.The data indicate that, of the major projects performed by the process indus tries, less than one in five meet their primary business objective in cost (less than 10% over-run), schedule (less than 3 months' slip), and operability (greater than 85% of nameplate in the second 6 months) (Fig. 1).Benchmarking is not the sole solution but it can be an important part in anoverall solution to this grim record. WHAT IS BENCHMARKING? Other than being another tiresome 'new management' buzzword, what is'benchmarking' and why should it be of interest? The term 'benchmarking' caninclude a number of different activities built around a single simple powerfulidea: 'I can improve by the careful study of how others do business'. At its best,benchmarking is a continuing discovery process that opens the organization tonew and even radical ideas, and can play a pivotal role in improving effective ness. © 1995 Blackwell Science Ltd. Engineering, Construction and Architectural Management 2 | 3, 167-178  Improved business results through benchmarking 169 Benchmarking is not a one-shot bullet that will improve performance; it is not industrial espionage; and it should not be what it so often becomes, i.e. industrialtourism.A number of activities fall into the general category of benchmarking. There is internal and external benchmarking; with competitors and non-competitors; one-on-one or data-based; domestic or global; qualitative or quantitative.The benchmarking that is described here is Quantitative Competitive Benchmarking, i.e. the benchmarking of one's performance against competitors usingquantitatively developed and derived measures of project excellence and effectiveness. Quantitative Competitive Benchmarking is a logical first step in benchmarking that is often followed by other benchmarking activities as key performance gaps are identified.Quantitative Competitive Benchmarking uses quantitative databases drawnfrom a large number of firms in the same or allied industries. The goal is to obtaina rigorous numerical comparison of business results on an 'apples and apples'basis. Quantitative Competitive Benchmarking answers that most basic of questions: 'How good are we in the things that are important to our business?'Quantitative Competitive Benchmarking has been developed in many areas of interest to the owner and contractor communities, such as capital project systemeffectiveness, operating costs, maintenance effectiveness, plant quality and reliability, and construction management.Quantitative Competitive Benchmarking needs to be understood in the contextof an overall quality improvement effort. In the 'Ten Steps to Quality' firstarticulated by Xerox (Fig. 2), the first four steps are covered by an initial © 1995 Blackwell Science Ltd. Engineering, Construction and Architectural Management 2 | 3, 167-178  170 Merrow, E.W. & Croker, W.H. benchmarking study. The most important and difficult step is the very first - whatexactly should be benchmarked? WHAT SHOULD BE BENCHMARKED? In Quantitative Competitive Benchmarking, the determinants of what should bebenchmarked are derived from analysis of historical data. The databases mustserve to link project system performance back to work practices. How this processworks is illustrated as follows.What determines our level of cost predictability in capital projects? Empiricalanalyses (and common sense) suggest that the most important thing to examine isthe relationship between estimating accuracy (as measured by the ratio of the bareestimate to the actual cost on a constant dollar, constant scope basis) and the levelof definition achieved when the estimate was made. As they say in real estate,'Location, location, location'. In projects, it is 'Scope, scope, scope'. Figure 3shows this relationship. Despite its scatter, it is statistically strong but is not strongenough for forecasting purposes.The second relationship is estimating accuracy vs. the use of new technology.Most project professionals know that new technology adds to estimating difficulties because new technology often causes late, unpleasant surprises. Thenumbers support that view, as shown in Fig. 4, but again it is a relationship thatonly a statistician could love. Now comes the power of analysis - when wecombine just those two factors (Fig. 5), things begin to behave when we combine,and the other factors that drive cost predictability we get the relationship shown inFig. 6, which provides quite a reliable relationship. © 1995 Blackwell Science Ltd, Engineering, Construction and Architectural Management 2 | 3, 167-178
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