Northlake Bookstore: Benchmarking for Performance Evaluation
By:
Manuel Garza
Hugo Hinojosa
Graciela Rodriguez
Jose Garcia
Alejandro Arizpe
Carlos Arizpe

Summary of Facts Upon assessment of the FY2004 financial information, Wendy Wiley, Northlake Bookstore’s manager, identified the first ever drop in book sales over the previous quarter. After identifying the drop in sales, Wendy turned to Chuck Irwin, the Vice Chancellor of Finance for Northlake University. He mentioned that Wendy should conduct a benchmarking analysis in order to identify the deficiencies that led to the drop in book sales. In addition, Chuck also asked Wendy to develop a set of short-term performance goals and measurements for future evaluations. Northlake is a private university located in the Midwest U.S. Annual enrollment is estimated at 12,700 students. Northlake is overwhelmingly comprised of undergraduate students. Over 60% of the university’s revenues come from student tuitions, with the majority of the remaining 40% stemming from donations and gifts. Chucks, the Vice Chancellor, is worried that the donations and gifts have decreased dramatically during the current year. He believes this is due to the current uncertain economic conditions and the stock market’s erratic performance. Wendy has been the bookstore’s manager for 7 years now. She previously worked as a Wal-Mart sales manager where she acquired15 years of experience in retail sales. Even though this is her first experience working in an academic environment, she has done an excellent job to date. In order to prepare for the benchmarking analysis report, Wendy has collected the bookstore’s income statement, product lines performance, and other operating measures for the last three fiscal years. The bookstore’s operations are divided into five product lines: textbooks, supplies and sundries, clothing, software and accessories, and computers. Benchmarking is an important tool used by the bookstore, in an annual basis, when evaluating their prior performance. At Northlake, benchmarking encouraged employees to strive for steady improvements in all of the operational areas by comparing themselves to the industry. For Wendy, benchmarking was essential to identify the bookstore’s efficiencies and deficiencies. Fortunately, Wendy has access to the National Association of College Stores (NACS), which is a comprehensive benchmarking database of other university bookstores. This database includes income statement, product lines, and other types of operating measures from bookstores around the U.S. In order to access the NACS benchmarks, member stores must agree to submit annual financial and operating results to NACS. Once they agree, the NACS benchmarks are free for all the member stores.

Major Problems For the first time in 7 years, since Wendy Wiley began working at the Northlake bookstore, the bookstore experienced a drop in annual textbook sales by an estimated 3%, or $180,000. Wendy wants to stop the problem from growing, as well as identify the deficiencies that led to its existence. Wendy believes that two major factors contributed to the decline and sales; increase in usage of online resources and textbooks by both students and professors. She believes that students and professors are both turning to online resources and purchasing either online textbooks or hard copy textbooks through online stores. Thus, Wendy believes that the bookstore’s decrease in sales stems from the industry’s move towards the internet. Students generally search for the cheapest textbooks they can acquire. Therefore, one of the major reasons are switching to online resources is that the average cost of textbooks is increasing, from a previous average of $50 per textbook to $150 per textbook in the previous five years. The increase in prices is mainly due to the fact that publishers are updating the books at a rate of every 2 years, as opposed to the previous norm of every 5 years. The case also mentions that Wendy is having problems with some Faculty which are submitting their book orders late. These late orders generally create more work and higher costs for the bookstore. Nonetheless, the main issue is the drop in book sales. Wendy wants to identify the deficiencies in financial performance, product line performance, operating measures, or other facts that led to the decreased sales. Wendy wants to stop the problem from growing and possibly bankrupting the bookstore in the future. Nevertheless, in the years analyzed, the bookstore experienced an improving trend in sales growth and net income growth.

Related Concepts Benchmarking is the main concept to research and understand in the case. Benchmarking can be defined as “the measurement of the quality of an organization’s policies, products, strategies, and their comparison with standard measurements, or similar measurements of its peers” (BusinessDictionary). In simpler words, benchmarking is the process of comparing a business’ performance with the best practices of its industry and competitors. The objective of benchmarking is to determine the areas in which a business is strong, and the areas where it is deficient. This will enable the business to remain competitive through increased efficiencies. Thus benchmarking reinforces the business’ strengths which can be transferred to business wide policies and strategies. According to Robert Camp, one of the pioneers in writing from Benchmarking, there are twelve stages in the process of Benchmarking:
|1 |Select subject |New textbook sales |
|2 |Define the process |Use latest income statement and operating measures as a performance metric. |
|3 |Identify potential partners |Members of the National Association of College Stores (NACS) |
|4 |Identify data sources |National Association of College Stores (NACS) |
|5 |Collect data and select partners |All NACS tables. |
|6 |Determine the gap |Against either the Average, 25th Percentile, Median or 75th percentile. |
|7 |Establish process differences |Where does the bookstore stand? Superior or inferior to the industry? |
|8 |Target future performance |Increase of 3.5% on new Textbook sales |
|9 |Communicate |Every single employee of Northlake should be informed and committed of the new plans and goals |
| | |to achieve. |
|10 |Adjust goal |Prioritize and be realistic. |
|11 |Implement goal |Short term and long term strategic goals. |
|12 |Review and recalibrate |Periodical evaluation of performance of both plans and achieved goals |

Since the concept of Benchmarking was implemented in the late 1970´s several if not all the companies has implement at least once this effective tool for measure and improvement. Results have been so positive that businesses have adopted benchmarking as part of their quality systems. To make this tool effective, managers should be structured but at the same time flexible to adapt plans and goals to the market and customers’ needs.
Market competition has been the major cause for businesses to adapt this process of constant evaluation of market, competitors and ourselves. For Northlake Bookstore innovative school resources such as e-books and online databases, mainly exposed on the Internet are the reasons for a decrease on books. For this case benchmark will confirm the importance of these topics and may present areas for improvement. If the internet influence keeps growing on students, it should be used as a positive tool instead of a enemy for Northlake sales.
Reference:

- The Business Dictionary, Web Finance, 2012. Web. 21 Oct. 2012. http://www.businessdictionary.com/definition/benchmarking.html#ixzz29z7Z4Lfy - Camp, R. (1989). The search for industry best practices that lead to superior performance. Productivity Press. Web. 21 Oct. 2012.

Benchmark Analysis / Solutions

Before beginning the benchmark analysis, Wendy should determine what percentile she will use. If the problem facing Northlake is industry wide, then Wendy should benchmark against the 75th percentile. However, if only Northlake is experiencing the financial difficulties, Wendy should benchmark against the 25th percentile. Thus, allowing the deficiencies producing the financial difficulties to be outlined and identified. In our case, we will benchmark against the NACS average, as the case did not specify the depth of the problem.

Global Performance

At the global level, Northlake’s Gross Margin was 1.7% ahead of that reported by NACS. This was mainly due to the COGS of 72.5% reported by Northlake which are 1.7% lower than NACS. Furthermore, Operating Expenses are a full 3.2% lower than NACS; with difference primarily concentrated in the Consumables Expense which is 1.5% below NACS. These results indicate that Northlake has good control over its ordering system, freight costs, and inventory management system.

In regards to customer service, Northlake has reported improving trends in Faculty Satisfaction, Customer Queuing Times, % of Course Packs and Textbooks available on the first day. All of these measures have steadily increased in the three years analyzed which indicate Northlake’s commitment to excellent customer service. Furthermore, the benchmarking analysis further reports Northlake ahead of NACS by $314 on the sales per FTE student. Even though, Northlake has a smaller total space, estimated at 995 sq. ft. less, it’s space per FTE student was 0.9 sq. ft. ahead of NACS. However, the ratio of sales to space was constant with that reported by NACS.

Pertaining to inventory management, Northlake reports mixed results. Over the three years analyzed, it reports an increasing trend in GMROI, but a decreasing trend in Cartons Processed Per Employee Hour and Days Textbooks in Receiving Area. These measures have been decreasing since the FY 2002 period and currently stand at 3.3 cartons and 10 days, compared to 3.7 and 8 in the previous period. However, when compared to NACS, Northlake reports $543 less in inventory and a much higher inventory turnover in all product lines, except for Software & Accessories and Supplies & Sundries. Nonetheless, it is evident that Northlake’s inventory management systems are superior to the industry average

Northlake’s operating efficiency benchmarking analysis concluded with mixed results as well. Although Northlake’s shrinkage percent is 0.2% lower than NACS, its sales per store, sales per FTE employee, sales per total space, and sales per selling space were much lower. These measures were $1,247,00, $61,541, $488, and $476 lower than NACS, respectively. However, Northlake has experienced dramatic sales growth over the past three years, with a 14.43% over NACS in the past period alone. Northlake also accomplished its sales growth with an average of 5.6 less FTE employees than the NACS average. Nonetheless, it is evident that modifying the store layout or increasing the size of the store is needed in order to rectify the operational deficiencies.

Text Book Sales

Northlake is currently experiencing its first ever decline in book sales. As can be seen in the graph below, there is a performance gap between Northlake’s new and used book sales versus the NACS benchmark; which further reinforces Northlake’s dilemma. Currently, Northlake is 0.8% and 7.3% below the NACS average in new and used books, respectively. These decreased sales are further exacerbated by Northlake’s superior performance in departmental gross margins, which are 2% and 2.6% above the NACS average, respectively. With the depressed sales, Northlake is unable to take advantage of its higher gross margins. Furthermore, as the industry heads towards the online marketplace, Northlake continues to fall behind. In the FY2004, only 1.26% of all sales occurred through Northlake’s website, well below NACS. Overall, these deficiencies dragged total book sales down to 4.9% below NACS. However Northlake’s overall gross margin from all text book sales was 2.8% above NACS. This provides Northlake with an opportunity to rectify the deficiencies.

Wendy is aware that both students and professors are moving onto online textbooks. However, online sales are well below NACS and Northlake doesn’t seem to be doing anything about it. It is evident that Northlake must increase their online sales as it seems the market is headed in that direction. First, Northlake should increase their advertisement in both print and online, Advertisement Expense is 0.2% below NACS. This can be achieved through e-mail and direct mail to all students enrolled in the current and upcoming semester. Northlake should also consider partnering with the university and creating a system which, upon registration, will provide students with a link to Northlake’s website and the textbooks required for the course. Once the textbooks are purchased, they can be bundled and shipped by Northlake to the student’s residence. Thus, providing students with a fast, one-stop, buying experience for their textbooks. Once the students have accessed the website, Northlake can push advertisement for their other product lines. Additionally, Northlake should pursue increased acquisitions and sales of used books, as they provide a much higher gross margin, 12.9% higher than new books. Increasing sales of such should not prove difficult, as students generally prefer lower priced used books than more expensive new books. Based on benchmarked price for books, Northlake should consider how to increase their operational efficiency in order to afford to reduce the average 3.5% premium they charge on the price of books. Perhaps modifying the store layout may increases their efficiencies enough to lower the prices by the premium amount.

Supplies & Sundries

Based on the benchmarking analysis, the supplies & sundries product line’s sales are well below NACS, at 6.2% lower than the industry average. However, the product line has a much higher gross margin of 37.6%, or 4.4% higher than NACS. When trying to increase the sales of the supplies & sundries product line, Northlake should explore the idea of reducing the prices. This can be achieved by cutting into the 4.4% gross margin, which provides plenty of room to slash the prices. Northlake should also follow more aggressive advertisement of the product line.

Clothing

The clothing product line possesses Northlake’s highest gross margin. The product line’s current gross margin totaled 47% for the FY 2004 period, a full 10.3% over the NACS average. Sales for the clothing line were also higher than NACS, at 11.7%, or 3.5% higher. The clothing product line represents the highest short term profit potential from Northlake. Again, increased advertisement will help increase the sales from this product line. Additionally, Northlake may be able to bundle clothing with the purchase of textbooks or other products when the university’s athletic teams win and school pride is at its highest.

Computers, Software, & Accessories

The computer product line is currently 4.7% ahead than NACS in sales, but 2.7% behind in gross margins. Furthermore, the computer product line has shown a sharp decrease in both sales and gross margin since the 2002 period, or by 3.4% and 5.5% respectively. If the deteriorating trend continues, Northlake should seek to either outsource the product line or drop it all together. Placing additional resources into a failing product line may drag Northlake into additional financial difficulties.

In the other hand, the software & accessories product line continues to perform well. Currently it is 3.2% and 2.4% ahead than NACS in both sales and gross margins, respectively. In comparison to the last period, sales for the product line dropped 0.5%. Nonetheless, Northlake should continue pursuing this product line as it will help the bookstore provide a complete customer service which encompasses all areas a student may need help in.

Conclusion

The benchmarking analysis has highlighted Northlake’s current deficiencies. Furthermore, it has also identified the root of the decrease in book sales. Nonetheless, it is evident that Northlake has positioned itself above the industry standard and is poised for future growth, unless it fails to follow the industry in regards to online sales.

The following are some short-term performance measures Wendy may use to analyze the bookstore’s operations and maintain their excellent customer service and profitability. First, in order for the bookstore’s customer service to remain above par, Wendy should constantly measure the customer’s queuing times, competitor’s prices for the same books, the stores hours of operations, and the availability of course packs and textbooks on the first day of class. Tracking these measures will help Wendy maintain the excellent customer service Northlake bookstore is known for. In regards to profitability, Wendy should track each of the product line’s gross margins, shrinkage percentage, and return on inventories. This will allow Wendy to identify the major operational deficiencies that may lead to the failure of the bookstore.