If your distribution company isn’t paying attention to key performance indicators (KPIs), it could be missing out on a significant opportunity to improve competitiveness and profitability. Defined as metrics that take financial and/or non-financial data and turn it into meaningful information that companies can use for benchmarking and performance measurement, KPIs support good decision-making and help managers and owners measure the impact of those decisions.
“As a wholesaler or distributor, you’re an essential part of your customers' supply chains,” writes Trade Gecko’s Crystal Gilliam in METRICS, KPIS AND BENCHMARKS FOR WHOLESALE: HOW DO YOU MEASURE UP? “To help maximize that relationship, it may pay off to focus on gathering metrics that provide the most value to those customers: in particular how your business performs when it comes to quality, service, and overall operations.”
What’s Most Important?
With so much data at their fingertips right now — and so many different data points to work with—the question is, exactly which KPIs should distributors be most concerned with? And, how can they use that information to improve their businesses, customer relationships, and bottom lines?
From a broad standpoint, the areas of financial management, inventory management, and customer management should be of utmost concern for companies. These three areas are closely aligned, and success or failure within one will generally radiate out to either or both of the other two categories. A slow accounts receivable process, for example, can reduce a company’s ability to invest in new inventory. That, in turn, can negatively impact customer service.
Here are the top KPIs to watch within each category:
Financial management
In today’s competitive business environment, keeping tabs on your company’s financial health has become more important than ever. Issues like excessive accounts receivable “float” can impact a distributor’s ability to operate efficiently and effectively. To avoid these issues, pay attention to KPIs like:
- Collection time for accounts receivables
- Sales and revenue performance
- Gross margin performance
- Days sales outstanding
- Working capital availability
- Accounts Payable Turnover KPI
- Accounts payable turnover (how quickly your firm pays off suppliers and other expenses)
- Inventory turnover
Inventory management
Aside from labor, inventory is usually a distributor’s biggest expense. Keeping it “lean” while also ensuring that you always have the right product at the right time and in the right place can be difficult, at best. Here are a few key KPIs to measure:
- Inventory holding costs
- Inventory turnover rates
- Average inventory
- Average days to sell inventory
- Obsolete inventory carrying costs/write-off costs
- Order fulfillment rates
- Number of back orders
Customer management
Having a COMPLETE PICTURE OF A CUSTOMER — all the way down to the invoice level — enables sales to truly maximize their selling opportunities. Key points to measure include:
- Customer order volume and frequency
- Average shipping times
- Delivery efficiency
- Customer backorders
- Time needed to fulfill backorders
- Margin breakdown for individual customers, products, product lines, etc.
Delivering Real Value with KPIs
Take a few minutes to think about these metrics. How much time and effort would it take for you to evaluate them for your business? What resources (people and technology) and processes do you have in place to regularly track and manage these metrics? What impact could they have on the health of your business?
“There are hundreds of metrics you can use to measure your wholesale business,” Gilliam writes. “The important ones are the aspects that will bring value to you and your business decisions. These are the metrics that will give you a good idea of how your company is doing in general, but also can help bring about change in more specific areas.”
Annie Eissler is the director of product marketing for MITS, which helps hundreds of distributors and manufacturers leverage the data in their business systems to make better decisions, every day and at every level of the organization. Eissler is responsible for developing, managing and measuring marketing plan, budget and programs, including customer-centric product planning, lead gen/nurturing programs, 20+ industry events, and partner programs with ERP and IT professional services organizations.
