How To Develop Actionable Distribution and Business KPIs for Optimal Inventory, Agile Operations, and Increased Sales
Distributors lose money on forty percent of invoice line items sold. Margins in commoditized industries under increased pressure from Amazon, manufacturers with direct-to-consumer (D2C) sales models and other factors often push margins down even further for some distributors.
So, how are wholesalers supposed to add value while fending off larger competitors, growing profits, and managing daily challenges? Metrics help. Metrics provide a clear picture and a single source of truth of what is happening in every corner of the business. A comprehensive business application eliminates data silos providing centralized, accurate, and insightful data to keep everyone on the same page. Used correctly, key performance indicators help distribution executives to outmaneuver competitors, build customer trust, and maintain employee loyalty to take their businesses to the next level.
While most distributors use metrics to drive daily decisions, improve quality, and guide operational excellence, many have yet to harness metrics to transform their organizations. They struggle to make sense of the information due to data issues, lack of strategic vision, missing benchmarks, and a focus on lagging indicators. Further, departmental metrics do not always align with corporate goals.
How Metrics Improve Distribution Operations
Metrics are everywhere in distribution, from accounting to sales and purchasing to warehouse operations. Monitoring data helps distributors boost sales, improve fill rates, reduce costs, fend off competitors, and optimize inventory levels and warehouse operations.
Avoid These Common Metrics Mistakes
Inaccurate, incomplete, and untimely data makes it impossible to establish meaningful metrics. Further, distributors often focus too much on lagging indicators rather than proactively monitoring leading indicators before problems erupt. Finally, too many companies focus on internal issues without comparing themselves against industry peers.
This Playbook explains how distributors can align their corporate goals with their departmental metrics, why holistic ERP applications are critical for gathering distribution metrics, and how to act on the metrics once they are defined. Download the complimentary Playbook today and learn how distribution organizations can transform the right way.
Relying on metrics is dependent on your ability to collect accurate, complete, and timely data. Inaccurate and delayed information results in poor choices, unhappy customers, and missed business opportunities.
LAGGING VS. LEADING INDICATORS
Lagging indicators identify what has already happened. Therefore, distributors need to use a mix of both lagging and leading indicators to monitor metrics to identify problems before they happen.
LACK OF STRATEGIC ALIGNMENT
What is your goal? This is a crucial question to answer before you establish KPIs. For example, if your goal is to gain market share, then investing in marketing and sales with reduced margins may not be a bad idea. Conversely, if your goal is to increase stakeholder value, you should decrease costs and increase sales margins. Align metrics to measure strategic goals.
MISSING PEER BENCHMARKS
Many companies think they are great at what they do, and others chase their competitors’ every move on the assumption that they do things better. Therefore, it is essential to benchmark performance against industry peers whenever possible. Look for associations and independent consultants to identify industry-established benchmarks for best-in-class performance.
Strategic Distribution Metrics
There are thousands of metrics to drive distribution efficiency. But what are the most important leading indicators and lagging metrics that executives should consider? Below are key performance indicators that best-in-class companies use to grow strategically.
Revenue and Profit: Revenue is a lagging indicator benchmarked against sales projections and adjusted for seasonality and promotions. These metrics support topline KPIs such as operating cash flow, profit and loss, and working capital.
Costs: Costs should be categorized and analyzed carefully. Cost categories include inventory purchase costs, labour, shipping and transportation, packaging, warehouse and operations overhead, and returns.
Cash Flow: Cash flow is vital for distributors who often purchase inventory months before actual customer demand. Operating Cash Flow metrics rely on accurate net income calculations, non-cash expenses, working capital, and receivable collections.
SALES AND MARKETING
Quotes: Your sales pipeline is a leading indicator of future revenue and product demand. Companies with low quote conversion or reduced quote volume will see revenue drop and decreased demand in future periods.
Marketing Leads: Distribution sales take time. It is vital to maintain and grow a pipeline of leads through various marketing activities. Measure leading indicators such as lead volume, marketing activities, and conversion rates for a clear picture of future sales.
Customer Metrics: Monitor total customer lifetime value, retention, customer acquisition costs, customer satisfaction or net promoter score (NPS), and growth in customer revenue and number of accounts.
INVENTORY AND WAREHOUSE
Procurement: Suppliers are crucial to your
success. Establish topline metrics to evaluate supplier performance and purchase cycle times.
Inventory: Inventory is an asset, but it is a considerable capital investment that ties up working capital with dead stock risk. Proactively monitor turnover rates to understand item velocity, associated carrying costs, and gross margin return on investment (GMROI) to identify inventory sales profit after costs.
Warehouse: Efficient warehouse processes are vital for profitable distributors. Monitor order cycle times, fill rates, overall order fulfillment efficiency, accuracy, return rates, and cycle times to improve operations.
Staffing: Staff availability and efficiency are crucial for managing daily operations. Monitor attendance, performance, and employee utilization.
Operating Margin: Also called Return on Sales (ROS), operating margins measure profits after paying variable costs before interest or tax. They are a vital metric to measure topline operational performance.
Quote-to-Cash Cycle: Quote-to-cash is the time from customer quote to cash receipt. This topline metric reflects efficient order cycles, customer satisfaction, and receivable collection business processes.
Align Strategic Corporate Goals with Departmental Metrics
Departmental KPIs must align with strategic corporate goals. First, establish strategic plans and topline metrics. Next, determine which departmental metrics drive the corporate performance you defined. Finally, discontinue metrics that do not support your corporate goals and continually look for new metrics to drive sustainable growth and improvements throughout your operations.
Discover a Better Way to Manage Metrics with a Comprehensive ERP Application Built on a Future-Proof Cloud Platform
It is easy to create distribution metrics. The challenge is ensuring data integrity and providing timely information in a meaningful way to stakeholders. Too often, companies rely on error-prone data collection and spreadsheet analysis delaying information. Instead, best-in-class distributors rely on holistic ERP applications with embedded business intelligence to analyze data from multiple sources with automated notifications to manage the business by exception. Modern cloud ERP applications like Acumatica provide a rock-solid data foundation with configurable inquiries, actionable reports, personalized dashboards, and insightful data analysis to transform business operations. In addition, custom workflows connect cross-departmental workstreams with collaboration tools.
“We use the dashboard to show items like shipments per day, dollar value per day, and on the sales side, we have monthly sales totals, totals by salesperson, invoice amount by order. For shippers—who’s doing the most volume there, and what our top-selling items are. In addition, we’ve broken out our brand partners in Asia so we can see how brand partners perform against others.”
There is no point in defining metrics if you take no action on the results. Therefore, continuously monitor and improve metrics with documented procedures for related activities. Train employees on how to use metrics, respond with corrective actions, and leverage projects and CRM tasks to coordinate activities.
Distribution Metrics Made Easy with Acumatica
Metrics are essential for today’s distributors to protect eroding margins, reduce costs, and fend off competitors. Know what is happening, predict what will happen, and manage your business by exception with role-based dashboards, actionable reports and inquiries, flexible workflows, and robust business intelligence applications. Align departmental key performance indicators with topline corporate metrics. Look for leading indicators to circumvent future problems and leverage technology to collaborate across departments with employees or externally with customers and vendors. Built on a future-proof cloud platform with native artificial intelligence and machine learning, Acumatica provides unmatched distribution depth with robust financials, native customer relationship management, service management, and powerful business intelligence applications.