Over the last few years, distributors have had more than their fair share of challenges, ranging from supply chain disruptions and inventory issues to unpredictable consumer behaviors and labor shortages. Many of these challenges may be here to stay, so the businesses that will succeed may be those that revisit their success strategy and take the “new normal” into account.
Whether you just began a business strategy roadmap or are already implementing changes, you need to be able to measure the health of your distribution company. Otherwise, how will you know whether your new strategies are working? Key performance indicators (KPIs) are metrics that can help you evaluate the efficacy of your processes. Examples include inventory turns, “perfect order” ratios, order return rates, surplus stock percentages, and on-time shipping rates. These metrics, and many others, are necessary for making informed decisions and adjusting your strategy so you can achieve and sustain your business goals.
Which Distribution KPIs Are Important to Prioritize?
To get an accurate picture of how well your business strategy is progressing, you need to track and measure the right KPIs. The exact ones you select will depend on your strategic and operational goals. But when you’re just getting started, it can be helpful to know which metrics represent the core measures successful distributors prioritize. Below is a categorized list of some of the key performance indicators beyond the basic financial measurements that we recommend as a starting point for professionals in the distribution industry:
- Order management: This category covers the entire process that occurs when a customer places an order, starting from the time you receive it to the day the items are delivered. KPIs that distributors use to measure order management performance include, but are by no means limited to, include:
- Fill Rate
- On-Time Delivery
- Accuracy Percentage
- Perfect Order (which is a combination of the first three)
- Average Number Lines Per Order
- Lost Sales as a Percentage of Total Sales
The most informative view of your business is one that is holistic and balanced. Perfect order and its components focus on those areas of procurement and delivery that impact customer experience and retention. Average lines per order addresses customer behaviors that drive operational costs. And lost sales, broken into categories, is often an indicator of systemic issues around product stocking choices, pricing, or customer relationship management.
- Inventory management: You’ll need these KPIs to measure how well the stock in your warehouses is moving. Important performance indicators in this category include:
- Inventory Turns
- Turn & Earn/GMROI
- Inventory Mix
- Long-Term Surplus Percentage
- Fill Rate
- On-Time Delivery
- Percent Inventory Committed
These KPIs help you understand how effectively you are using your inventory investment dollars. Driving turns often impacts fill rates and on-time delivery. Surplus or dead stock also impacts turns, and inventory mix helps you understand where your purchasing choices may be misdirected.
- Sales: The bottom-line numbers you look at on a regular basis don’t tell the whole story about how well your sales team and the processes they use are performing. Specific KPIs you should look at include:
- Growth from New Customer Acquisition
- Growth from New Product Offerings
- Growth from Established Accounts and Products,
- Growth Potential Index
- Period over Period Sales and GM Percentage Improvement
- Turn & Earn/GMROI
Sustaining growth requires winning new customers and developing existing customer accounts. Similarly, new products must be evaluated and offered. Tracking the results from all of those efforts is important, as is balancing those activities with your ability to support your growth financially, either with existing cash-generating resources, new capital, or debt. The KPIs above can provide this critical insight.
- Vendor management: This category refers to your trade vendors and the supply chain processes that occur between the time you place your orders and the time you receive them at the warehouse. Key performance indicators that will help you understand how your vendors are performing include:
- Percent Lines Returned
- Supplier On-Time Delivery and Accuracy
- Supplier Fill Rate
- Freight Spend as a Percentage of Sales
Internal purchasing decisions, as well as your suppliers’ failures, can often sit at the root of issues in filling orders, both complete and on time. It’s important to understand all causes, and just as you measure how well you are meeting your customers’ expectations, you must evaluate how your suppliers are meeting your expectations. Knowledge is power when negotiating pricing and choosing suppliers.
Armed with KPIs like these, you’ll be able to figure out which processes are working well, identify problem areas, and compare your current performance to past years.
4 Tips to Implement Distribution KPIs Correctly
Now that you know some of the specific KPIs you should regularly be assessing, it’s time to understand how to implement these correctly to produce accurate information. Below are four concepts to help you stay aligned:
1. Focus on a few specific areas at a time.
It’s great that you’re eager to get everything on track, but resist the temptation to make a huge list of KPIs and take them all on at once. Biting off more than you can chew at the beginning is one of the leading reasons distributors fail when implementing new processes. Instead, focus on a few of the measurements above and get them working well before you move on to others. The change management process only works when each new piece has your full attention. It’s better to demonstrate success early in order to set the stage for future changes. In fact, the most successful distributors are those who recognize the value in continuous improvement, where they look for the true constraints within their business and then focus on removing them.
2. Trust the information you’re receiving.
There is a pointed difference between data and information. Data is simply the raw numbers. Big Data is a large accumulation of those raw numbers. Most distributors don’t have data scientists on their staff who can sift through each row and column of data to create relevant, meaningful, and actionable insights—their technology of choice must do that for them.
Choose a toolset that has been designed for your industry and that effectively processes, analyzes, and structures data to make it meaningful and useful in the full context of your business. Such a tool will give you accurate, comprehensive information to measure the performance of your business.
Once you’ve distilled the mountain of data into the few key points that make up each KPI, it’s important to trust it, even if what it says goes against your expectations and biases. Trust, of course, is generated when you validate the message, and that in turn changes your perceptions and biases.
By relying on technology to do what it does best, which is processing and structuring data, you can focus on what you do best, which is making informed decisions that impact your business.
3. Turn Data Into Actionable Information.
Having information to tell you what is happening within the business is vitally important, but what is more important is being able to understand exactly why those results are occurring so that steps can be taken to alter the future. It’s not enough to measure for the sake of measuring. It’s all about improving your company’s performance—and the right technology can empower you to do just that.
4. Educate your team.
In order for employees to be information-driven caretakers of decisions, they need to know what they’re looking at. And to do this, they need to master regular use of any tools you’ve implemented across the company. Often, teams only know how to complete specific functions in one particular way. To maximize the power of data, they need to be educated on how the features of the software will help them do their jobs, what the data really means relative to their goals and those of the company, and how to use the data to make the right choices. The best solutions embed information that explains the numbers–not just displays them. This helps get at the root causes and core data, so take the time to teach employees and management alike what the numbers mean and how they are derived.
When you understand the root cause of any issues around your business processes and associated decisions, you can more productively address those issues as opposed to when addressing through guesswork. Remember, go slowly and select the distribution KPIs that are most important to your company first. From there, you’ll make strategic choices that will lead to cycles of continuous improvement and overall success.