If you run a distribution business, you probably track many different metrics and record a lot of data from your business. With today’s technology, it’s easy to gather vast amounts of data. However, collecting a lot of data presents a new problem: which data points are most important? That’s where key performance indicators (KPIs) come in.
Although distribution companies should be taking many different KPIs into account, we’d like to highlight what we believe to be the three most important KPIs for a distribution business.
One important note is that we are only dealing with historical KPIs. Historical KPIs enable comparisons between the present and the past to determine where your company is improving and where it may be losing ground. Predictive KPIs, on the other hand, use leading indicators to predict future performance; they may include agricultural futures, housing trends, and more.
Although many KPIs may be important to your distribution business, here are the three most crucial KPIs for distributors.
- Inventory Turnover Ratio
The inventory turnover ratio, which compares your inventory turnover rate to the cost of goods sold during a particular time frame, can show you how efficient your inventory strategy is. In the first place, this ratio and its accompanying data can alert you to which items have the lowest or highest turnover. You can then adjust your inventory or sales strategy accordingly. Two more related metrics that will likely be useful are the number of open purchase orders and the trends in what customers are currently purchasing.
- On-Time Shipping Ratio
Now that you’ve analyzed your internal inventory practices, it’s time to turn to the customers: what is your on-time shipping ratio? There are few things more frustrating than learning that your package is delayed, so on-time shipping is one of the most important things to focus on to maintain and improve customer satisfaction. In addition to looking at your overall on-time shipping ratio, if you have multiple warehouses, you can compare the performance of each of your warehouses. If one warehouse regularly outperforms or underperforms, you can investigate what’s working well or what’s working poorly and make adjustments in that warehouse or other warehouses, as necessary.
- Profitability by Item
Profitability by item is more of a category of metrics and data: you can analyze the profitability of particular customers, products, distribution channels, and markets. Through these metrics, you can generate big-picture insights into where your company is producing the most profit and where you need to improve efficiency or strategy. Profitability should be a big factor in most strategic planning conversations.
If you’re new to monitoring KPIs, here are a few ideas of first steps to get you started using your data to its fullest extent. First, you’ll need a software solution that’s capable of tracking large amounts of data. We recommend implementing a powerful modern ERP like Acumatica to gather and connect data from all corners of your business.
Next, do some more research about what KPIs would be most useful for your business—making sure to align these KPIs with your company’s strategic plan. A good place to start is this free whitepaper from Acumatica.
Lastly, create a basic system and calendar for monitoring and utilizing the data you collect. If your software collects data but you never take the time to analyze it, you’re not getting your money’s worth!
The process of managing data to make more data-driven decisions can be very daunting, especially if you don’t have the right software or the right consulting partner. Here at ASI, we can provide both! Contact us or schedule a free consultation today to learn how to best harness your data for improved business outcomes.