Distributors: Know these key business metrics.

Anyone running a business or a business unit wants to continually make improvements that will lead to better financial results. But it’s hard to improve on anything if you don’t have in place a system of metrics that can:

• warn you of problem areas
• measure progress in the areas where you want to do better.

Small process improvements can mean big bottom-line boosts for distributors.

Margins in some distribution enterprises can run 10% or lower. When you have such a low margin percentage, your biggest profitability “wins” are going to happen more from cost improvements than sales increases. Here’s why:

• If a $10,000,000 company with a 10% sales margin can increase sales by $100,000, then they earn an additional $10,000. Not bad, but...
• If that same company can reduce costs by $100,000, they earn $100,000—a dollar-for-dollar profit improvement. And with a 90% cost of sales, opportunities to gain efficiencies are plentiful.

In high-volume, low-margin businesses, improving efficiencies can have a powerful, positive financial effect. (That’s a key reason why the stock market sold off Costco after their Q2 2017 earnings report. Same store sales were up a very impressive 6%, but they lost a few basis points on their already meager 1% margins.)

Now, let’s look at two critical areas where fulfillment and delivery operations can make a difference: operational and customer service metrics.

Operational metrics

In distribution, operational metrics focus on fulfilling customer orders. They generally fall into two categories:

1. Fullfillment Velocity: the time between when an order is taken and when the customer receives it.
2. Fullfillment Cost: the expense incurred (inventory carrying cost, labor, overhead, logistics, etc.) to get the order delivered.

Here are some key operational metrics you should know:

• Average inventory
• Average days to sell inventory
• Write-off costs for obsolescene
• Lines picked/received/put away per person
• Percentage of stocked orders picked and shipped on the day of order
• Inventory receiving/put-away backlog
• Incorrect shipment costs
• Logistics costs
• Dollars shipped per square foot
• Backorder backlog

I’m going to take a wild guess and say that you can probably observe performance in these areas to see where your operations can improve (everyone can improve!).

But imagine if you could measure performance in these areas, create and implement an improvement plan, and demonstrate improvement through ongoing measurement. Imagine the financial difference you’d be making for your company.

Customer service metrics

Customer service metrics are concerned with performance areas that directly affect customer happiness or unhappiness:

• Fill Rates. If you can’t fulfill complete orders consistently, customers will turn to your competitors who can.
• Line Fill Rates. Partial line fills are also going to result in unsatisfied customers.
• On-Time Deliveries. Customers rely on timely delivery of their orders, and a high on-time delivery rate will drive customer loyalty.
• Returned Merchandise. There are costs to every return—do you know why customers are sending back merchandise? What needs to change?
• Customer Service Costs. Is a high-sales customer also a high-headache customer? While you don’t want to cut a customer loose, you also want to have a handle on how much time and money you’re spending to make him happy.

Notice how the first three on this list can also be read as operational metrics? When you think about how much more difficult (and costly) it is to pick up a new customer than to retain existing ones, the importance of getting service right is clear.

If you can measure it, you can improve it.

The more actionable a business metric is, the more valuable it is to your enterprise. And the more actionable metrics you have to work with, the more ways you can improve processes and your bottom line.

That’s where the right distribution ERP software comes in. By providing you with actionable business intelligence in real time, it empowers you to drive improvements in the areas I discussed above and many, many more. Plus, it unifies this information in a single place, quickly giving you the full picture of your distribution business, anytime.

I’ll be blogging more in the coming weeks about difference-making metrics for distributors. Subscribe now and you’ll always be up to speed.