KPIs for Distribution
Every company that handles a physical product is, in fact, a wholesale distributor and needs the information and tools to effectively monitor and manage the distribution side of the business. This applies to manufacturers, wholesalers, and logistics specialists, in every industry segment from retail to e-commerce; from health and beauty to electronics; from consumer goods to industrial equipment. All rely on measurements to monitor business activities and performance, document successes and challenges, and help direct management decision-making. Of course, we measure a number of parameters simply to comply with mandatory accounting and reporting requirements, but smart management will incorporate those measurements into valuable intelligence that helps run the business more effectively and more efficiently. In this guide, we discuss KPIs for distribution.
Types of KPIs
When we think of measurements and KPIs, we are most likely thinking about what can be called historical measurements – summaries and analyses of events and data. KPIs compile this data into usable forms that target the specific interest of the viewer, the functional area of the business, and the needs of that specific industry and activity.
Many KPIs are financial, as finance is the common language of general business management in distribution and all other industries. Common financial KPIs in every industry monitor sales, costs, margins, cash flow, and asset utilization. But many more KPIs are operational measurements
that managers and executives use to focus on specific activities and interests relative to transportation schedules, inventory, on-time delivery, backorders, customer service, and more. All of these kinds of KPIs can be classified as historical measurements since they focus on the analysis of data from activities that have already occurred. We can speculate and try to project how things will play out in the future, and we do that of course, but that is not built into the structure of the measurements.
Historical KPIs can be set up with alerts and warnings that monitor and detect exceptions, calling attention to issues through graphic characteristics like traffic lights (green = all okay; yellow = an indicator that something is not quite optimum; red = cause for concern) or “push” alert messages sent via email or text.
Predictive KPIs use what can be thought of as leading indicators to project performance expectations into the future. Management can use these projections to steer decisions and actions aimed at avoiding undesirable outcomes or enhancing desirable results. Predictive KPIs for distribution may use economic indicators, demographic trends, or specific industry indicators like housing starts (an indicator of future demand for plumbing fixtures, windows, carpeting, furniture, etc.) or health trends (future demand for medications or supplies), for example.
Distribution Flow Dashboard
It can be hard to find problems without an overall picture. However, you can show your processes and KPIs on a dashboard. Operational distribution KPIs can be tailored to track overall business status and performance as well as specific areas of operations. Each node of the distribution network can be monitored individually or in combinations across multiple factors. You can look at factors like inventory, on-time shipments, profitability, etc. for a single warehouse or leg of the supply chain or other groupings or categories.
A number of basic KPIs measure financial performance and apply to all kinds of businesses – sales and margin, return on equity, cash flow, and the like. Operational KPIs that are focused on distribution may include common indicators that everybody already watches like the Inventory Turnover Ratio as well as others that focus more on specific areas of distribution operations.
Inventory Turnover Ratio
This display shows inventory turns for two different groups of items – low turnover items and high turnover items. This snapshot shows the current status in the familiar ratio format as well as some key indicators that a purchasing manager might want to watch like open POs and purchasing trends. These core metrics are extremely relevant, and each user can create their own view.
On Time Shipping Ratio
This example compares on-time shipping performance for custom orders at three different warehouses over a span of several years. While it is informative to see how the different warehouses do compared to each other, it is interesting – and disturbing – to see that all three warehouses are showing a marked decrease in on-time shipments for the most recent two years.
Custom orders are a challenge for any business, and they can either strengthen or weaken customer relationships Was there a policy change in this case? A supplier cost-cutting or inventory reduction initiative that took effect between 2016 and 2017? This basic display quickly eliminates warehouse-specific concerns and leads the analyst toward system-wide concerns that can be researched through drill-downs from this starting point.
Many companies getting started with KPIs will become excited by the new insights and visibility and keep defining new ways to look at the business. That is a good thing, of course, but often leads to a proliferation of KPIs that can quickly become counterproductive… again, too much of a good thing. Best practice is to have a relatively small number of high-impact KPIs (for an individual user) – no more than 8 or 10 – aimed at the critical factors for that business, department, project, or area of responsibility. A flexible Business Intelligence system will support drill-down for easy analysis and the easy creation of new ad-hoc measurements for those times when an unusual situation or new idea mandates a different view.
Make sure that the KPIs for distribution are more than just window dressing. They must drive decisions and actions. If they are believed, trusted, and relevant, appropriate decisions and actions will follow.
Be sure that incentives line up with measurements; people respond to the way they are measured only when incentives are properly aligned.
Need a little more insight beyond this guide of the KPIs for distribution? Drop us a line on 011 792 9521.