Outpace the Competition with Business Intelligence: Key Performance Indicators for Distributors to Analyze

Determine how things are going with vendors, inventory, the warehouse, and your customers with key performance indicators for Distributors.

Jeff Johnston

Consulting Manager

Follow Me:

Table of Content

    The capability to leverage business intelligence and business analytics tools is critical for distributors. Intelligence helps you understand how well you’re operating and the reasons why. Analytics helps you predict what will happen and make the necessary adjustments ahead of time to achieve your business objectives. You can determine how things are going with vendors, inventory, the warehouse, and your customers with key performance indicators for Distributors.

    Both business intelligence and business analytics rely heavily on access to key performance indicators (KPIs) that tell you how things are going with vendors, inventory, the warehouse, and your customers. Here’s a rundown of the eight critical areas where distributors need to develop key performance indicators for Distributors:

    #1 Vendor Fulfillment

    This is your vendor performance scorecard that tells you the on-time delivery rates of each vendor as well as the quality of their deliveries. How often do they over-deliver or under-deliver on item quantities? What are the defect rates and the severity of those defects? You also want to know each vendor’s procurement cycle—the average amount of time to fulfill your orders.

    Generating these vendor KPIs is critical. They are a key part of your business, and you’re a key part of their business—filling a central part of their supply chain. With the performance scorecard, you can understand which relationships work well and then have discussions on how to improve things. And that will make it easier for you to keep your customers happy.

    Microsoft Dynamics 365 Buyer's Guide for Distribution

    This guide will provide an overview of the entire platform and answer questions about features, selection, purchasing, implementation and support of the Dynamics 365 suite of solutions.

    #2 Vendor Profitability

    It’s just as important to consider the role each of your vendors plays in enabling your business to operate profitably. Here’s where you analyze how much each vendor contributes to your total revenue and your total margins. Do they invoice you accurately and on time? Do they drain your margins by causing you to spend extra time reconciling invoices?

    Typically, the 80/20 rule applies—80% of your customer revenue comes from 20% of your vendors. Some distributors rely on just two or three vendors. Knowing how much each one contributes to your bottom line is critical so you can focus your time and nurture relationships with the most important vendors.

    #3 Warehouse Efficiency

    Here’s where you measure your receiving accuracy in terms of item quantities and the amount of time your warehouse team spends on each purchase order. Then, it’s on to analyzing the efficiency of each team member in putting items away as well as their time for picking times.

    You may discover that certain purchase orders and sales orders require more time. Or you may find some warehouse workers perform less efficiently all the time—perhaps additional training is in order? Efficiency metrics also help you discover your total labor costs and the overhead that’s required to receive purchase orders and then fulfill customer sales orders.

    #4 Inventory Efficiency

    Given the supply chain disruptions of the last few years, being efficient with your on-hand inventory is more important than ever. As every distributor knows, inventory sitting in your warehouse comes with carrying costs. You need to understand those costs while keeping enough inventory to meet customer demand.

    Key metrics to analyze in this area include inventory turnover rates and item value along with back-order and shrinkage rages. You also want to know the average days on hand for each SKU. With this information, you can store your fast-moving items where they’re easiest to access. Another area to consider is bailment—if you store inventory for which your vendors retain ownership. You need to know the status and the value of that inventory at all times so you can respond quickly to vendor and customer inquiries.

    #5 Freight

    This KPI set focuses mainly on freight associated with customer orders but could also apply to transfers between warehouses and vendor purchase orders if you pay your own freight. For customers that you offer free shipping to, for example, you want to know how the estimated costs compare to the actual costs. It’s great that you offer free shipping, but you want to know how much you’re absorbing into your margins.

    If you pass freight costs along to customers, you also want to measure the accuracy. Perhaps you’re under-charging or maybe you’re generating a little extra profit. No matter whether or not you pass the costs, you need to know the average cost per order, per customer, and per SKU. You also need to identify add-on charges in cases where mistakes occur. This could be identifying a residential address as a commercial location, or failing to note that a location requires a liftgate to drop a shipment.

    #6 Item Profitability

    When analyzing item profitability, break the numbers down by individual SKUs, looking at the gross profit percentage and the gross margin percentage. It’s also helpful to measure profitability by item groups and brands in case you can spot a trend across a range of items. By knowing which items are the most profitable, you know where to focus your marketing efforts. And for your low-margin items, you can consider if they move fast enough to justify carrying them.

    Profitability is also impacted by cost trends. You want to identify supply chain constraints and raw materials with volatile costs so you can account for them in your pricing. You may also discover, for example, that you need to use a last in/first out (LIFO) costing model to minimize tax obligations.

    #7 Customer Fulfillment

    Starting with fulfillment, the customer metrics you collect will mirror the metrics for vendors. The big difference is that you are grading yourself: How are you performing at fulfilling your customer orders? Just as you did the vendors, what is your on-time delivery rate? What is your back-order rate? How accurate are your deliveries in terms of the over/under quantity percentage, and what’s the return rate?

    A critical KPI in this set is demand forecasting. You want the ability to predict what your customers will order in the coming months so you can ensure there’s enough inventory on hand as well as resources to handle receiving, picking, packing, and shipping.

    # 8 Customer Profitability

    The second set of customer KPIs that mirror the vendor KPIs is perhaps the biggest: customer profitability. In addition to identifying the total revenue of each customer and the percentage of your overall revenue that each customer accounts for, what is the overall margin for each customer? How do each customer’s margins break down across products?

    It’s also important to delve into the total cost of goods sold (COGS) for each customer. This includes onboarding, managing the relationship, servicing orders, and handling returns. Many distributors discover unprofitable customers, so it’s critical to identify these cases so you can work with those customers to turn them into profitable relationships. Hopefully, these relationships turn into partnerships that benefit both parties.

    Microsoft Solutions for Business Intelligence and Analytics

    To implement these business intelligence and analytic capabilities, many distributors turn to the Microsoft technology stack. It starts with Microsoft Power BI for generating internal key performance indicators for Distributors. In addition to producing a wide range of visualization reports that you can customize, Power BI ingests and analyzes large datasets from internal and external sources.

    You can also leverage Microsoft Azure Data Lakes and Azure Synapse Analytics to process both structured and unstructured data, and then feed it through Azure Machine Learning to apply artificial intelligence to your analytics. And with the Microsoft Power Platform, non-technical users can then create analytics reports in Power BI.

    All of these Microsoft technologies rely on Dataverse, which is a Common Data Model for analytics. The model enables a unified solution that connects systems to extract, transform, and consolidate your data into your data lake for consumption by Power BI—so you can generate the business intelligence and analytics you need for your company to operate profitably.

    For more information on building KPI scorecards that provide the business intelligence and analytics your distribution business needs, contact Velosio today.

    How Digital Transformation Can Benefit You as a Distributor

    Jeff Johnston

    Consulting Manager

    Follow Me: