You’ve got a wholesale or distribution business and things are rolling. Your customers seem to be happy, revenue is coming in and business is good. But you want to measure how good - to give your customers, investors, shareholders and yourself a real picture of the state of things. That’s where metrics, benchmarks and Key Performance Indicators (KPIs) come in - to tell you how things are really going.
As a wholesaler or distributor, you’re an essential part of your customers' supply chains. To help maximize that relationship, it may pay off to focus on gathering metrics that provide the most value to those customers: in particular how your business performs when it comes to quality, service and overall operations.
Benchmarking: choose your best practice benchmarks wisely
There are several things to think about when choosing external benchmarks. These benchmarks should be based on companies that are doing things well - that you want to measure your progress on. They can include:
- companies of a similar size and business model within your industry
- companies that are doing something well that you want to emulate, even if they’re not in your industry, for example: Amazon’s e-mail strategy, Zara’s supply chain, or Redmart’s backend operations.
- industry leaders in your field, even if they are working on a different scale than your own company
Bring out the measuring tape - choosing your metrics
Benchmarks chosen, it's time to start measuring. There are hundreds of metrics you can use to measure your wholesale business. But the important ones are the aspects that will bring value to you and your business decisions. These are the metrics that will give you a good idea of how your company is doing in general, but also can help bring about change in more specific areas.
Adrian Lai is managing director of Cornerstone Management Group HK, a consulting firm that helps businesses adopt cloud-based solution software, specializing in accounting and financial services. He suggests that it can be particularly helpful to look at product and inventory metrics. This can include analyzing which types of products are selling and at what quantities; and how quickly it's moving from the point that you stocked it. This analysis from the outflow perspective is very good, but can also be seen from the other side - what about the stock that isn't moving? Adrian advises:
"It can be good to know how long some of your stock has been sitting, unsold, in your warehouse. It will help generate ideas for last-season sales, flash and pop-up sales, or other marketing opportunities. Otherwise, you may have dead stock on your hands that is just there, losing money."
That's just one angle from which to look at which metrics to focus on. You can also look at the metrics from one of three following viewpoints, important to your customers and mentioned above: quality, service and business operations. These are just a few sample metrics from these areas:
Sample Quality Metrics
- production efficiency: if you’re also a manufacturer, these are measures of how efficient your production process is
- cut-to-ship ratio: an apparel production efficiency metric, which is the total number of pieces cut or produced versus the number actually sold to the customer
- percentage of defective or returned products: the amount of products that your customer has to return due to defects or imperfections
- ship to promise: a measure of the timeliness of order filling
- shipping accuracy: a measure of the accuracy of shipping/order filling from the customer’s perspective
Sample Service Metrics
- customer retention: the amount of customers you still have in the current time period as compared to a previous time period, perhaps over a time period of six months to one year
- customer satisfaction ratings: a measure of how satisfied your current customers are with various aspects of business including order fulfillment, shipping, and quality control
- on time in full: OTIF is an inclusive metric that measures if you were able to deliver the expected product and quantities in the expected time, and comes from the point of view of the customer
- customer purchasing frequency: measures the amount of unique customers in a given period of time, generally six months to a year
- repeat customer rate: measure how many of your customers come back for a repeat purchase in a certain time frame
- efficiency ratios: a variety of calculations that help measure the way a company uses its assets and liabilities, these can include liability repayment, sales to inventory, fixed asset turnover
- visit to order time: measures the beginning of the order process - how long it takes for your order to go from the customer to the fulfillment center
- sales order fill rates: a measure of orders fully fulfilled and shipped
- buyer demographics: what are the demographics of your most frequent customers?
Sample Business Operations Metrics
- return on equity: ROE is a measure of your company’s profit as a percentage of the equity of shareholders, and is a good gauge of profitability
- return on assets: ROA measures how efficiently you use your assets to generate profit
- inventory ratios: ratios that measure inventory cycles and purchasing management such as inventory turnover
- overall warehouse expenses: warehouse costs as compared to company sales, or measures of transportation and logistics costs as compared to sales
- sales velocity: measures how fast your inventory is moving out the door from the point that you stocked it
How to turn metrics into KPIs
Now, take all these metrics and look at them closely.
Which ones can you attach a tangible goal to?
Which ones are particularly relevant to your business?
Which ones are distinctly measurable, and will ensure that they provide a valuable result that can be quantified?
These key metrics that answer the questions above should become your business’s KPIs. Analyze your metrics, attach realistic, measurable goals and timelines to them and you'll have your KPIs to focus on.
According to David Parmenter2, author of several industry books and overall expert in KPIs, a business shouldn’t try to track more than 10 KPIs at any given time. This is enough to give an idea of the progress of your company, but not too much to become overwhelming.
So what's the bottom line with all these metrics?
So why all this tracking and measuring? Adrian from Cornerstone sums it up succinctly.
"These metrics, on the basic level, help you measure your performance. If you don't have these numbers and don't analyze them, you are pretty much operating blind and hoping for the best."
That's the simple answer. Metrics help you judge how your business is doing. You can predict expansion and forecasting plans, look for future trouble, identify areas where you can do better - and further expand your value to your customers.
Maybe you’ll like what you see; maybe you’ll see major areas to work on - but whatever the outcome, these metrics will be the key to seeing how you can continue to add value to the supply chain of each of your customers. And with the right adjustments, they’ll see the value of keeping you a part of their supply chain as well.