What Is a Distribution KPI?
A distribution Key Performance Indicator (KPI) or metric is a measure that a company in the distribution sector uses to monitor its performance and efficiency. These metrics help companies identify areas of operational success and failure through measuring specific quantifiable aspects of their business. Distribution metrics analyze inventory management, utilization rates, fleet management, order picking and shipping, and financials.
How Distribution KPIs Can Help Your Company
Distribution is the often-forgotten little brother of manufacturing. Most people are interested in utilizing KPIs to improve their manufacturing efficiency. However, bringing your factory from ninety percent efficiency to ninety-five percent would cost exponentially more than it would to improve a highly inefficient distribution process. As such, this post will go over distribution KPI examples that cover operational, lean, and financial performance. And, as a bonus, we will also explain how you can streamline your reporting process using distribution reporting solutions.
Operational KPIs for the Distribution Industry
Basic day-to-day operations are the backbone of the distribution industry. If your fundamentals are suffering, your company will struggle to retain its market share in a highly competitive industry. This section will cover 12 operational distribution performance metrics that will help your business maintain its competitive edge:
- Order Lead Time – This distribution KPI is one of the fundamental metrics that companies use. It measures the average amount of time it takes an order to reach a client once the order has been made. This information is of high importance to clients as it helps them plan.
- Perfect Order Rate – Nothing in life is ever perfect. However, that doesn’t stop distribution centers from striving for perfection. The perfect order rate KPI measures the number of orders delivered from the distribution center without any kind of error. With the advent of autonomous warehouses, this distribution metric has been increasing across the industry.Perfect Order Rate = (% Orders Delivered on Time) * (% of Orders Complete) * (% of Orders Damage Free) * (% of Orders with Accurate Documentation) * 100
- Back Order Rate – This is a distribution metric that measures the rate at which orders are being made for out-of-stock items. Ideally, this KPI is kept low. Occasional spikes are acceptable as they arise from situations of unexpected demand. However, a consistently high rate indicates poor forecasting and/or poor inventory management.Back Order Rate = (Undelivered Orders / Total Orders) * 100
- Lost Sales – Often times, a potential customer will request a quote, and eventually decide not to use your distribution service. This is a distribution metric worth tracking. Determining the percentage of quotes that do not result in any business can help give insight into changes your company may need to make, such as price, level of customer service, and shipping times, to name a few.Lost Sales = (1 – (# of Sales / Total # of Quotes)) * 100
- Picking Accuracy – Similar to the perfect order rate mentioned above, this distribution KPI looks to reduce errors. However, this key performance indicator scrutinizes a specific process. It measures the percentage of orders that are picked and packed without error.Picking Accuracy = (# of Accurately Picked Orders / Total # of Orders) *100
- Picking and Packing Cost – Everything in a business has an associated cost. Most business will take a high-level approach and breakout component like labor, assets, fixed costs, etc. However, in the distribution industry, the picking and packing cost is a variable cost that you can try to control. This distribution KPI measures how much a company spends on an order line for tasks like handling, labeling, and packing.
- Order Cycle Time – The order cycle time metric measures the amount of time between orders. Specifically, it is the average time period between the placing of one order and the next. This may sound simple enough, but it is highly dependant on your company’s internal processes. An efficient order processing system will drive this distribution metric down, improving efficiency, and in turn, profitability.
- Vender Performance – This might seem like a somewhat unconventional distribution KPI, but it is very important. This performance metric measures the performance of a vender to ensure they don’t impact your business. The most common measure is a vendor’s shipping time.
- Labor and Equipment Utilization – This is a productivity KPI for the distribution industry. It measures the rate at which your workforce and equipment are being utilised in the warehouse / distribution center to fulfill orders. An excess of idle workers and unused equipment can be a major financial burden on a distribution business.Utilization Rate = (Actual Output / Maximum Possible Output) * 100
- Returns Due to Improper Shipment – This is a distribution metric that you want to be as low as possible. In fact, zero percent is the goal. The name is exactly as implies: This KPI tracks the number of returns due to improper items being shipped as a percentage of total items shipped.
- Receiving Cycle Time – Distribution operations start with receiving. As such, it is important to nail down the efficiency here. Any inefficiency that stems from receiving will snowball through the subsequent processes. The receiving cycle time distribution metric measures the amount of time it takes to process a delivery.
- Put Away Cycle Time – The put away process occurs after the receiving the delivery. This productivity KPI tracks the average amount of time required to put items away in the distribution center. This process can be improved through rearranging the warehouse to be more efficient, better employee training, or automation.
We have covered 12 operational distributions KPI examples in the section above. However, this is not an exhaustive list. There are tons of distribution KPI metrics that are used to measure the performance of a fulfillment center or warehouse. Eventually the question becomes “How many KPIs do you need?”
How Many Distribution Key Performance Indicators Does Your Company Need?
Most companies have too many KPIs. They have KPIs to measure everything. This is because management needs to be able to report to shareholders, and shareholders want insight into everything a company does. This can be very costly to a company if all these KPIs are processed manually (data gathering, processing, and reporting). The advent of technology such as distribution dashboard software has streamlined this process for many companies. However, it does not change the fact that someone needs to review these KPIs to interpret them and make decisions.
The KPI decision making doesn’t have to be made by one person. For example, would it make sense for the CFO of a company to be reviewing distribution KPIs that pertain to inventory and warehouse staff production? Not really. That task should fall onto the warehouse manager as they are more familiar with the warehouse operations. As such, it is better to break KPIs into a hierarchy and associate each level to their respective company employee. High level KPIs that deal with overall company performance should be reported to executives, while functional level KPIs should be reported to middle management.
With that in mind, we can conclude that there is nothing wrong with gathering large amounts of data to analyze a business, so long as it doesn’t inhibit the day-to-day business operations. The lean distribution KPIs listed below are a perfect example of what a warehouse manager should filter through and report a brief summary to the company executives.
Lean Distribution KPIs
With origins stemming from the practice of lean manufacturing developed by Toyota, lean distribution aims to reduce the amount of “waste” in a company’s distribution network. This “waste” represents any activity that does not add value to the end customer. As such, lean distribution can be thought of as an optimization problem, and what better way to measure efficiency than KPIs? Here are some lean distribution KPIs to get you started:
- Inventory Turnover Ratio – This lean distribution metric measures the number of times the entire inventory moves through the warehouse over a specific time period. This is an ideal metric for warehouse/purchasing managers to track, as it helps ensure that there is always an appropriate level of inventory.Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
- Inventory Carrying Costs – The carrying cost associated with inventory can often be overlooked by warehouse managers as it is comprised of many smaller cost components. The total inventory carrying cost is calculated by adding up rent, utilities, salaries, opportunity cost, inventory costs, and insurance.
- Days Sales of Inventory – This distribution key performance indicator measures the average number of days it takes to completely turn an inventory into sales. This helps a warehouse manager determine the liquidity of a particular item in inventory. It is important to keep in mind that this metric will vary a lot depending on the item being sold.Days Sales of Inventory = (Average Inventory / COGS) * 365 Days
- Sales Order Fill Rate – Are you able to meet a client’s order immediately with the current inventory? The order fill rate tracks the percentage of orders that can be filled based on the current stock. Ideally, your distribution dashboard tracks both your inventory and orders, making this a simple KPI to report daily.Sales Order Fill Rate = (Inventory / Order Quantity) * 100
- On-Time Delivery – This is a straightforward distribution KPI. It simply tracks the number of deliveries made on-time as a function of total deliveries. While this is very fundamental, it gives an overall view of how the distribution network is performing. This is the type of KPI that senior management will want to see.On-Time Delivery Rate = (# Orders Delivered On-Time / Total # Orders Delivered) * 100
- Dock Door Utilization Rate – This distribution metric analyzes how efficiently the dock doors are being used. Earlier, we talked about the carrying costs of inventory. If your distribution center has unused dock doors, it drives up the carrying cost as you are likely paying rent for a larger space than you need. Or, if you experience waves of usage, it may indicate a need for better fleet management.Dock Door Utilization Rate = (Dock Door Use Time / Total Dock Door Time Available) * 100
- Storage Productivity – The name of this distribution KPI may be a bit misleading. The storage productivity metric actually represents the volume of inventory that is stored per area (how many cubic feet of storage per square foot of warehouse real estate). Building higher racking/storage will lead to a higher productivity rate.Storage Productivity = Inventory Volume / Floor Area
- Space Utilization – This distribution key performance indicator tracks the amount of space occupied by inventory compared to the total amount of space available. Low utilization rates can indicate that a warehouse is larger than required.Space Utilization = (Inventory Volume / Total Storage Volume) * 100
- Receiving Cycle Time – This distribution KPI metric measures the average amount of time it takes to process a delivery to the warehouse.
- Fuel Economy Per Vehicle – There has been a large push for distribution fleets to move away from gas/diesel vehicles and go electric/hydrogen. However, that doesn’t change the fact that fuel economy is still important. Training drivers to avoid behaviors like speeding and excessive idling can save a company large amount of money in fuel costs, as well as maintenance and repairs.Fuel Economy = Fuel Usage / Distance
- Fleet Asset Utilization – This distribution KPI is something that a fleet manager should check on regularly, especially before ordering replacement vehicles or expanding the fleet. Increasing asset utilization can greatly reduce a company’s capital costs.Fleet Asset Utilization = # of Vehicles in Use / Total # of Available Vehicles
Lean distribution KPIs are a step up from the operation KPIs that we first discussed. These examples of lean KPIs in distribution should only be implemented on an established distribution line that is looking to squeeze the most out of its assets. However, managing all these KPIs will require the use of specialized distribution dashboard software.
How a Distribution Dashboard Can Streamline Your Reporting
A distribution network has a lot of data that it needs to collect to keep track of its inventory, shipping, and finances, let alone KPIs. Most companies use specialized ERP software to handle this. However, insightsoftware has created some of the world’s best distribution reporting software that is able to interface with your existing ERP to make KPI tracking and reporting as easy as one-two-three. Here are some of the benefits of using our distribution reporting software:
- Automated data collection. Our distribution reporting solutions interface with your existing ERP and automatically collect the data required for KPI analysis and reporting.
- Centralized data. Our distribution KPI dashboard brings your data to one centralized location so that you have access to what you need, when you need it. Over are the days of waiting for someone to send you data by email.
- Prebuilt KPI templates with ERP interface. Creating your own KPI templates from scratch is time-consuming and monotonous. Our distribution software solutions come with prebuilt KPI templates that know exactly where to find the data in your existing ERP solution.
- Reports at your fingertips. With all your data automatically collected to one place, generating reports is as simple as snapping your fingers . . . or clicking your mouse. Actually, we can even automate that too. Imagine that: reports automatically sent to your boss without you having to lift a finger.
At this point, you should be aware of the best operational and lean distribution KPIs, as well what kind of software you should be using to track them. Up next are the financial KPIs for the distribution industry that you should be tracking to monitor the financial health of your company.
Financial KPIs for the Distribution Industry
While it is very important to have KPIs that track warehouse/distribution center performance, it is equally important to have KPIs that track the financial health of the company. Here are some examples of financial KPIs in distribution that your finance department should be tracking:
- Accounts Receivable Turnover – This financial distribution KPI is used to determine how effectively a company collects its receivables (money) from clients. It is generally perceived that a high accounts receivable ratio is created by having a good collection process, as well as high-quality clients. A low ratio implies the opposite: a poor collection process and financially unstable clients.Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable
- Days Sales Outstanding (DSO) – The DSO metric is an extension of the accounts receivables turnover ratio mentioned above. This distribution accounting metric calculates the average number of days it takes for a company to receive payment after a sale. This is also a key component of the cash conversion cycle mentioned later.DSO = Accounts Relievable * Number of Days / Total Credit Sales
- Operating Cash Flow – Every business needs to have a cash flow, or else they won’t stay in business for very long. This distribution performance metric measures the amount of cash flow generated from normal business operations.Operating Cash Flow = EBIT + Depreciation – Taxes – Change in Working Capital
- Unlevered Free Cash Flow (UFCF) or Free Cash Flow (FCF) – The FCF metric takes the operating cash flow metric one step further by subtracting operating costs and investments. This can then be used to check if a company generates enough income to cover their interest or dividend payments.Unlevered Free Cash Flow = Operating Cash Flow – Capital Expenditures
- Working Capital – How much cash do you keep in your wallet to spend? You can consider that personal working capital. Working capital is the amount of money your company has on hand, ready to be put to work when needed.Working Capital = Current Assets – Current Liabilities
- Quick Ratio – The quick ratio is a common financial ratio that any distribution company will utilize to quickly estimate financial health by determining its ability to cover its short-term liabilities immediately.Quick ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
- Current Ratio – This distribution KPI is similar to the quick ratio, but a bit more forward looking. While it still measures the ability to meet short-term obligations, it does so over the period of one year, rather than immediately.Current Ratio = Current Assets / Current Liabilities
- Accounts Payable Turnover – Do you enjoy it when someone owes you money, and you are waiting to be paid? Probably not. That likely means that people don’t like it when you are shuffling your feet about paying them. This distribution performance metric measures how effectively a company pays its suppliers.Accounts Payable (AP) Turnover = Total Supply Purchases / ((Beginning AP – Ending AP) / 2)
- Cash Conversion Cycle (CCC) – The CCC is a financial metric that measures the amount of time it takes for a company to convert its entire inventory back into cash. The main components of this are days inventory outstanding, days sales outstanding, and days payables outstanding. This is a distribution KPI metric that should be directly reported to the company CFO.CCC = Days of Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding
- Total-Debt-to-Asset Ratio – This is a very straight forward distribution KPI metric. As implied by the name, it compares the total debt load of a company to the company’s total assets. It is a useful distribution KPI for the CFO to track as it can be used as an indicator for loan approval.Total-Debt-to-Asset = (Short-Term Debt + Long-Term Debt) / Total Assets
- Gross Profit Margin – This financial KPI is of importance for the distribution sector. It calculates the amount of money left after subtracting the cost of goods sold from the revenue as a percentage of revenue. This establishes a baseline of profitability for a company.Gross Profit Margin = (Net Sales – Cost of Goods Sold) / Net Sales
- Operating Profit Margin – The operating profit margin builds upon the gross profit margin calculation. It subtracts both the cost of goods sold, as well as the company’s operating expenses from the revenue. If this number is negative, it could mean that the goods are not being sold at a high enough price, or that operating costs need to be reduced.Operating Profit Margin = Operating Income / Net Sales
- Net Profit Margin – Have you ever head the term “the bottom line”? It is actually referring to the bottom on the income statement, which is the net profit (income). This financial distribution KPI compares a company’s net income relative to its revenue.Net Profit Margin = Net Income / Net Sales
- Average Annual Growth Rate (AAGR) – Your business has grown 50 percent over the last five years. That sounds amazing, but is it? You can use the AAGR financial metric to determine what that growth would look like on an annual basis (which in this example is 10 percent, for those who care).
- Compound Average Growth Rate (CAGR) – Continuing from our last example, seeing a 10 percent AAGR might make you feel pretty good. However, that is a linear measure that doesn’t account for compounding. A more accurate way of determining growth or return is by using CAGR.
Congratulations on making your way through the Top 38 Distribution KPIs and Metric Examples for 2020 Reporting. You should now have a basic understanding of the different types of distribution KPIs that exist, and how to efficiently report them using business intelligence software.
We know that KPIs and reporting can be a difficult topic to grasp and may take some time to digest. If you have any questions, send us a message. Our reporting experts at insightsoftware will be more than happy to answer any questions.