In today’s world, things can change in an instant. One walk-in order at the sales counter could turn into a lucrative partnership that drastically increases your profits. Likewise, a competitor could swoop in and offer one of your most profitable customers a more compelling price on a hose assembly causing you to lose their business.
Now, more than ever, you need to have your finger on the pulse of your business in order to adapt and remain competitive in the industrial distribution marketplace. You need to not only be keeping up with industry trends and have a solid grasp of how you’re doing, but also understand how you stack up to similar companies in your industry. Doing so will allow you to benchmark your distribution business against your competitors, watch your company's performance over time, establish triggers for scaling, and quantify where you're going.
Below, we outlined three simple steps to help industrial distributors benchmark and track growth and success.
1. Establish Benchmarks
In order to be able to gauge how you’re doing and set yourself up for growth, you need to first establish some industry benchmarks. These benchmarks will serve as reference points that you can use to compare your performance against other likeminded companies. To start, ask yourself:
- How are we doing? What is the typical level of profitability in the industry?
- How good can we be? What results are being generated by the most successful industrial distributors?
- How do we get to high-profit results? Which Critical Profit Variables (CPVs) appear to drive profitability?
Many trade associations share industry reports that can help you set industry benchmarks against your peers and stay on top of industry trends and forecasts. To gain the insight needed to answer the questions above, you may want to check out some of the following sources:
- FPDA Motion & Control Network: The FPDA offers several benchmarking reports, including a Profit Report that includes an analysis of a typical distributor’s performance in terms of sales growth, return on investment, gross margin, and more.
- AHTD - The Association of High Technology Distributors: AHTD members have access to quarterly reports that allow them visibility into the current state of markets and their expected growth rates.
- NAHAD - National Association for Hose & Accessories Distribution: In partnership with CoMetrics, NAHAD provides participating member companies with confidential, leading-edge business insights through their Distributor Performance Dashboards (DPD), where participants can compare their company to others in the industry.
- MCAA - The Measurement, Control and Automation Association: The MCAA publishes an Annual Market Forecast report in addition to a number of research articles on market opportunities in the measurement, flow control and automation field.
- NFPA - The National Fluid Power Association: NFPA has a wide variety of programs including their Stats Pro Toolkit for benchmarking and their monthly Confidential Shipment Statistics (CSS) Program.
2. Determine Your Key Performance Indicators
Once you have a clear understanding of your industry benchmarks, you’ll then want to determine which metrics, or key performance indicators (KPIs) will help you reach your goals of meeting and exceeding them. While some KPIs may be more or less valuable to certain distributors, some common KPIs that every industrial distributor will want to keep track of include:
- Profit Margin (pre-tax) Percentage – measures the pre-tax profit as a percent of revenue
- Return on Assets (ROA) Percentage – calculates the same pre-tax profit figure as a percent of the total asset investment in the business
Critical Profit Variables
- Sales per Employee – measures employee productivity
- Total Gross Margin Percentage – reflects the ability to manage cost of goods sold (COGS) effectively
- Operating Expense Percentage – focuses on expense control
- DSO (Day Sales Outstanding) – average a/r collection period
- Inventory Turnover (times) – reflects accounts receivable collection practices
3. Measure and Track Performance
Now that you know which metrics are most valuable to your business, you’ll need a way to measure and track these KPIs over time. The best business management solutions for distributors should come with a wide variety of tools that provide immediate, real-time insight into your business performance.
TrulinX software by Tribute, Inc., can help you determine the state of your business with a number of real-time performance tracking tools and reports to give you the relevant information you need. From sales bookings and inventory positions to vendor report cards and special pricing agreements (SPAs), you’ll get a real-time snapshot of your business that you can easily compare to previous days, months, and years.
TrulinX helps you measure these Critical Profit Variables:
- Gross Margin Percentage – reflects the ability to manage pricing and COGS effectively
- Operating Expense Ratio – measures the ratio of Operating Expense per Net Sales
- Sales per Employee – measures sales generated per full-time employee (employee productivity)
- Inventory Turnover – measures the number of times the entire inventory stock is sold per year
- Average A/R Collection Period (Days) – reflects accounts receivable collection practices
- Sales Change % – from year to year
Additional KPIs that can be tracked in TrulinX:
- Return on Net Worth – measures profit earned as a percent of net worth
- Profit Margin – measures profit earned as a percentage of net sales
- Sales to Inventory Ratio – measures dollar sales generated per dollar of inventory
- Gross Margin Return on Inventory – measures gross margin earned per dollar of inventory
- Typical Sales Volume – identifies where your sales come from
- Gross Margins – average of the past 12 months of sales
Monitor other important Business Management Metrics in TrulinX:
- Inventory Value by month and trends over time
- On Time Shipments
- Vendor Service Levels
- Lead Time Accuracy on new items
- Accuracy of Release Days and warehouse efficiency by location
- Lost Sales
Get Insight Into Your Business with TrulinX Business Management Software
Now is the time to analyze your distribution business and its position in the marketplace to determine the steps needed to make it more competitive and profitable. From increasing gross margins and inventory turnover to decreasing operating expenses, TrulinX can give you the tools you need to improve and track your performance, while ensuring you are profitable and responsive in this tough market.
To learn more about Tribute's industry expertise and how TrulinX software can benefit your organization, request a demo today.