Historical analysis and industry benchmarking can be useful tools in identifying issues and managing risk. Most companies focus the process at the financial statement level; gross profit, inventory turnover, and current ratio. In the distribution industry, more companies are recognizing the need to use other techniques to protect against unforeseen threats.
1. Minimize supply chain disruption
Four of every five responding companies say they are vulnerable to a major supply disruption, according to the Assessment of Excellence in Procurement Report. As a result, 50 percent plan to increase their sourcing of products from China, India, and other Asian countries over the next three years. Although the focus on customer concentration is essential in the distribution industry, companies are becoming more aware of the imminent risk of vendor relationships and their channels of distribution. We cannot predict natural disasters, severe weather conditions, telecommunication breakdowns, or transportation issues, but understanding the sourcing of the manufacturer is on the radar of most distributors.
2. Break down the information
Key performance indicators of a company provide a general overview of financial health and accomplishment. However, disaggregating information by product line or transaction type often provides further insight into where the company needs to focus its time and effort. The process should include a comparison to industry benchmarks and historical trends that may provide insight into the competition and potentially mitigate an inadvertent assumption of business risks. For example, a company assumes significant risk by extending credit. A business may drill down to uncover certain risks or opportunities by computing the average days outstanding and turnover ratios on accounts receivable by product line or by customer. The business could mitigate those newly identified risks by limiting credit or electing to extend payment terms to further attract customer purchases. Terms and conditions of a sale are key factors in the distribution industry.
Over the past year, companies have continued to advance and expand their understanding of key performance indicators. The resources available in most business systems are often underused and should be reassessed to make certain all relevant issues are being identified and addressed in a timely manner. We must begin to think outside of the box when designing and monitoring key performance indicators.
Robert S. Olszewski can be reached at Email or 215.441.4600.