What are your gross margins? How about your operating expense? Sales per employee? Inventory turnover? Return on investment?

These are some of the critical profit variables that every distributor should be tracking to help quantify where your business has been, where it’s heading, and whether something has gone wrong. With these key performance indicators (KPIs) and metrics, you can keep a watchful eye on the overall health of your distribution business and make adjustments as needed.

Nine Distribution KPIs to Regularly Assess

While there are literally hundreds of different KPIs that can be used to measure the health of a distribution business, here are nine critical profit variables that measure broader metrics that should receive a fair amount of attention.

Gross Margin

Gross margin is a metric that reflects the ability to effectively manage pricing and cost of goods sold (COGS). For a distribution business, it represents the profit made on each product sold before taking into account other operating expenses, like salaries and rent.

Gross margin is calculated by subtracting COGS from net sales and dividing by net sales, then multiplying by 100 to express the answer as a percentage. You can use this number to benchmark against others in the industry, compare customers against each other, and review gross margins by product groups and families.

Net Sales – COGS
------------------------- X 100
Net Sales

For benchmarking, here are some gross margins for comparison:

• FPDA 2020 report – 31.4% for a typical distributor, 33.6% for a high performing distributor
• NAHAD 2024 report – 35% for a typical distributor, 45% for a high performing distributor
• AHTD 2023 report – 25-30% for a typical distributor, 30-35% for a high performing distributor

Operating Expense

Broadly, your operating expense incorporates selling and administrative expenses, basically everything except COGS. The operating expense ratio focuses on expense control and can be used by distributors when positioning their business for growth, during downturns, and when identifying areas for improvement.

Operating Expense
------------------------- X 100
Net Sales

For benchmarking against others in the industry, here are some operating expense ratios for comparison:

• FPDA 2021 report – 24.4% for a typical distributor, 19.7% for a high performing distributor
• NAHAD 2021 report – 30.4 % for a typical distributor, 27.8% for a high performing distributor
• AHTD 2021 report – 23.7% for a typical distributor, 22.4% for a high performing distributor

Sales Per Employee

Sales per employee is expressed as a dollar figure and measures sales generated per full-time employee – essentially employee productivity. It’s also important to consider profit per employee.

If you have a business that is cyclical, consider using a rolling 12 months for the sales. This number can help you establish a “best performing range” by comparing your numbers over time to other benchmarks, such as overall net profit. When the number is too low, you may be overstaffed or not at peak effectiveness. To a point, higher is better, but it can also indicate the need to increase staff to prevent burnout and turnover.

Net Sales
---------------------
Number of FTEs

Here are some sales per employee metrics you can use for benchmarking:

• FPDA 2021 report – $419,250 for a typical distributor, $485,807 for a high performing distributor
• NAHAD 2021 report – $320,685 for a typical distributor, $380,663 for a high performing distributor
• AHTD 2021 report – $510,438 for a typical distributor, $516,358 for a high performing distributor

Inventory Turnover

Inventory turnover measures the number of times the entire inventory stock is sold per year – how quickly goods move through the warehouse, indicating the efficiency of stock management. The inventory turnover metric is calculated by dividing the warehouse COGS by inventory, typically for a given time period. A higher ratio indicates more efficient inventory management, while a lower ratio could signal issues with overstocking and slower selling goods.

You can establish a goal that balances control of inventory investment with customer service level that takes into account the target performance for different product lines, growth and new product offerings, and the economic climate.

Warehouse Cost of Goods Sold
-----------------------------------------
Inventory

For comparison to a trade association report, the best number to use are the 12 month turns. Here are some KPIs for benchmarking against others in the industry:

• FPDA 2021 report – 4.9 for a typical distributor, 5.6 for a high performing distributor
• NAHAD 2021 report – 3.8 for a typical distributor, 3.9 for a high performing distributor
• AHTD 2021 report – 6.5 for a typical distributor, 8.0 for a high performing distributor

Average A/R Collection Period (Days)

The average A/R collection period reflects accounts receivable collections practices. This distributor KPI is calculated by taking accounts receivable and dividing by sales/365 days. This metric can be used to compare month-to-month figures, which helps to focus on trends rather than just a single month. Note: average A/R collection period is not the same as A/R turnover, which is net sales divided by average accounts receivable.

Accounts Receivable
---------------------------
Sales/365 days

For benchmarking, here are some trade association figures:

• FPDA 2021 report – 44.7 for a typical distributor, 46.9 for a high performing distributor
• NAHAD 2021 report – 42.3 for a typical distributor, 40.9 for a high performing distributor
• AHTD 2021 report – 45.7 for a typical distributor, 44.9 for a high performing distributor

Return on Net Worth

Return on net worth measures profit earned as a percent of net worth. This metric can be used in a couple of ways. To understand what earnings are generated from investments (assets), divide profit before taxes by total assets. That figure can then be used to determine financial leverage, which is calculated by dividing total assets by net worth. It measures the extent to which outside financing is used. The higher the number, the more outside financing is used.

Profit Before Taxes
-------------------------
Total Assets

It’s important to track how the numbers vary over time. You can also benchmark against others in the industry with the following trade association data:

• FPDA 2021 report – 21.9% for a typical distributor, 40.5% for a high performing distributor
• NAHAD 2021 report – 20.4% for a typical distributor, 50.3% for a high performing distributor
• AHTD 2021 report – 34% for a typical distributor, 48.2% for a high performing distributor

Profit Margin

The profit margin KPI measures profit earned as a percentage of net sales. Net profit margin takes into account all business expenses, beyond just COGS. That makes it a more stringent metric for distributors to measure profitability. Net profit is the infamous bottom line of a P&L statement and reflects the total revenue remaining after accounting for all outgoing cash flow and additional income streams.

Profit Before Taxes x100
--------------------------------
Net Sales

For benchmarking, here are some trade association metrics:

• FPDA 2021 report – 15% for a typical distributor, 28.5% for a high performing distributor
• NAHAD 2021 report – 4.6% for a typical distributor, 13.8 % for a high performing distributor
• AHTD 2021 report – 13.1% for a typical distributor, 23.1% for a high performing distributor

Sales-to-Inventory Ratio

The sales-to-inventory ratio measures dollar sales generated per dollar of inventory. This metric is important because the ratio of sales to inventories provides critical clues about whether a distributor is keeping storage costs under control and achieving targeted revenues. It is calculated by dividing warehouse sales by year-end inventory.

Warehouse Sales
-----------------------
Year-End Inventory

Gross Margin Return on Inventory

This metric measures gross margin earned per dollar of inventory. It can help identify areas for improvement and to make better inventory decisions, while avoiding wasting money on products that don’t sell. Gross margin return on inventory is calculated by dividing warehouse gross profit x100 by inventory.

Warehouse Gross Profit x100
---------------------------------------
Inventory

Other Distribution Metrics to Monitor

According to various trade associations, the nine key metrics above and these additional metrics are all important for distributors to monitor. Here are some of the other metrics to monitor:

• Typical Sales Volume – where does your sales volume come from so you can focus your resources.
• Sales Change % (from year to year)
• Gross Margins (Average)
• Inventory Turnover (times)
• Inventory Value
• On-Time Shipping
• Vendor Service Levels
• Default Lead Times
• Release Days
• Lost Sales

Using TrulinX ERP Distribution Management Software for Key Metrics Best Practices and Reporting

The good news is that TrulinX ERP distribution management software makes it easy to measure and extract this information. TrulinX also provides several daily, weekly, and monthly reports that provide a clear picture of areas that need immediate attention.

Here’s where you can find the key metrics in TrulinX:

• Gross Margin – Most easily found in the Sales section of Business Activity Display.
• Operating Expense – Found on the Income Statement
• Inventory Turnover – Business Activity Display, Inventory tab – combine with the Service Level Report for a better overall picture of inventory management performance; information can be reviewed by product groupings: MTD/Previous Year Sales by SPC Report
• Average A/R Collection Period – Business Activity Display, Days Outstanding, Accounts Receivable tab
• Return on Net Worth – Profit Before Taxes can be found on the Balance Sheet and Total Assets on the Income Statement
• Profit Margin – “Bottom Line” of the P&L Statement
• Gross Margin Return on Inventory – MTD/Previous Year Sales by SPC Report

Keeping a close eye on your distribution business is critical. TrulinX is designed for distributors to give you clear insight through key metrics and KPIs, without going into unnecessary details. If you’re ready to get clear insight into your distribution business, request a demo today.

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