Analysis of benchmarking and success factors in distribution.
by Guitze Messina*
When Warren Buffet, one of the richest investors in the world, is asked: What are the businesses you prefer to invest in? He usually answers: "There are 3 types of businesses (1) the one with high inventory turnover (2) the one with high margin and (3) the one with none of the above. I only invest in those with a combination of factors 1 and 2 and always avoid those with type 3."
In the distribution business, knowing the success factors is no less important than in the world of investment. The big problem is that measuring a factor and having a number is a good first step, but for it to have value it is necessary to be able to compare it with something else; let's look at an example:
If we are told that the sales per employee of the XYZ company are 80 pesos per day, that number means nothing unless we can compare it with the average sales of the competition or the industry. Therefore, it is not only important to know what are the success factors in distribution, but to be able to compare them with similar companies to know where we can improve and where to focus our management efforts. This is what we call Benchmarking or comparison of factors with the industry.
Next, we will mention the various success factors that HARDI has found during its history and which have guaranteed the long-term permanence of its distributor members. We will also offer the reason why this factor helps determine the success of a distributor.
1) Inventory rotation per year: This is a critical factor because it tells us how good sales work we are doing to change all our inventory X number of times in 365 days. It is also an important operational factor because it tells us if we are possibly buying very little or a lot of inventory, if we have obsolescence, or if we could be losing sales by moving little volume selling at very high prices. As we can see it is necessary to be able to compare this factor with the industry to be able to draw greater conclusions, but this is a factor that every distributor must measure today.
2) Gross profit margin: Our industry is very competitive and we usually have to cover our costs with a very small percentage of the value of the product. If this percentage is very high, our sales fall and if it is very low our profits may disappear. Like factor #1 we must be able to compare our margin to the rest of the industry in order to determine how well we are calculating sales prices, how efficient we are at managing our costs, and what profits we are making for our shareholders at the end of the year.
3) Rotation/Margin Factor: In HARDI we use the multiplication of factor 1 and 2 to obtain a factor that allows to easily and visually compare the companies that have more opportunities for improvement. The higher the turnover/margin factor, the better the distributor's managerial performance. Obviously we need to compare ourselves to the industry in order to know where the opportunities for improvement are.
4) Staff productivity ratio: This ratio seeks to determine what percentage of the company's gross profit is required only to cover payroll expenses. To the extent that a distributor requires a smaller percentage of their gross income to cover their payroll, it is understood that their employees are more efficient and their costs are lower. In order to draw greater conclusions we must be able to analyze trends and compare it with the industry as well.
5) Gross profit per full-time employee: This ratio tells us how much an employee contributes to the gross profit of the business and is a key factor of comparison with other distributors to know the efficiency of our sales and management of our costs.
6) Average period of accounts receivable: Family businesses depend a lot on the management of their working capital and obviously we all want to have accounts receivable from 0 pesos to 0 days, but we know that to grow we must offer credit and manage it properly. The best way to know if we have good control of our accounts receivable is by comparing ourselves to the industry average and then to the best quintile of distributors in the industry. If we only know that our accounts receivable are 39 days it doesn't tell us as much as if we knew that the industry average has cxc of 32 days. In this case we know that we have the opportunity to improve, just by being able to compare ourselves to the industry.
7) Potential growth rate: This is a rather interesting accounting factor that is obtained by dividing the net profit / (Average accounts receivable + average inventory-accounts payable). In general we can say that the higher the net profit of a distributor, the higher its growth potential. If we compare the factor of our company with the average in the industry and with the highest quintile we can determine what our growth potential is with respect to the competition.
8) Growth in sales: Without a doubt we all want to grow and the growth in sales from one period to another indicates the level of health that an industry has. The important thing is also to know how we are growing versus the growth of the industry in general and then in relation to the competition. If our sales grew by 5% this number alone does not tell us anything. Now if we grew by 5% and the market grew by 8% we know that we are losing market and if the market grew by 3% we can conclude that we are gaining market.
Our goal at HARDI is to offer all distributors the possibility to compare these success factors safely, maintaining 100% confidentiality. In over 15 years making these comparisons none of our members has lost their information and no agency, competition and not even HARDI itself has had access to their information.
These factors help to improve our competitiveness and profitability, it is in each distributor to use the values to know the areas where they must concentrate their efforts to be more efficient. We will be showing all distributors who visit us at our launch event in Las Vegas the power of our comparison tools, the security of them and how they can use them to improve their businesses.
* Guitze Messina. Executive Director, Mexico. Heating, Air-conditioning & Refrigeration Distributors International (HARDI). www.hardinet.org - [email protected]
