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Internal rate of return (IRR) a key decision making metric for the distribution industry

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Internal rate of return (IRR) a key decision making metric for the distribution industry

At the heart of the distribution business is cost and profit management. Decreasing safety stock, improved leveraging of warehouse resources, gaining efficiencies on cube utilisation and route planning can make substantial differences to a distributor’s bottom line. For distributors, metrics are crucial to identify lost revenue opportunities, highlight areas where costs can be reduced and enable faster decision making with fewer resources. This blog will discuss how assessing metrics such as internal rate of return (IRR) can provide valuable and actionable insights for distributors.

How can Internal Rate of Return aid decision making in distribution?

Highlighting the importance of metrics, Tony Pericle author of “Transforming Data into Action: Using Analytics for Better Distributor Sales Decisions” states, “Analytics can both provide advanced warning of an impending storm and identify alternative paths around a storm… Companies need to constantly monitor the landscape ahead and course-correct when necessary or risk ending up in the wrong place.” One of the challenges when steering the decision journey is where to invest and how to overcome the inability to compare opportunities; the IRR is a metric that allows businesses to compare multiple opportunities.. IRR reflects anticipated gains as a percentage of the initial investment. Consider these areas of distribution in which metrics such as internal rate of return can overlay the decision making process and allow targeted improvements to yield better returns:

  • Stock turnaround – whether to reduce safety stocks and better balance overall inventory levels freeing up cash for other investments
  • Inventory quantity or value? Distributors often have to consider whether to invest in short lead time, fast moving items or higher value, slower moving items with more margin over a set period of time
  • Stratification of customers and products for improved profitability analysis by buying / market profile. Once these fundamentals are clear, you can pinpoint changes that will increase profitability. For example, changing the service model from direct sales to telesales, reducing discounts, or imposing minimum order quantities can reduce the cost to serve your customers
  • The downstream impact on warehousing costs to improve purchase decisions
  • Measure how supplier changes may affect long term profitability and margins in order to negotiate pricing conditions and discount deals
  • Whether to invest further capital into the business by purchasing more stock, recruiting additional sales people or whether the money that would be invested would make more profit in the bank through interest

Harnessing Big Data – distribution information overload

In order to calculate key metrics such as internal rate of return, distributors must have access to accurate, up-to-date information. From original manufacturing and assembly data to shipping and logistics information, distributors collect and store masses of product, customer and supplier data. Although there are many publications featuring the big data topic, the real challenge for many distributors is what to do with the available information. With the sheer volume of data and the embedded experienced-based decision making that is regularly seen in the distribution industry; investing time, talent and technology is often challenging.

Most distributors already have all the data needed to make smarter, faster business decisions, the question is how to accumulate, categorise and analyse the data in order to make accurate and timely decisions.

Choosing the right technology to support your profitability

Looking ahead, distribution leaders may look to invest in both technology and analytical resources in order to fully leverage the power of big data. Metrics such as internal rate of return can allow distributors to more efficiently use warehouse resources, reducing overtime and improving productivity.

An ERP system such as Microsoft Dynamics AX and Microsoft Dynamics NAV enables distributors to maximise profits by identifying areas where they can increase efficiencies and improve margins. Distributors are able to easily identify their most profitable buyer/market profiles with intuitive dashboards and querying tools, as well as measuring the cost of fulfilling orders. For a deeper insight into how technology can aid best practice in distribution and provide valuable insight, download our white paper or contact Prodware today.

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