Distributors bolster the supply chain health of nearly every industry. In some sectors, such as consumer goods, commodities and perishables, distributors are more than just facilitators; they are indispensable. Yet distributors have often been regarded as second-class supply chain citizens. They work for—rather than with—manufacturers. Their value is acknowledged but seldom optimized. They do their job; we do ours.

But the picture is changing. More companies are realizing that distributors are indispensable in tapping global markets, connecting with new suppliers, and ensuring that supply chain economies are maintained even as supply lines are strained, twisted, and stretched.

Organizations are also noting that untapped synergies are possible because they and their distributors leverage the same basic supply chain processes: demand forecasting, inventory management, order management, field force planning, IT, and so forth. The bottom line is that a potentially fruitful opportunity exists for companies to make distributors a more integral and valuable part of the extended enterprise. Following are some guidelines for assessing distributor performance.

Distributors’ core supply chain processes are more or less the same, regardless of the industry they serve. The major differences usually are in emphasis. For example, demand forecasting and inventory management tend to be more critical in pharmaceuticals than in commodity consumer goods. However, the fact remains that five basic processes—demand forecasting, order management, inventory management, warehousing, and transportation—form a good generic platform for gauging distributor value.

For each of these five areas, two types of assessments are valuable: qualitative (evaluating process maturity) and quantitative (measuring process proficiency). Depending on the industry and scope of distributor operations, each type may be positioned as a one-time activity (a snapshot of distributor performance) or as an ongoing exercise performed, say, every one to three months to continuously improve key areas of distributor operations.

For qualitative assessments, a distributor’s process-level sophistication might be categorized as:

• Basic: Its operating approaches are merely sufficient to support core business objectives.
• Progressive: It uses advanced technology and sophisticated methods to support some business processes.
• High performance: It combines leading-edge technology and best practices that are typical of the top 10 percent of companies in the industry it is supporting.

In demand forecasting, for example, a distributor of fast-moving consumer goods might be deemed basic if it uses simple historical trending to predict future demand. If it uses advanced statistical techniques based on market insights and a product’s complete life cycle, its demand forecasting capabilities can be considered high performance.

Or consider an evaluation of how a distributor approaches inventory planning. As shown in Figure 1, if the distributor does not differentiate between inventory items and uses a single method of planning irrespective of the inventory characteristics, then its performance might be rated basic on this particular checkpoint. A similar approach could be used for other aspects of inventory management, such as replenishment strategy or safety stock calculation. In the end, results would be tallied and a single rating assigned to the entire area of inventory management, or demand forecasting, etc.

Quantitative assessments provide a metrics-based picture of distributor performance, as well as a basis for comparing performance across distributors. Such assessments are also useful for mapping performance trends over time and establishing internal company benchmarks. For quantitative assessments, the choice and relative valuation of key performance indicators (KPIs) is decisive. For example, the cost of transporting diamonds would be far less significant than, say, the cost of transporting detergents.

Again using fast-moving consumer goods as an illustration, good KPI candidates for the five core supply chain processes might be:

• Demand forecasting: forecast strike rate.
• Inventory management: stock in days (units), inventory strike rate, number of days of stock-outs.
• Order management: customer order cycle time, average SKU penetration, order fill rate.
• Warehousing: warehousing costs as a percent of revenue, throughput rate, orders shipped complete.
• Transportation: number of deliveries per vehicle route, capacity utilization.

The above guidelines are far from comprehensive. Their goal is to show how a distributor assessment might be structured. Every company will need to develop its own measures and evaluation mechanisms, and decide how to apply the insights their assessments generate.

Still, the importance of a standardized, market-relevant, end-to-end distributor-assessment process is increasing. More than ever before, distributors are becoming accountable business partners, not mere middlemen. Understanding and leveraging their value is part of what supply chain leaders do in their ongoing pursuit of high performance.