The indirect channel depends on the distribution network. But what do these guys do? And why does the indirect channel depend so heavily on distribution?
Well, it’s simple. Manufacturers cannot cover all of their markets. And, everyone (end-user/reseller) cannot buy direct from the manufacturer. The dynamics of selling and buying direct is complex for a whole host of reasons. Enter, the middle man…..or the revered (or irreverant..depending on whom you ask) distributor.
Distributors come in various stripes – global, national, regional or specialized. By specialized, I mean these are folks who have expertise in a certain business or a sub-category of a business. Pretty much everything that one sees in a store touches a distribution center (DC) of some sort. Whether the DC’s are owned by the firm or are independent, DC’s form a very vital link in complex supply chain and logistics network that covers the globe by means of which products are procured, sold and delivered.
Regardless of who these distributors are, their business model is based on operating margin. At the gross level, the distributor essentially marks up the price (disty invoice price) of the products that they buy from manufacturers and sells them downstream to the value chain. This could be a direct sale to an end-user or to the agent/reseller/retail network. More often than not, distributors do not have any direct end-user customers. Most distributors serve only the indirect channel.
In addition to margins, distributors also receive MDF’s or Co-Ops, infrastructure support, event sponsorships, marketing campaign support, special promotions etc on a near continual basis (amortized across vendors). This support enables the distributor to add a few more points to their operating margins.
Distributors typically operate in a high-fixed cost environment. They have to operate warehouses and all the elements that come with inventory management such as damaged goods, aging goods, inventory turns, returns (RMA’s), cross-shipping, large buy-ins, bid roll outs, demand planning, transportation, etc. In addition, they have to manage the market on both sides of the equation – the vendors and their thousands of customers.
These guys are logistics experts and often even product/solution experts. Many distributors serve as proxies for manufacturers. Vendors often train distributor resources on their products, technologies and road-maps to enable distributor sales teams to be knowledgeable on the SKU’s carried by them. Distributors also constantly engage with key groups in their markets by means of events, expo’s, trade-shows and the like. This often allows vendors to connect with their customers at disty-events.
Regardless, operating margins are low and it’s a tough business as competition across distributors is stiff. Furthermore, customers tend to shop around causing a perennial downward pricing pressure. A regional or niche distributor has a better chance of making additional margins as opposed to one that carries millions of SKU’s. But it all depends on the line of business.
That said, the value add of distributors can be summed up by the following points.
- Risk Management – They help offset the product risks of the manufacturer by bringing in the inventory (sell-in).
- Logistics and Market reach – The manufacturer is now able to reach a larger market by strategically selecting the ‘right’ distributor. Further, the pain of managing product logistics spread over a large area is off-loaded to the distributor.
- LoC – Distributors offer invaluable service by means of offering a LoC (Line of Credit) to their customers. Barring a few key customers, for the manufacturer it would be inconceivable to offer LoC to all customers. Such an action would decimate the balance sheet with an extremely high (and unsustainable) AR (Accounts Receivable).
- Marketing and Sales – Most distributors have outbound marketing and sales teams to help drive revenues. Sales teams are typically inside sales teams with mostly outbound functionality. The marketing teams orchestrate programs, campaigns, events etc to help drive sales.
As I mentioned before, this is a margin business and these guys are supply chain champs. They typically have a tightly optimized DC network with associated logistics and 3-PL support. And to survive and thrive, they are are very adept at squeezing every last dollar from their supply chain(s). I will try and provide some additional color about distributors in one of my following posts.