Fear of disintermediation, or manufacturers bypassing distributors to sell directly to end customers, has grown in recent years, with increased adoption of e-commerce making such a move appear more feasible than in the past. As a result, distributors are faced with an increased need to prove their value to both manufacturers and customers or risk being viewed as simply an added cost in the chain.
This article examines the role distributors play in the supply chain and how they can approach the challenge of proving value to fight the threat of disintermediation, including results from MDMs survey on disintermediation, conducted in partnership with Grant Thornton.
Online buying and e-commerce options make direct communication between manufacturers and end-users easier than ever before. As a result, many may be reconsidering the role that distributors play in the supply chain: What value does the distributor really add if the transaction itself can take place so easily online?
As the market adjusts to what initially looks like a more efficient transaction, distributors are searching for innovative ways to differentiate – and effectively communicate – what they have to offer.
In a recent MDM survey, conducted in partnership with Grant Thornton, distributors find that to compete with a new player in today’s market, they need individualized customer service and the ability to develop relationships with customers who often don’t know what they want.
That new player is actually not a new player – it’s no one. The distributor is being replaced by online, self-serve options, allowing them to skip over the job that distributors do entirely.
Most survey respondents (75 percent) said they are “concerned” or “very concerned” about disintermediation. Distributors understand the value they bring.
“I know value is added to a manufacturer only having to ‘sell’ the features and benefits to the distributor, rather than trying to inform unknown customers through other channels,” one respondent noted.
But at the same time, they recognize the need to prove that value to the other players.
The Value of Distribution
Customers have their choice of suppliers, so offering the right type of service is essential for serving customer needs, according to Rod MacKenzie, owner of Green Building Resources, Atlanta, GA. For building and construction materials, different customers often need different products, on different timeframes and operate with different knowledge bases.
“They might not even know what they need on a job until they get there,” MacKenzie says. “That’s what I see with a lot of the contractors that I work with. Planning is not their strong suit. Most wait until the last minute, and then all of a sudden it’s a crisis, and they come to me. And I probably have it on my shelf.”
MacKenzie says that speed is one of the best places to compete with disintermediators, such as Amazon. Does Amazon provide the product? Yes. But Amazon is operating with a two-day shipping allowance, MacKenzie says. For the customer that needs a tight turnaround, a well-connected distributor is often the best, fastest answer to the problem. But, he says, it’ll cost them.
“I can maximize my price based on speed,” MacKenzie says. “If you want it right now, I can stop what I’m doing and get you what you want, but I’m going to make money on you.”
But speed isn’t the only value a distributor offers, and according to Bob House, CEO of BeyondTheory Logistics, it’s not even the greatest value the distributor offers.
“It’s not just product availability, it’s about product knowledge, training and supply,” House says. “Placing an order fast is not the value in a contract.”
That juncture holds potential for distributors who are looking for ways to differentiate: the customer relationship. If a distributor can convince a customer to plan better, and to communicate that plan, the price points improve for everyone.
“For my best customer, the price comes down over time,” MacKenzie says, “because I know how to prepare for you, and you’re willing to share your order expectation with me.”
Karan Girotra, co-author of The Risk-Driven Business Model, says that this might be the most accessible change in business operations for distributors.
Addressing when the customer is making their buying decisions can affect the transaction on every level, he says. The distributor and manufacturer benefit when they can rely on an ongoing purchase order, and the customer benefits by getting the best price.
“Sometimes we can tell a certain group of customers, if you change when you buy, we’ll give you a break on price,” Girotra says.
But transparency and trust between the customer and the distributor is the most important component, and one of the hardest to develop.
The Transparent Relationship
House says that transparency ideally moves beyond just the customer and the distributor to include the manufacturer. A clear line of communication
between all three players is what will create a lasting, significant return on investment for all.
“There’s no conflict of interest, everybody signs a piece of paper saying there are no hidden rebates, trade allowances, etc.” House said. “The manufacturer understands we’re not holding them hostage. Nor are we threatening them with a lack of access to the end customer.”
But for a distributor, convincing a customer that transparency is the best way to go might be just as difficult as figuring out exactly how to differentiate a business model.
“You have to make sure there are benefits for everyone,” says Lalit Wadhwa, vice president of global supply chain solutions for electronics distributor Avnet Inc. “If there are benefits for everyone, it’s far easier to achieve transparency.”
If only some of the partners benefit, there’s no reason for the other partners to invest in the necessary changes, he says.
While nearly all of respondents to the survey (85 percent) said they plan adapt their product offerings to differentiate their businesses in the next year, half indicated that they would be deepening their product offerings in their current product categories, and half indicated they would be adding new categories.
One respondent wrote that adding new categories would help maximize operational costs and keep the company relevant to “ever-changing consumer tastes/choices.”
“Adding new product categories that are also complementary with what we are already promoting will be an easy way to bring additional volume and tap other channels,” the respondent wrote.
Adding new categories and offering more variety gives the customer more options, but it can come at a cost, according to Girotra. One way to get around this is to just make it look like there are more options, which of course depends on the product.
Girotra points to the auto industry as an example. “They’re not necessarily having that many different products to stock, because they can make different variants from the same components,” he says. “They’re creating different products that have common components to create the appearance of variety.”
Other respondents to the survey said that they plan to expand their current product categories to provide to niche markets. “Adding breadth on related segments adds convenience for customers,” one respondent noted. “We may trim less profitable products with low demand to focus sales efforts.”
Girotra supports this approach as the one with the least risk. He used the example of hospitals, noting that some large, corporate medical institutions have been branching out with specialized clinics. For a distributor that offers both high-end and low-end products, the offerings could be disconnected, focusing each branch and targeting different markets.
Most respondents (80 percent) also said they plan to adapt their service offerings in the next 12 months to differentiate themselves from the competition. Nearly half (46 percent) plan to expand current offerings, while 40 percent want to add new services.
Small businesses don’t always have the resources for huge operational changes, but doing what larger companies are doing isn’t always the answer anyway, one respondent said. “Nearest competition is a national company with much deeper pockets than our small, family-run business. We aren't going to win trying to do everything the same way they do.”
With the prominence of e-commerce and the changing behaviors of buyers, the threat of disintermediation has grown for many distributors. The answer isn’t just standing by and taking it, according to one survey respondent. “Customers and manufacturers take us for granted,” one respondent said. “We need to remind them of the value we provide.”