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Disintermediation — How Will the Distributor Survive?

February 11, 2020
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As seen in the Westchester Business Journal and Fairfield Business Journal

The players in the historical supply chain have been allies for over 100 years. Indeed, from manufacturer (let’s call them the supplier) to distributor, to retailer, to consumer, all of these players have relied on and profited from each other since the Industrial Revolution. However, in today’s technological age, the internet, e-commerce solutions, artificial intelligence, and advanced analytics, along with the increased awareness by manufacturers of how to connect to the ultimate users of their products, have all significantly increased the disruptive forces of disintermediation.

Disintermediation is essentially the removal of intermediaries from a supply chain, or “cutting out the middlemen.” Disintermediation has existed for decades, but technology has brought it to a different level. Amazon, eBay, and ASOS are all examples of how companies utilizing technology as their primary asset have forever changed the traditional supply chain.

With customers experiencing a wider range of choices available to them, all with instant purchase options, distributors are under the constant threat of having gross revenues and margins reduced or being squeezed out of the supply chain altogether.

Advanced web portals, app-based ordering, and telesales enable suppliers to cover large geographies without building regional warehouses. More and more suppliers are moving to the direct sales model or teaming up with partners like Amazon. Every time a distributor loses a customer to a supplier, they not only lose revenues and profits, they also create a competitor with the ability to offer competing products at a lower price point.

In order to address this threat, distributors need to understand some of the challenges the suppliers will face when trying to sell directly to the retailer or consumer. Suppliers will need to manage the high cost of many smaller shipments they are not accustomed to; improve technology for security measures to protect the customer’s privacy; manage the additional exposure of income and sales tax reporting in a multi-state environment; and most importantly, provide a high satisfaction level customer experience. This understanding will put the distributor in a better position to improve themselves in the service areas the supplier is attempting to enter. Here are a few things distributors should do to make sure they are operating at a best-in-class level in order to increase the strength of their customer relationships:

Meet or exceed your customer’s expectations for on-time delivery. In order for a supplier to enter into your space, their business process must change significantly, including the reduction of shipment sizes and dramatic increases in delivery locations. The investment for this business pivot is significant for the supplier. Discourage your competitor’s attempts by making it difficult for them to meet your customer’s expectations by:

  • Monitoring your on-time delivery performance on a weekly basis
  • Including delivery performance statistics as part of your key performance indicators
  • Incorporating delivery performance into compensation reviews at every level of the organization, from the warehouse personnel to the chief operating officer

Invest in your technology. Make sure your organization is operating using best-in-class software solutions.

Unnecessary software customization is usually counter-productive, increasing the need for monthly manual processes just so employees can work with reports similar to those produced by the legacy software. Resist this temptation and adapt to how the new software was designed. Utilizing appropriate software the way it was intended will increase time available to work on process improvement and analysis, instead of wasting time reorganizing information with manually prepared spreadsheets and pivot tables, etc.

Utilize technology and processes to increase the accuracy of shipments. More important than on-time delivery is accurate delivery of the correct quantity and type of product ordered. Again, consistently monitoring and creating improvements to minimize returns and under/over shipments will keep your customers coming back.

Know your customers. Understand what they perceive as value. Today’s buyers have more product information than ever. They are more sophisticated and demanding, expecting a global reach, real-time fulfilment capabilities, technical support, and deep knowledge of product design and capabilities. Use this knowledge to determine where your company’s value lies.

Distributors likely have products in their portfolio which are more susceptible to disintermediation than others. Therefore, partial disintermediation may be the answer. Consider analyzing your portfolio of products to determine which products your supplier could efficiently take directly to the buyer. Chances are the supplier is already looking at this as well. It may make sense to allocate resources away from these products or segments and invest in the areas which are harder for the supplier to penetrate.

Employ a team approach. Work with your supplier so both sides win. As noted above, customers are more informed than ever. The customer experience is delivered by supply chain, or, using another term, the value chain. Suppliers and distributors can work together to deliver a best-in class customer experience. Many suppliers and distributors are identifying an essential new requirement for effective partnerships — the mutual investment in competencies around digital tools. Digital partnerships that collaborate around marketing programs, customer acquisition, complementary websites, collaborative customer support, and above all, the sharing of data and information have a formula where 1+1=3. All of this leads to collaborative growth, verses an eat-what-you-kill mentality.

Suppliers will continue to gain scale, build their own distribution platforms, or go direct with enhanced digital platforms. This trend is a threat which will turn slow-moving distributors to commoditized warehousing, fulfillment, and transportation roles. But if distributors look at their markets strategically and understand how technology will help enhance their strengths and improve their customer’s experience, the future will not be so unsettling.