We all know distributors help manufacturers by re-selling products. But there are many other ways a distributor adds values in manufacturing process that need to be understood. Its true, distribution channel costs money – sometimes as high as 40% to 50% of MRP. But a properly aligned distribution channel also adds enormous value through tangible and intangible ways. Knowing these facts can help manufacturers make optimum use of their distribution channels. This article describes some known and some not-so-known facts about how distribution channel adds value in manufacturing.
1. Bulk Breaking
Companies produce in lots, but consumers buy in single piece. So, we have retailers who buy in moderate quantity and sell in single units. However, the nature of manufacturing is such that, its completely uneconomic for even a small or medium sized company to sell to retailers. Distributors break manufacturing lot into pieces or dozens or whatever units the retailers wants them in. Its a cost which distributor picks up
2. Maintaining Competitive Price
A retailer needs supply in moderate quantity, that a manufacturer would find it hard to service, so we have bulk breaking. But, apart from small order size, a manufacturer simply can not afford to supply to thousands of retailers across the country. Just the logistics cost can drive cost of distribution and consequently final price of a product so high that it would be wiped out of market by competing products. No manufacturer can afford to do so.
3. Cash Flow
Distributors help manufacturers in cash flow management by ensuring smooth flow of cash. Retailers work on credit of varying payment terms and periods. Distributors take the responsibility of offering credit to individual retailers and collect the cash. However, the distributor works on fixed credit period and pays manufacturer regularly before lifting merchandise. This way, manufacturers can focus on their central activity of manufacturing and enjoy healthy cash flow
A company runs on its salesmen. They are the ones who bring bread onto our plates. Most companies have a model where the distributor/stockist provides local salesmen, though some companies like P&G and Unilever disburse the cost of salesmen. Its distributors who mostly pick the cost of local salesmen.
Stocks need space for storage. So distributors hire/own godown space and makes it available for goods. They also have to follow the various guidelines laid down by the companies for safe stock keeping (Ex. Cadbury requires a cold chain since chocolates are sensitive to temp changes)
6. Market Knowledge
Distributors know the most about their markets. They are expected to keep a close eye on competition and maintain good relations with top retailers. A dynamic distributor could be a goldmine of information that otherwise companies pay to market research companies
7. Special Promotion
A company may have various marketing schemes to promote new products or incentivize an old one depending on its overall marketing strategy. A distributor implements these schemes on the ground in consultation with manufacturers.
8. Market Feedback
Distributor acts as arm of the manufacturer in the market. Unlike wholesalers who act independently, distributors work in close consultation with manufacturers and provide vital information on customer feedback, how company’s products are doing, consumer complaints, market trend etc
9. Distribution Infrastructure
Distribution requires various infrastructure such as delivery vehicles, delivery manpower, office, staff, internet etc. for ensuring uninterrupted supply on ground. All these cost money.
As one can see, each activity described above costs money. To offset these costs and allow distributors make money – manufacturers sets a margin so that distributors can earn on distributing goods. On its own, without distributor help, the company would have spent much more than its spending on distribution margin. Besides, there are many intangible benefits like market feedback, promotion schemes on the ground, achieving sales targets etc.
There’s a general thinking that middlemen add cost. As middlemen, distributors do add cost, but they also add lots of value. That’s why distribution channel is considered an important asset in the valuation of any company.