Distributors in the driver’s seat
Product manufacturers become disintermediated.

By : Jim Pinto,
San Diego, CA.

In past years manufacturers were considered "upstream in the food chain". Intermediaries (sales channels, distributors, retail outlets) were considered "downstream" links, generating lower margins. Today, no single product supplier can compete against local specialists in all geographies. So, the big switch occurs - the product manufacturer gets disintermediated.

This article was published by:
Check out AutomationTechies.com
AutomationTechies.com, April 2003

Also, a version of this article was published as:
Cost of doing business tightens even more
ISA - Intech article the back-page of ISA - InTech, March 2003

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The expression "disintermediation" means elimination of intermediaries in a business process, usually when the cost to do business with them exceeds the value they provide. Business is a continuous loop of suppliers and customers, all intermediaries. Today, globalization and e-commerce are forcing every link in the business chain to be evaluated and re-evaluated regularly, to measure value in the ever-changing business processes.

Intermediaries in the food chain

In past years manufacturers were considered "upstream in the food chain" - they generated the highest profit margins with proprietary products. Intermediaries (commodity suppliers, sales channels, distributors, retail outlets) were considered "downstream" links, and generated lower margins. The lower your business was in the food chain, the lower your margins.

It was assumed that the product manufacturer was the start of the process - just as the end-user was the final link in the chain. Everyone else was an intermediary. However, when products become commodities (minimum differentiation, commonly available from several suppliers) the manufacturer loses that prized position and downgrades to just another link, another intermediary in the value creation process.

Knowledge is spreading everywhere

In the competitive, global business environment knowledge is quickly and widely disseminated. Quality manufacturing was thought to be a proprietary skill. But now many other countries, notably China, are producing high quality products at lower cost. Engineering developments too have proved to be more effective overseas - not only cheaper, but also faster and better. So, many major automation companies are moving both product development and manufacturing offshore.

Today, the design of a product, its manufacture, distribution and service are all separate businesses - very few companies (even the largest) can really financially control them all. The best that most can do is to form alliances with businesses that are specialists in each segment and in target geographies. Large companies like GE have already recognized that separation will occur, and they try to control ownership through correct outsourcing and alliance relationships. The changes are profound, deep and long lasting.

Products have become commodities

In the past leading manufacturers had products that were entrenched and appeared to have the upper hand. Their designs and applications knowledge were highly proprietary and commanded significant premiums. But today proprietary products are disappearing very quickly and many leading companies are struggling to differentiate.

Commodity products are available from a number of sources around the globe. With widespread e-commerce, customers shop between brands for features and price. Product selection and procurement has become just one step in the development of complete solutions for specific requirements.

Customized requirements are the key

To the customer, all that matters is the total system solution that meets specific needs. No single manufacturer, however large, can provide all that is required. The dominant purchasing influences are local understanding of needs, effective completion of specific requirements, local delivery of the complete solution - which includes startup, maintenance and maximization of up time through fast and effective service.

Distribution and services - the direct links with customers - have become the real value, the distinguishing competence. Product selection includes specifications, pricing, delivery, availability, spares, maintenance, etc. In addition, there is a strong need for customization to meet specific needs, systems design, startup, commissioning, availability of spares, maintenance - the services typically provided by a local specialist Systems Integrator (SI).

Distributors have the choice of becoming SIs themselves. But that would limit their scope. The best distributors service several different SIs, each specializing in different vertical markets - paper mills, pipelines, engine-test, etc. They provide them with customer contacts, project leads, a wide choice of products with optimized pricing, local stocking at less cost and faster response than the factory.

With a wider scope and vision, plus the advantage of being local, it is most often the savvy distributor who best understands the customers needs and helps with the choice of products and services for specific projects.

Whatever happened to product loyalty?

Traditionally, most Distributors and SIs and were loyal to specific product brands. They focused on selling and integrating systems based on a good long-term relationship with the manufacturer, who provided factory training, support, deep price discounts, etc. Distributors were captive, subject to a variety of restrictive rules made up by the manufacturers and designed to secure their loyalty. Foremost was a strong prohibition from selling products from competitive suppliers.

To boost declining revenues during the past couple of years, several major product manufacturers have made a push to provide complete “solutions”, thereby going into competition with their own sales channels. This only succeeded in alienating SIs, who quickly looked for alternative suppliers and speeded up their own learning curve on alternative products. Competitive suppliers, anxious to gain inroads into their entrenched competitors business, offered significant price advantages, as well as strong support and advantageous payment terms. Savvy Distributors, recognizing their own value, provide a choice of competitive brands and help to ensure that customers needs are being met with the widest choice available.

Unless a product manufacturer provides significant proprietary value (and in industrial automation, there is very little of that left), the move to several suppliers is natural, and inevitable. Customers want a choice of products all linked to the same purchasing source - the distributor. This is similar to the concept of the automobile dealer - delivering whatever the customer needs, from a choice of different brands.

No single product supplier, even the largest, has a broad enough product base, and sufficient knowledge in specialist vertical markets. So, few can compete against the local specialists, and certainly not in all geographies. The large supplier quickly becomes non-competitive against the local SI, who teams with a strong Distributor to offer a broad lineup of products and services.

So, the big switch occurs - the product manufacturer gets disintermediated.

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