Taking a bigger byte
Distribution channel benefits manufacturers, trade group says.
The use of middlemen in the technology industry is increasing because manufacturers are realizing that two-tier distributors are the most cost-effective way to reach the business-to-business market, according to the Global Technology Distribution Council.
A February 2009 study commissioned by the trade association showed that higher costs for price protection and marketing were more than offset by reduced costs for shipping, handling, warehousing, returns, accounts receivable, financing and other administrative costs. The study relied on 13 expense types provided by nine large IT companies.
'When you add them up, for B2B, as a manufacturer it's absolutely more expensive to set up your own warehouse, credit department,' customer service and sales, said Tim Curran, the council's chief executive officer. The indirect sales model also allows vendors to get their money immediately.
Manufacturers typically offer to protect a distributor's purchase price from future discounts offered to the broader market. A distributor will report back how much stock they have of an item purchased at the higher price and receive a credit for the difference. Suppliers also pay distributors extra to run events promoting their products.
Most IT products are sold in bundles with peripherals and software from different manufacturers. 'So if a manufacturer wants to set up its own direct sales force it needs logistics, a credit department, bank relationships, to be prepared to cover bad debt. So they can offload all that to a distributor,' Curran said.
Not having to invest in all that overhead is especially important when sales volumes drop, he added.
'The technology distributors are the most efficient managers of inventory' among all U.S. industries, Curran said. Commerce Department data shows monthly inventory to sales ratio in the sector at 0.8 compared to a general average of 1.15 ' an indication that inventories of IT products are turning more than once per month, he noted.
During the recession, it took a long time for the economy to draw down inventories. Inventories of technology products, however, were already low 'because manufacturers and distributors have developed extremely effective forecasting and inventory allocation models to analyze demand patterns,' Curran said. 'They've done a phenomenal job of managing inventory at a low level and providing very high order fill-rates, in the high 90 percent area, through the downturn.'
Large manufacturers may sell direct to their biggest and best clients, but are relying more on distributors for the bulk of their sales, Curran said.
Dell, which previously only sold computers directly to consumers, is among the companies that have turned to distributors to reach the corporate world.
Many vendors are also using two-tier distributors to fulfill sales through their Web sites.
And large retailers tend to have direct relationships with a handful of major suppliers, but often utilize two or three distributors to source from secondary and tertiary suppliers.
IT distributors have reached and exceeded the highest sales levels achieved before the economy soured, the Global Technology Distribution Council reports. Members achieved worldwide revenues in excess of $100 billion last year and monthly sales are running above the peaks in early 2008. Second-quarter U.S. hardware revenue increased 10 percent from the first quarter this year, and by 20 percent compared to the second quarter of 2009. Year-over-year sales in Europe were up 15 percent but have stabilized more during the current calendar year.
The sales rebound is driven by companies replenishing dated desktop computers, laptops and mobile devices and by a new trend of hotels and other businesses purchasing consumer products, such as flat-screen TVs, for professional settings, Curran said.
