It's a dirty job, but someone has to do it. Dustman? Pig farmer? England football manager? No, all these trades sound like a doddle compared with being a distributor in the current climate. Any distributor will tell you so.
Frank Lavery, sales director at specialist distributor Primary Storage, sums it up: "End customers and resellers want to pay as little as possible for products, and receive world-class service. Meanwhile, vendors expect a distributor to handle all logistics and take all the credit risk on their behalf for as little as possible."
According to Jamie Kelley, marketing manager at networking vendor D-Link UK, the big problem for distributors is that they are increasingly seen as an expensive overhead which many of their customers and suppliers feel they could do without.
"The main issue is the 'value' of the distributor - how they can differentiate themselves. This is particularly the case for broadline distributors. They are exposed to the new breed of distributors which focus on networking and internetworking connectivity," says Kelley.
Aggregation is the spectre haunting many middle-band distributors. Big-name vendors are looking for economies of scale and reducing the number of distributors they use. Seagate and Compaq, for example, now employ only a third as many distributors as last year.
Some niche vendors take a similar view. David Thomson, European optical product manager at storage vendor Plasmon, says: "From a vendor's perspective, the main issue is over-distribution. As a specialist in removable storage, Plasmon has a very niche product offering, and having too many distributors selling mid-to high-end solutions is not ideal.
"Some distributors will want to sell the product with value add, while others will be concerned only with winning an order by price cutting."
Like resellers, the distributor's mantra has become 'box-shifting is bad, value-add is good'.
John Kemp, managing director of specialist mobile distributor A2000 Distribution, says: "Service is the name of the game. If the three most important criteria in the property market are 'location, location and location', then in distribution it should be 'service, service and service'. It may not be that way for all distributors at the moment, but it should be, and has to be, for those that want to survive."
Pure box-shifting could become the job of courier companies, which are already forming alliances with some medium-sized broadline distributors.
The gulf between broadliners and specialists is widening, and distributors will have to decide which way to jump to avoid falling down the crack, says Paul Sangster, managing director of distributor Hammer. "A bad distributor is one which does not know its identity in the market and is not sure which direction it is going in," he says.
"It's pointless signing a distribution contract if it doesn't tie into your existing model. You need to keep your focus, and I have seen companies that have ignored this, go to the wall."
Even one-time broadliners are jumping across to the specialist side of the gulf. Koby Amedume, marketing manager at storage solutions provider CMS Peripherals, says: "The distribution model seems to be changing. More broadliners are developing strategic business units to try to focus on specific sectors such as security or storage. This is simply the tip of the iceberg. The smart ones will focus even further."
Broadline distribution is not dead. Although added value is seen as essential in today's increasingly commoditised market, this can consist of slick logistics and a broad product range. Distributors with muscle, such as Computer 2000 (C2000), Northamber or Ingram Micro, could still be looking forward to a healthy future.
Julian Klein, managing director of C2000, says: "We work with the leading IT vendors. As a broadline distributor, it is important to be able to offer as much choice as possible. C2000's extensive and up-to-date range is one of its unique selling points."
Extra services will also be in demand. "We are increasing investment in areas such as drop-shipment, configuration and end-user billing, because our customers are telling us these are the services they want," says Klein. "Resellers want to focus on their core activities, and we want to do the same, in areas such as logistics and cash collection."
However, in future, distributors without the necessary resources will struggle. "The gross margin percentage for broadband disties is disappearing fast," says Lavery. "Their response is to try to get bigger and dominate the markets they operate in, forcing vendors to deal with them."
Smaller distributors are likely to become specialists, although they seem to have little ambition to move in on their resellers' territory.
Rob Nash, director of sales and marketing at Unipalm, says: "Unipalm is 100 per cent channel and intends to stay that way. Distributors that have their own reseller arm will always have split loyalties. Don't believe what they say about Chinese great walls. They didn't keep Genghis Khan out, and won't keep out the broadliners."
Resellers will start to feel the pressure - if they are not feeling it already - in the provision of 'bonus' services such as marketing, pre-sales support and training, says Amedume.
"Distributors and vendors are now more focused on the returns they get from marketing funding. Both distributors and resellers must quantify return on investment to the stakeholder. There must be a criteria attached to the funding, such as increase in sales or the acquisition and migration of customers," he says.
The same applies to pre-sales support and consultancy. Security reseller Allasso has a good reputation among resellers for the quality of its pre- and post-sales support. However, Scott Duncan, UK general manager, warns: "Resellers must realise that pre-sales assistance is not an unlimited pot and only available up to a certain level. It is not practical to provide support to every reseller. It is best to concentrate pre-sales efforts on major partners that need support most when selling complex products."
Lee Crowe, logistics manager at network specialist TNS Distribution, is more blunt. "Distributors should provide expert pre-sales assistance, but not for free," he says. "A degree of expert pre-sales service and consultancy should be offered and paid for by the reseller. This way, no pre-conceptions will be formed."
Paid-for, post-sales services and support will be a major growth area for distributors. Unipalm has started to offer internet hosting and managed services. InterQuad has set up a new consultancy division to help resellers to become application service providers (ASPs), and Hammer is launching an on-site service model. This will provide site surveys, installation and on-site support where resellers want it. Ideal Hardware is prepared to outsource almost all of a reseller's functions if required.
The ecommerce effect
Another fact haunting distributors is ecommerce. Ever since its inception, ecommerce has threatened to 'disintermediate' the supply chain by cutting out the middleman.
"Ecommerce will make a great deal of difference to the distributor's sales process," says Crowe. "Web-based sales will remove the need for typical distributor sales as we know them today."
But specialists see little threat. Sangster says: "Hammer's clients want to do business with a specialised distributor. They are not looking for ecommerce models."
Volume distributors are gearing up for ecommerce themselves, says Klein. "Electronic orders already generate more than 20 per cent of our monthly billings. We envisage that amount reaching 25 per cent by the end of our financial year," he says.
C2000 has a relationship with Actinic to enable resellers to set up their own trading sites for which C2000 provides data feeds. Value-added resellers (Vars) can add their own margin and terms.
"Resellers can use ecommerce to provide the same service to their customers that we provide to them. We will be providing the back-end data feed and the logistics services, so this will draw us closer to resellers," says Klein.
Information will also be able to flow up supply chains, according to Harry Croydon, chief operating officer at ebusiness insurance solutions provider, Safeonline: "Ecommerce should allow disties to open up their books to vendors. Reporting and knowledge should flow from the distie to the vendor to aid their development. Physical distribution will become less important," he says.
Ecommerce will offer new opportunities to forward-thinking distributors. Allasso is offering an email content management service from its sister company Activis, which has been taken up by about a dozen Vars so far. Allasso believes it is the first service of its kind to be offered through distribution.
"Many of our Vars are moving into managed services," says Bernie Dodwell, sales and marketing manager at Allasso. "It is great news for the big companies, but smaller Vars do no have the resources to compete, so there's a move to distribute services as well as products to the channel."
Lavery sums up the potential benefits of ecommerce. "It will help distributors to educate their customers; many services and support functions can be improved by the web. It will reduce the transaction cost which is fast becoming the largest cost in the chain," he says.
In for the skill
The successful distributors of tomorrow will be those that develop new skills and differentiators, while maintaining many of the qualities on which their customers rely today.
"Resellers are demanding high-skilled service delivery, like project management, design consultancy and engineering, and distributors need separate skills according to the requirements of the client," says Crowe.
"But the age-old functions of distribution - stock, availability, reliability and credit - will always remain. A good litmus test by which to judge a distributor is what products it has or has not got in stock."
If they manage to achieve the balancing act and adapt to new market conditions, distributors can look forward to a relatively healthy future.
"Distributors' strength is knowing how the models are changing and how they can hook new products from new vendors into the businesses they support," says Croydon. "The ASP model is an example. What else is required to make this happen, and what other products can be sold through it?"
Foreign vendors with small or no satellite offices will always need distributors. Rob Henney, a director at networking distributor Anixter, says: "The explosion in telecoms has created opportunities in distribution. To be successful, these companies need to build a worldwide communications infrastructure in a very short time.
"Vendors need distribution partners that can deliver their products across the world in large quantities and under time pressures."
Ultimately, distributors have one big advantage: the IT industry needs them. Even direct-selling PC vendors use mainstream distributors on the side because they could not otherwise get their products out fast enough. It may be a dirty job, but there is no one else to do it.
"The reach of the two-tier structure is unparalleled," says Amedume. "Vendors simply cannot do the job of both the reseller and distributor. Our ears are closer to the ground and we work well with resellers, taking time to understand their business models."
- Broadline distributors will become fewer and bigger as sleek logistics and economies of scale become their major weapons.
- Other distributors will increasingly specialise in niche markets and/or services.
- Funding to support resellers' marketing and pre-sales activities will become tighter, while paid-for services to resellers will increase.
- Ecommerce could actually be good for distributors, by cutting costs, improving information flow and enabling new services.
- Although new skills and services will be important, basic functions such as stock, reliability and credit will remain crucial.
- Like them or loathe them, distributors will always be there because much of the IT industry cannot do without them.
|Case study: Ideal Hardware|
|According to Ian French, chief executive of Ideal Hardware, the poor old distributor is just not appreciated. "The general view, especially among manufacturers, is that we are simple box-shifters, that we are purely a provider of warehousing and credit," he says.|
"We think this view is fatally flawed. But I know that many manufacturers still feel their supply-chain is too inefficient."
"Ecommerce was supposed to be the panacea. But it isn't," says French. "Actually, the web creates as many problems as it solves. It does not take out the costs of storage, transport or credit."
So there will still be a place for the humble distributor. For pure commodity products such as monitors, French believes the major broadliners will become "super logistics partners" - shifting boxes with superlative efficiency, probably in alliance with one of the leading courier companies. They may never even own the products, but act purely as outsourcing agents.
For the rest, added-value and specialisation are the way to go. But French is not impressed with the all-round abilities of the channel. "Most of the resellers we talk to in Europe are very weak technically and financially," he says.
"The classic scenario is where the reseller sells a product that it does not understand, installs it badly, then comes back to us to say that it is broken."
So Ideal has subsidiaries, Unisolve and Unifund, which can handle configuration, installation and consultancy on the reseller's behalf. Add in logistics and accounting from Ideal, and all the reseller has to do is make the sale and handle technical support.
One of Ideal's resellers will soon have nothing but a sales and technical support department. Ideal will do the rest.
"How much free training can I provide when there is no guarantee of business for me?" asks French. "Why train people so they can go and buy cheaper elsewhere?"
Ideal checks its records to find out which resellers simply shop around for the cheapest deals, and does not encourage them to come back. But the main reason for turning away custom is the credit squeeze.
"We are unable to supply credit adequately to half our customers, and we probably turn away 20 per cent of potential business every day because they cannot get credit," says French.
Little wonder he sees added-value and specialisation as the way ahead.
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