Being a distributor is arguably the most difficult position in the sales chain. It is in the interest of manufacturers to clear out as much of their stock as possible so as not to keep warehouses full of stock and to ensure a steady, positive cashflow. The dealer, on the other hand, should keep as little stock as possible to avoid a negative cashflow, yet must meet customer demands.
There are other problems. We all know that manufacturing companies will attempt to offload older stock to a distributor immediately prior to the launch of a new product. This effectively makes the previous generation of a product obsolete. The distributor can then either knock out product to dealers at bargain prices or hold a warehouse full of goods that nobody wants.
There are many advantages to being a distributor. For instance, distributors buy in bulk in order to meet dealer demand and as a result benefit from the discounts offered by manufacturers.
Anticipating the peaks and troughs in demand can also be a problem. The launch of Windows 95 and the Microsoft-driven pre-release hype caused many dealers to anticipate not just a demand for the software, but also a rise in demand for machines and upgrades on which to run it.
The demand for hardware in the home market is highest at Christmas, but even so, nothing can be taken for granted. Market research company Context carried out a survey of European resellers immediately after Christmas. Forty eight per cent of dealers had forecast that sales would remain the same as last year, while 17 per cent expected sales to be lower. As it turned out, of those that had expected a stagnant market, 56 per cent said that sales were higher than expected. But of those predicting a fall in sales, 26 per cent found their forecast to be accurate.
Forecasting is a critical factor for distributors. Overestimate and there is the possibility that stock may be left on the shelves. Underestimate and failure to supply may mean the dealers will go elsewhere. 'Everything in distribution is a problem unless you factor it in,' says James Wickes, managing director of Ideal Hardware.
But the greatest difficulty that Wickes faces is having to supply the support services that dealers and customers have come to rely on from the distributor. 'In terms of business problems, the biggest one in distribution is that all the manufacturers have laid off their direct sales force and rely on selling through distributors. In the past, they would have supplied the experts and support services to back up the direct sales force, but these days they expect the distributor to supply them,' Wickes says.
On the whole, Wickes feels that the pricing and discount policies of the manufacturers are fair to all distributors irrespective of the size of the company or order. 'It is important that all the distributors get the same price, otherwise a grey market is created,' he says. But he admits there are some exceptions. There is some discrimination, but it happens on a global basis, usually with US companies that push a particular subsidiary in order to penetrate an overseas market, according to Wickes.
When it comes to the relationship with dealers rather than manufacturers, Wickes feels the most difficult task is keeping in tune with what the customer (in this case the dealer) requires. This view is supported by Adrian Gale, managing director of Metrologie, who believes it is essential to understand the dealer's business, particularly if it specialises in a vertical market segment.
Gale concurs with Wickes' view that the distributors bear the burden of the support services that would once have been provided by the manufacturer. Metrologie, a Digital distributor, has seven full-time support staff specialising in Digital hardware and software. But to take on the required support staff means the distributor must be able to guarantee a level of business that will justify the cost of those staff. For companies like Digital, IBM, Compaq and the larger suppliers, the expenditure can usually be justified. But for many distributors dealing with smaller manufacturers, that level of support is not possible.
One key factor in becoming a successful distributor is manufacturer accreditation. Unfortunately for the channels, accreditation processes are flexible. Some, like Digital's, are rigorous, while others are less demanding. 'The Digital accreditation programme is pretty tough, but other companies are not so stringent. Compaq, for example, and this is not a criticism, sets fairly low targets. You just have to do a certain level of business,' Gale says.
Sometimes, too close a relationship with a supplier can cause as many problems as it solves. Two years ago, Technology, an ICL-owned distributor, was perceived as being too close to its parent by some of the other suppliers, like IBM and Compaq. ICL's rivals in the hardware business feared that Technology would favour its parent company over the opposition and push the bulk of the business in ICL's direction. IBM and several other companies threatened to withdraw their business from Technology. In the event, the company realised it was in its best interest to distance itself from ICL and maintain a good working relationship with other suppliers.
Martin Finn, commercial director with Digital and Hamilton Rentals, but formerly Northamber sales manager, is convinced that distribution is a difficult furrow to plough. 'It is a young man's game. When I was at Northamber, the sales targets were set at #500,000 a day or 850 sales. Our performance at Northamber was judged on whether or not we delivered on time. It was our key selling point because we inevitably did,' Finn says. Whether such targets are attainable is a moot point, but the figures are not unusual. By way of comparison, the average Prudential Insurance salesman in the south east of England is instructed to bring in #3,500 worth of new business a week.
Finn is critical of the sort of service that the majority of distributors offer, to some extent echoing the views of James Wickes. Finn believes that because the distributor's profit margins are relatively low, they cannot afford to hire the quality of staff that would ensure an adequate level of service. 'Our major issue with distributors is that they cannot deliver the level of service we expect. If you look at the majority of middle managers in the distributorships, you'll find they are a lot younger than most of the managers in other parts of the industry. When you get down to the actual salesmen, they are a lot younger still,' Finn says.
One of the major problems faced by distributors is how to retain customer loyalty. 'How do you keep customer loyalty when there are so many distributors on the market,' Finn asks? Hamilton regularly uses five distributors. The difficulty for the distributor is to retain its client base, particularly when products are in short supply.
Context senior consultant Jeremy Davies believes there are a number of problems facing the distributors. 'To be a successful distributor you must have a European, if not a global business.' Davies also believes that one of the major difficulties faced by distributors is what's euphemistically known as 'shrinkage'. Shrinkage is just a polite term for stealing, which according to Davies, is a serious problem for distributors. 'If you ask distributors about shrinkage, most will say they do not suffer from it, but employee theft is rampant among the distributors. If you are running a high-margin business then you can withstand some pilferage, but distributors are running on such low margins that it has become a serious problem for them,' Davies says.
Davies identifies other problems that distributors face. One is the level of stock they must carry. 'They face an enormous liability in terms of the amount of stock they are required to carry on very low margins.' But of equal, if not greater importance, is keeping control of the lines of credit to dealers.
With companies like ICL and Digital openly declaring that 50 per cent of their sales come through third-party channels, the responsibility of controlling the lines of credit has been shifted from the manufacturers to the distributors.
The falling cost of hardware has also hit the distributors hard, reducing profit margins even further and putting pressure on the companies to shift more and more product. One of the major problems for distributors and dealers alike is that the market has become saturated. Although more powerful machines are surfacing at 18-month intervals and new generations of applications and operating systems require more memory and storage, there is not the same enthusiasm for purchasing PCs as there was five years ago.
According to James Wickes, Ideal Hardware did not get caught out by the hype surrounding the launch of Windows 95 last year, which many thought would have given a boost to the hardware market. 'The market had been so subdued that I thought, whatever will be will be,' Wickes says.
Wickes believes the key a distributor's survival is successful forecasting, having available a high level of support and adding value. 'I remember talking to Finnis Conner of Conner Peripherals before it was taken over. Conner made the point that if you do not add value, you add cost,' he says.
The majority of manufacturing companies use more than one distributor, providing a choice to the dealers customers. But being a distributor of one of the major suppliers does not guarantee success. Distribution is a cutthroat business and is not made any easier by the fact that distributors must carry the additional burden of support and after-sales service that was once handled by manufacturers.
Consider also that there is no such thing in the PC distribution business as a sale or return, that the dealer is responsible for controlling the credit lines and that some manufacturers will deliberately offer products at bargain prices just before they release new ones. Now what looked like a promising business could turn out to be a nightmare.
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