The Advantages of Distribution

By Steve Raymund  |  Posted 2006-03-20 Email Print this article Print

Opinion: Vendors should stick to what they do best—building and marketing products—while letting distributors focus on their own specialty: logistics.

The numbers tell a compelling story.

More than 100,000 technology resellers and solution providers rely on distributors in the United States alone, according to research compiled by the Global Technology Distribution Council. Distributors ship more than 2.5 million orders each month, often directly to users, while retaining the reseller's or solution provider's brand identity.

The monthly communication between distributors and their channel customers involves approximately 1.5 million inbound and outbound phone calls. Millions of additional transactions take place over the Web, including order placement and round-the-clock information access. Distributors also handle approximately 200,000 technical support calls per month for channel sales. And the credit services we offer keep product flowing.

For all we do for our business partners, distributors garner gross margins of around 5 percent and net pre-tax margins between one and two points—an equation that clearly points to the incredible efficiency of the IT distribution business model. Manufacturers considering whether to bypass distribution would do well to ponder these efficiencies and myriad services before "insourcing" the many complex jobs we perform.

Are you ready to handle a hundred times more orders? Is your credit department prepared to manage a diverse portfolio of sub-prime receivables? Are you ready to field scores of new sales representatives, support engineers, and customer service staff?

These roles have been deftly managed by distributors as part of our natural evolution over the past two decades. Such services are core to our business model, which has withstood not only the test of time but also dramatic economic fluctuations and new competitive challenges. From the torrid pace of the '80s and '90s to the more moderate IT industry growth rates of today, distributors have proficiently adjusted costs and infrastructure based on changing conditions.

Click here to read more about one distributor that is offering its VARs and integrators distribution with a twist.

In addition, we have refined our offerings to ensure we have the right products and services to meet increasingly specialized customer needs, including the development of robust e-business capabilities. Ironically, during the Internet's infancy, many observers concluded that e-commerce would seal the fate of distributors; instead, the Web and XML integration have bolstered our central supply-chain positions by enabling unprecedented efficiency gains.

While facts and figures clearly speak volumes about the benefit distributors and their low-cost structures deliver to OEMs, the channel relationshipswe have established are equally vital. The trust that resellers and solution providers place in us is immeasurable, as they know that we exist solely to meet their needs.

We're not focused on developing the next great product. We're dedicated to finding the next great way to help our customers penetrate new markets and overcome unique business challenges, predominantly in the SMB space. They know that our success depends exclusively on theirs. In fact, we're helping foster new opportunities by connecting our customers with each other for broader geographical coverage or diversification into new technology areas and vertical business segments.

In the quest for higher margins, some manufacturers and publishers may think they can replicate the distributor business model, perhaps even the multivendor solutions we stock. The question quickly becomes, "At what cost and to what end?" Should working capital be applied or diverted to such higher-cost/lower-return operations as distribution and logistics? What about the distractions to an organization built for altogether different purposes? Is it possible to provide the same quality of experience that distributors routinely deliver online and on the phone? Can all of these issues be addressed at a better price point without substantial SG&A increases?

The ultimate question should be, "Is this the best way to increase shareholder value?"

Our contribution should be viewed in the broader context of outsourcing that's enabled OEMs and publishers to hone theirs skills in areas that create real value for shareholders. For areas not considered a core competency, such as IT operations, manufacturing, and call centers, outsourcing specialists are increasingly relied on to perform these non-core functions. Outsourcing the downstream section of the supply chain also makes sense.

In most cases, when an IT vendor thinks first of its core competencies —usually developing, marketing and optimizing products and programs —the vendor is looking out for the best interest of their shareholders andcustomers. The disservice usually arises when the vendor looks to become something it is not, such as an IT products distributor.

Steve Raymund is chairman and CEO of Tech Data Corp., the world's second largest IT products distributor, and an authority on the IT channel. After about 20 years of holding the post, he is stepping down as CEO pending a search for a replacement. He will remain as chairman.


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