09 May 2023

Understanding indirect distribution: unlocking new avenues for market reach

Introduction

Manufacturers either SELL DIRECT to their end-users or sell first to INTERMEDIARIES (Distributors), who then on-sell the product to end-users.

Direct Distribution: the manufacturer sells direct to their customers.

Indirect Distribution the manufacturer sells to wholesale distributors (one or more), who take the product into stock. The wholesalers then sell to retailers. The end-user buys the product from the retailer.

The Wholesale Distributor ("wholesaler") and Retail Distributor ("retailer") are also known as "intermediaries" and together they are referred to as a "sales channel".

The sales channel can be a two step process as shown in the above diagram, or a single step where the manufacturer sells direct to retail distributors.

Selling via intermediaries is called INDIRECT distribution.

By leveraging indirect distribution channels, companies can expand their market reach, optimize resource allocation, and create mutually beneficial relationships with intermediaries. In this blog article, we will explore the concept of indirect distribution, its key components, benefits, and best practices for successful implementation.

Defining Indirect Distribution

Indirect distribution, also known as channel distribution or distribution through intermediaries, refers to a marketing strategy in which goods or services are delivered to consumers through an intermediary network.

Unlike direct distribution, where companies sell their products or services directly to customers, indirect distribution involves partnering with intermediaries such as wholesalers, retailers, agents, and resellers to facilitate the movement of goods or services to the end-users.

Key Components of Indirect Distribution

Intermediaries: Intermediaries (also called Distributors) are central to indirect distribution. The whole point of indirect distribution is that intermediaries sell to the market on the manufacturers behalf, overcoming the need for the manufacturer to deal direct with the end-users. They act as a bridge between the manufacturer and the end consumer. Intermediaries can be wholesalers, retailers, distributors, agents, or brokers, depending on the nature of the product and target market.
Channel Structure: The channel structure represents the arrangement of intermediaries involved in the distribution process. It can vary from a simple structure, involving a single intermediary between the manufacturer and the end consumer, to a complex structure involving multiple levels of intermediaries.
Logistics and Supply Chain Management: Indirect distribution necessitates efficient logistics and supply chain management to ensure timely delivery of products or services to the end consumer. This involves coordinating inventory, transportation, warehousing, and order fulfillment processes to minimize lead times and maintain adequate stock levels.

While the process of taking orders from distributors and shipping products to them sounds simple, there are many complexities...

The manufacturer may not have sufficient quantity in stock of all items. Necessitating shipping a partly fulfilled order and keeping track of the need to make-up the difference later.
Errors can occur. Wrong products shipped. Deliveries to wrong address or the truck breaks down. Products damaged in transit.
Each distributor may have different agreed pricing and this may be based on volume price breaks (discounts for placing bigger orders). These arrangements have to be tracked.
Damaged goods need to be returned and claims assessed. Returned product needs to be either repaired, scrapped, or returned. Refunds have to be processed.
Warehousing and dispatch processes can become complex when multiple distributors are being supplied to and each placing multiple different orders.

These are just some of the problems all of which are routine and daily in the life of managing distribution channels and require expensive IT systems (that themselves need to be supported) and warehousing staff are required to manage these processes and physically pick, pack, and dispatch orders and receive returned products.

Behind all of this is the need to constantly communicate with distributors to discuss issues and coordinate problem resolution.

Indirect distribution methods

There are a number of indirect distribution methods (or models), here is a list of the most common with links to detailed descriptions of each...

Benefits of Indirect Distribution

Extended Market Reach: Indirect distribution enables companies to tap into new markets and reach a larger audience by leveraging the established networks of intermediaries. Through partnerships with wholesalers, retailers, and other intermediaries, businesses can gain access to customers they may not have been able to reach directly.
Cost Efficiency: For companies with limited resources, indirect distribution offers cost advantages over establishing and managing their own distribution channels. By leveraging existing intermediaries, businesses can reduce expenses associated with infrastructure, warehousing, transportation, and staffing.
Reduced Inventory: Once product leaves the factory and is shipped to the distributor, they are invoiced and storing the product becomes their problem. Whereas with DIRECT DISTRIBUTION (no distributors) the product originator would need much larger warehousing to store finished goods inventory.
Expertise and Support: Intermediaries possess valuable market knowledge, expertise, and customer insights. By partnering with experienced intermediaries, companies can benefit from their domain expertise, market intelligence, and customer relationship management skills.
Focus on Core Competencies: Indirect distribution allows businesses to focus on their core competencies such as product development, marketing, and innovation, while leaving the distribution logistics and channel management responsibilities to the intermediaries. This enhances overall efficiency and effectiveness.

Disadvantages of indirect distribution

Sharing of profits: Clearly the intermediary needs to be paid for their work and this cost is added to the price of the goods being sold. To maintain a competitive price for the end-user, this cost is usually taken from the manufacturer's profit margin. However, without the distributor the manufacturer would normally expect to incur considerable additional marketing and distribution costs if they sold direct to the market. Indirect distribution works best if the cost benefit of the distributor outweighs the cost benefit of selling direct.
Lack of focus: Many distributors also distribute products on behalf of many manufacturers. In some cases, they may even sell competing brands. The distributor may not put sufficient effort into promoting your products to maximize market opportunity. This may be for a number of reasons ranging from incompetency, finding it easier to sell other products, lack of staff, or making higher margins on competing products they sell.
The need to manage, nurture, and support distributor relationships: while distributors have existing customer relationships and access to markets that the manufacturer may not have access to, simply appointing distributors is often not enough. Since distributors have many products to sell, they have limited resources to allocate to individual products. To encourage them to take greater interest in promoting your product takes effort, consequently the manufacturer needs to allocate time (or employ specialists) to work on monitoring distributor performance, and providing support services such as training, working together on securing large accounts, and providing promotional support. Often manufactures also need to create demand (called "pull through marketing") by paying to advertise products that ultimately drive sales to distributors.
The distributor owns the customer relationship: Indirect distribution puts a barrier between the end-user and the manufacturer. Should the relationship with the distributor end, the manufacturer effectively depletes their customer base.

Best Practices for Indirect Distribution

Partner Selection: Careful selection of the right intermediaries is crucial for successful indirect distribution. Consider factors such as reputation, market coverage, distribution capabilities, financial stability, and alignment of values and objectives.
Collaborative Relationships: Nurture strong, collaborative relationships with intermediaries based on trust, open communication, and mutual respect. Establishing a win-win partnership is essential for long-term success.
Clear Channel Strategy: Develop a clear channel strategy that outlines the roles and responsibilities of each intermediary, establishes pricing policies, defines territorial rights, and ensures consistent brand messaging across all channels.
Effective Communication and Training: Regularly communicate with intermediaries to provide updates, share marketing materials, and offer training programs to enhance their product knowledge and sales skills. This facilitates better customer engagement and promotes brand loyalty.
Distribution Agreement: The expectations of both parties (manufacturer and distributor) should be incorporated into a distributor agreement. While a distributor agreement is a legal document, best results are achieved when it is thought of as a plan rather than a legal instrument. The distributor agreement would set clear guidelines as to the division of duties (this is what we will do, this is what you will do) toward achieving a successful partnership.
Performance Evaluation: Continuously monitor and evaluate the performance of intermediaries to ensure they meet the agreed-upon standards. Provide feedback, incentives,

JWPM Consulting

What is indirect distribution?