A distributor purchases goods from a manufacturer and distributes them on their behalf. They act as an extension to the company’s salesforce. They are wholesalers who trade goods for profit, like the early merchant traders.
They are used in different industries and sectors in different ways appropriate to the sector requirements and characteristics.
They form part of a supply chain which usually includes a manufacturer and often dealers and retailers. The basic supply chain structure has many variants. Let’s have a look at some definitions.
Manufacturers produce products
Distributors move the product from manufacturer to market.
Dealers or retailers usually purchase the product from the wholesale distributor and sell to end users.
Types of distributors
There are several types of distributors –wholesale and retail. There are also manufacturers’ sales offices, agents, commission agents and brokers.
A distributor takes title and legal ownership of the products, whereas a broker facilitates the transfer of products without necessarily handling them or owning them
Wholesale distributors buy product from the manufacturer and offer them to resellers, but not to the end user or consumers. They are a business to business, or B2B, operation
Retail distributors sell directly to end users, or business to consumer, or B2C
Similarities to franchising
There are some similarities to franchising, in that the relationship is contractual, and the distributor is usually allowed to use the brand, but not pass themselves off as the manufacturer. Distributors and dealers usually have the right to use the manufacturer’s trademarks and logos.
There is usually a clearly defined territory and an agreed strategy, objectives and specification, governed by a contract. Powerful trading partnerships can be developed.
But distributors don’t pay up front fees for the right to sell goods. They purchase the goods on their own account and then distribute them. The distributor or dealer usually has their own established market and reputation, and may carry several competing brands.
Why do manufacturers use distributors?
Basically so that they can concentrate on their core business of manufacturing without the cost and distraction of managing a sales force.
The manufacturer may be involved in marketing programmes, incentives for distributors and dealers, discounts for the consumer, and if appropriate by providing technical training programs for distributor and dealer staff.
Although distributors might undertake simple repairs, difficult technical problems will probably be referred to the manufacturer. So distributors are an efficient means of selling car parts to garages, or electronic components to electronic companies. They ae not so effective for selling complex industrial products or IT equipment.
Share the financial load
For the manufacturer, capital is required to purchase components, manufacture products and hold inventory. Distributors purchase goods on their own account, freeing up the producer’s working capital for new production.
A manufacturer may engage a distributor to cover a territory for them. For example a company manufacturing products in China will probably have several distributors in the USA, one in the UK, another in Germany, and so on. They are often known as import distributors.
This means that the manufacturer can concentrate on manufacturing rather than on selling their goods in new territories, thus avoiding the risks incurred by entering new markets, with the associated costs and investment of time.
The distributor may carry several ranges which he promotes to his network of retail buyers, showing them the ranges, introducing them to the manufacturer, acting as their point of contact in the relationship with the manufacturer.
In turn the buyers may purchase directly from the manufacturer, but will depend on the distributor to manage the relationship, and deal with any issues. The distributor will earn a commission on any business transacted. Or the buyer may purchase from the distributor in their home country.
This allows them to purchase directly where they want to buy large volumes because they are sure of the demand, or to mitigate the risk by buying from domestic stock, or indirectly. The risk of purchasing and importing the stock then lies with the distributor.
The buyer will pay a higher price for stock bought domestically, rather than as a direct purchase from the manufacturer.