Wholesalers in the Business World - Essay Example

1 Wholesalers in the business world Introduction If you are looking for a lively debate, try the "Role of Wholesalers in the Business World". There are few topics to top that for sheer bipolarity. There is one school of thought that is of the view, that wholesalers are a dispensable link in the distribution chain, and that it is the unfortunate customer who pays for this additional baggage. Then there are those wholl bet their bank, that this genre of intermediaries has a crucial role. But do they indeed have a role in the business world? Kinds of Wholesalers The wholesaler is probably as old as the mountains. That may be an exaggeration. But they have certainly been around for centuries. The role they have played depended largely on the merchandise or service they represented. “Wholesaling includes all activities involved in selling goods or services to those who buy for resale or business use (Kotler 532)”. There are three main differences between wholesalers and retailers. Wholesalers are not concerned about the location of their establishment, the ambience or about promotion, because their customers are resellers and not the final consumer. The transactions of wholesalers are usually bigger than retail transactions, and they cover a much larger geographic area. Even governments treat wholesalers differently, in that the tax and legal parameters concerning them are different from those for retailers. 2 As we will see later in this paper, there are different types of wholesalers, providing a variety of services. Some wholesalers provide selling and promoting services. These services complement the functions of manufacturers who cannot attend to these functions themselves for whatever reasons. Sometimes manufacturers are compelled to use these services of wholesalers, as local customers are more prepared to trust a local wholesaler, than some far away manufacturer. Wholesalers offer their customers a wider choice. By representing many manufacturers, they are able to offer customers the wares of all the entities they represent. Sometimes wholesalers buy in bulk, and offer their customer smaller units of a product – quantities that customers cannot buy - by approaching manufacturers directly. Wholesalers also offer inventory holding services and transportation. Wholesalers sometimes render financing services by offering credit terms to their customers. They also assist their customers by providing them market intelligence. In addition, they counsel their customers on such topics as inventory management, operational excellence and store layout and displays. Types of Wholesalers An understanding of the types of wholesalers will answer the question: Does a company need a wholesaler at all? There are many types of wholesalers. The major types are described below: 3 There are merchant wholesalers who are known by the products they deal in. These are establishments that are usually independently owned. Such wholesalers are sometimes also referred to as jobbers and distributors. Then there are full-service wholesalers. As their name implies, they take care of the distribution side of a manufacturer. These wholesalers carry inventory, have a sales force of their own, provide transportation of goods, and even give management advice. There are two types within this genre. There are the wholesale merchants who carry inventory; sometimes they carry just one or two lines or many lines of merchandise. They not only carry stock, but also provide transportation and even take care of financing. They resell primarily to retailers. The other type of full-service wholesaler is the industrial distributor who sells only to manufacturers and not to retailers. However they also provide all the services of their counterparts who sell to retailers also. Another common type of wholesaler is the limited-service wholesaler. As their name suggests they offer fewer services than the full-service wholesaler. Within this genre too there are subtypes. You have cash-and-carry wholesalers, truck wholesalers, drop shippers, rack jobbers, producers’ co-operatives and mail-order wholesalers. Cash-and-carry wholesalers carry limited, fast-moving merchandise, and sell them to small retailers for cash. Truck wholesalers sell and transport the limited merchandise they carry. The merchandise is usually semi-perishable, and their customers are predominantly hospitals, supermarkets and hotels. 4 Drop shippers act as a go-between for manufacturers and buyers. When they receive an order, they find a manufacturer whose products are closest to those specified, and organise with the manufacturer to ship the merchandise directly to the buyer. The merchandise is usually lumber, coal and heavy machinery that are bulky. These wholesalers assume the risk and responsibility in the goods, from they time goods are accepted for shipment to customers. Rack jobbers supply goods on consignment basis. They stock the racks of their customers and retain ownership in the goods and bill their customers only for the goods that are sold to an end user. The goods they represent are normally non-food. Producers’ co-operatives deal predominantly with farm produce, which they collect to sell in local markets. Mail order wholesalers take their wares to customers through catalogues. The products they represent are small like jewellery, cosmetics and speciality foods. Another type of wholesaler is the broker or agent. This type of wholesaler does not take ownership of goods. They simply work as a go-between for a commission. These wholesalers deal with a specific line of goods or group of customers. The difference between brokers and agents is that while brokers may be appointed for single transactions, agents work for longer terms. Agents represent buyers or sellers on a more long term basis. In addition to the types of wholesalers listed above, there are also the miscellaneous wholesalers who perform specialized activities. 5 Whatever the type of wholesaler, they are all faced with the same basic decisions. One major decision is the market they serve. This decision can be based on the type of customers they serve, customer size or the type of services that those customers require. Another decision facing wholesalers is the type of product they represent. Increasingly wholesalers are expected to carry full lines and sufficient stocks to bring down fulfilment times to a minimum. However more and more wholesalers choose to carry only lines that are sufficiently profitable. Wholesalers usually mark up the price of the merchandise they carry to cover expenses and still leave them a worthwhile margin. The mark up is normally in the region of 20%. Most wholesalers depend on their sales force to promote sales. They do not engage in other promotional activities on their own. In the years just gone, wholesalers did not pay much attention to their physical location or the ambience of their establishments. But increasing competition has changed all that. Wholesalers are now concerned about location, and the other advantages that modern technology has to offer. (Kotler 532-534) But Are Wholesalers Really Needed? Arguments For Those for, have solid reasons that the services of wholesalers are indispensable. Their strongest argument is that often selling and distribution are not part of the business definition of an organization. 6 George S. Day reasons that the business definition of an organization is the foundation of its strategy. He also says that a business definition reveals the “true function or purpose of the business” and that it also “sets the boundaries of effort” (Day 25). People in support of the need for wholesalers say that “making cars” – for instance - is the business definition of a company, whereas the distribution of cars is not. They also state that in an environment of limited resources, companies should allocate resources to core activities and not dilute focus by trying to play the spread. Even Michael Hammer and James Champy support this argument stating that some companies are “bloated, sluggish, noncompetitive, uncreative, inefficient” is because of the way “these companies do their work” (Hammer and Champy 1). Another important reason why wholesalers are indispensable is when companies want to grow by going global. In such situations, it is often ruinous to think of anything other than using the experience and expertise of established local channel partners. “An established corporation looking for new international markets makes a foray into an emerging market, carefully limiting its exposure by appointing an independent local distributor” (Arnold 131). This is because local distributors have the advantage of knowledge and understanding of their own markets. This does not mean that there are no attendant drawbacks. But with proper planning these problems are surmountable. The Arguments Against 7 The explanation that the naysayers come up with, to argue that wholesalers are an unnecessary add on, are also founded in reason. Their beef is that wholesalers do not actively promote the merchandise the represent, that they do not carry enough inventory to optimise order fulfilment, and that they do not provide timely and efficient market feedback. “The process of innovation begins with identifying the outcomes customers want to achieve; it ends in the creation of items they will buy” (Ulwick 97). Prahalad and Ramaswamy also subscribe to this view. They contend that customers are the ones that are changing the equation in the marketplace. They reason that customers are a source of competence for companies. As the competition becomes even more severe with every passing year, listening to customers has become all the more important. Incremental changes may give companies fleeting advantages, but it is innovation that drives sustainable competitive advantage. (Prahalad and Ramaswamy) Those against using wholesalers, contend that they do not get efficient and timely customer feedback and that this snag increases their response time to changes. The argument in support of timely innovation is that if you do not make your own products obsolete, your competition will. History is full of new products that have failed. The reason for such failure is not “the economic value of physical products” but “more in the minds of people”. Products will continue to fail unless businesses begin to understand the nuances of decision making relating to new products, taking into consideration the biases of internal 8 executives and customers. (Gourville 106). People who argue against the use of wholesalers say that wholesalers are a barrier to staying connected with the market. The other argument is that wholesalers are not really stake holders in a business and therefore the success or failure of the organization they represent is not of any great concern to them. Another argument against the use of wholesalers is that they become the point of contact with the customer. And since customers tend to form an impression about the brand, based on their relationship with the customer-facing entity, this is a huge responsibility that manufacturers expect their wholesalers to fulfil. Aaker states that a brand, like any individual, has personality. (Aaker 141). Customers will superimpose the personality of the customer facing entity – the wholesaler - onto a brand. So if a wholesaler does not live up to the brand image the manufacturer wants to create, a brand can be doomed. Not many brands have the resilience to bounce back after creating an undesirable impression. Some wholesalers can become so powerful that they can dictate price and other terms to their principles. If this happens manufacturers can do very little, as most manufacturers do not have dual channels of distribution, or any other sort of plan B. Conclusion Whether an organization needs a wholesaler or not, would depend on the business model it chooses. Business models are “at heart, stories – stories that explain how enterprises work” (Magretta 86). 9 Magretta explains that every business model consists of two parts. The first part is about creating a product. That is, designing a product, sourcing its inputs and manufacturing it. The other part is all about locating customers, making them buy the product and delivering it. It may suit an enterprise to focus on the essence of its business definition, and leave the job of selling and distribution to wholesalers. The contention that wholesalers are not concerned about the well being of their principals is not always true. More often than not wholesalers accept the fact that theirs is a mutual destiny: the better a principal does, the better their own fortunes. These days enterprises do not see wholesalers as external entities; they are inducted as partners in the business. Prahalad and Ramaswamy sight the example of Wal-Mart. This distributor shares information with Procter & Gamble on a daily basis about warehousing and replenishment. Other distributors too give regular feedback to their principals in required formats, so that the principals are constantly in touch with the pulse of the market. In some cases wholesalers are also involved in the development of new products. (Prahalad and Ramaswamy) Time has proved the paperless office to be a myth. In the last decade, not only has the number of transistors in computers increased as predicted in Moore’s law, the number of computers too has increased exponentially. But the amount of paper we use, has ironically, increased and not reduced. The other myth is about wholesalers. 10 The internet was supposed to be the scourge of wholesalers. “A retailing disruption, instigated by the Internet, is now underway, and it promises to alter the retailing landscape” (Christensen and Tedlow 44). While this is true in some ways, the Internet’s ability to shorten the distribution chain making the wholesaler obsolete has proved to be wrong. Instead of a reduction in the number of wholesalers, their numbers has only increased. In the last decade or so wholesaling has grown at “a compound rate of 5.8%”. The factors responsible for this growth are many. However the principal reasons are, the proliferation of large manufacturing units located away from end users, the practice of manufacturing in anticipation of sales and the “increasing need for adapting products to the needs of intermediate and final users” (Kotler 533). It is competitive advantage that sustains companies. And competitive advantage accrues only from “performing different activities from rivals, or performing similar activities in different ways” (Porter 2). Successful companies are finding unique new ways of delivering value to customers. And there is no “one solution fits all” way out. Each company has to create its own uniqueness. And if the use of a wholesaler fits into their scheme of things, then the wholesalers is not just an arm in the extended enterprise, but a partner with a linked destiny. In the meanwhile the role of wholesalers will continue to be grist for debate. References Aaker, David A. Building Strong Brands. USA: The Free Press, 1996: 141. Arnold, David, “Seven Rules of International Distribution.” Harvard Business Review Nov-Dec 2000, Vol. 78 No.6 Christensen, M. Clayton and Tedlow, R. Richard. “Patterns of Disruption in Retailing.” Harvard Business Review. Jan – Feb 2000, Vol. 78, No. 1. Gourville, John. T. “Eager Sellers Stony Buyers.” Harvard Business Review, June 2006: 106 Hammer, Michael and Champy, James. Reengineering the Corporation: A Manifesto for Business Revolution. NY: HarperCollins Publishers Inc., 2003:1. Kotler, Philip. Marketing Management. New Delhi: Prentice-Hall of India Private Limited: 2001: 532-33. Magretta, Joan. “Why Business Models Matter.” Harvard Business Review 2002: 86 Prahalad, C.K and Ramaswamy, Venkatram. “Co-opting Customer Competence.” Harvard Business School, Working Knowledge Newsletter 2002 Porter, Michael. E. “What is Strategy?” Harvard Business Review, Nov. Dec. 1996:2 Ulwick, Anthony. W. “Turn Customer Input into Innovation.” Harvard Business Review January 2002: 97. Read More