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Optimizing the Value of Trilateral Manufacturer Distributor Purchasing Relationships
When you just look at a purchase from a pricing perspective, it would be reasonable to think that purchasing products directly from the manufacturer be an effective way to reduce unnecessary overhead and markup costs. While I generally find this to be true in practice, if it were that black and white the large number of distributors thriving in today’s markets would cease to exist. Manufacturers and distributors each have strengths and weaknesses, but in a strategic purchasing landscape you do not always need to choose between the two. In fact, developing a balanced relationship with manufacturers AND distributors often proves to yield the most value, particularly with high volume purchases.
It is important to consider the value that each party offers to the customer. An advantage that manufacturers have is the ability to set and control price points. Even though a distributor may receive favorable pricing due to the large volumes that pass through their supply chain, the base pricing is ultimately the decision of the manufacturer. Working through a distributor almost guarantees that your purchase price will include a markup of some kind to cover overhead or commission fees.
Distributors thrive in two areas where manufacturers often fall short.
- Distributors have the ability to provide a variable product mix. Take, for example, a company that purchases industrial motive power batteries and is evaluating the options of purchasing them through a distributor v. direct from the manufacturer. The manufacturer can provide only the battery but a distributor can also provide the charging stations, watering systems, and other parts to support the overall battery operations. The combined volume of ancillary items purchased from one company may reduce freight, handling, and time from purchasing resources enough to justify the price markup.
- Where most manufacturers focus on engineering, manufacturing, and R&D, distributors have the resources to provide more robust sales and service. For products that require frequent warranty maintenance and repair, using an authorized distribution network can reduce downtime by providing a network of service locations. In many industries, manufacturers only sell through distribution networks to ensure their customers receive the service and support they need. This often leads customers to believe they have to accept this and contract solely through a distributor center. There is, however, an opportunity to form a relationship with the entire supply chain, building a relationship that benefits all parties.
The first step in fostering this relationship is to work with the distributor to understand the level of control they have over price, quality, and warranty. A similar conversation should be had separately with the manufacturer to understand their relationship with each distributor, their overall distribution network, and their level of control over the final selling price. Building relationships with both will give each insight as to the value of your business and the overall goals of your organization. This can then be leveraged to negotiate an agreement that would benefit all three parties. The manufacturer has incentive to offer specialized pricing through the distributor to secure the business, the distributor has the opportunity to provide service and ancillary items, and the customer has a more transparent view intro the distribution network and confirmation that they will receive best pricing.
Putting in the extra effort to form a trilateral agreement will prove to be a positive investment of time and resources. All too often transparency is lost within the supply chain and pricing is not as competitive as it is perceived to be. In addition, it is always worthwhile to challenge the pricing structure set by both the manufacturer and distributor together, especially for items tied to volatile indices. A best practice is to have all commodity pricing stated in the contract with an understanding of how an increase or decrease in the pricing index will be passed through to the customer. Each price fluctuation indicated by the distributor should be accompanied by a manufacturer’s letter of confirmation. This keeps overhead consistent and managed - as that is often the area of spend that is most addressable during negotiations.
Customer needs and account structures are rarely ever one size fits all. Challenging the status quo of a distribution network will keep both manufacturers and distributors transparent and cost competitive. Additionally, soft value can be driven through these individual relationships should a key manufacturer and distributor in your supply chain cease to do business with one another or undergo a drastic change in organizational structure. Engaging all involved parties is an ideal way to fully understand your supply chain from production to delivery, drive value, and reduce risk.