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The two-tiered information technology (IT) supply chain has adapted over the years to the rapid evolution of the technology market, but one constant remains: the channel is the only efficient way to deliver technology hardware, software and services to the small to medium businesses (SMBs) that constitute North America’s most vital economic sector. Small businesses create almost half the new jobs in the United States, according to the SBA, and the channel [Understanding The Channel] continues to evolve to serve this market more effectively than any other supply chain.
The SMB market is highly fragmented, ranging from professional offices to manufacturing to retail and wholesale sales. The economies of scale possible when manufacturers sell to Fortune 500 accounts don’t work in this fragmented marketplace. Instead, specialized value-added resellers (VARs) serve the varying needs of end users in different businesses and different geographic areas. These VARs need distributors to aggregate IT hardware and software and deliver it in a timely fashion, sometimes even drop shipping it directly, and transparently, to the end customer on the VARs’ behalf.
WHAT DISTRIBUTORS DO
Over the past several decades, distributors have played a variety of different roles in the IT supply chain, but one function has been central from the beginning: the ability to get the right product to the right place at the right time. IT distributors have become logistics geniuses, handling the diverse product set of contemporary technology, storing, picking, packing, and shipping everything from disposable supplies like printer ink cartridges to high-end servers requiring careful configuration and testing.
Distributors aggregate product from manufacturers, typically storing three to four weeks of inventory. When resellers get sales orders, distributors can almost immediately fulfill those orders with both individual products and finished configurations. If distributors didn’t exist, either resellers or end users would have to place those orders with vendors and wait for the products to be manufactured and assembled.
While best known for their logistics expertise, distributors perform a variety of other valuable services in the IT supply chain as well. As technology grows more complex, for example, distributors are often the only source of product knowledge that spans multiple vendors’ lines. Without the distributors’ multi-vendor expertise, many technological challenges would end up in finger-pointing rather than solution-selling. Distributors’ multi-vendor testing laboratories and guiding expertise allow resellers to try out different configurations of state-of-the-art technologies, assembling solutions from different manufacturers so they can deliver the most effective and efficient solutions to their end-user customers.
THE "DIRECT IS CHEAPER" MYTH
Despite the advantages that distributors bring to bear on the technology sales and fulfillment process, Dell Computer Corporation’s success story has convinced many that buying directly from manufacturers is the least expensive, and therefore the best way to source technology. Dell has indeed been a model of efficiency, but the IT landscape is full of other companies that tried and failed to make Dell’s model work. The technology marketplace is simply too broad, varied and fragmented for a single marketing approach. For the majority of vendors and end-user customers, the two-tiered channel is the most effective delivery system, especially for the vast and multi-faceted SMB market.
For vendors, the channel is cost-effective because it allows them to concentrate on their core competencies: R&D, design, sales and marketing, brand management, demand creation and technical services or repairs, while the channel provides logistics and inventory management, configuration, credit, solution selling and integration, among other efficiency-building services. For resellers, the channel is cost-effective because it minimizes warehousing costs and shipping headaches, allowing them to concentrate on developing and servicing solutions for their customers. And for end-user customers, the channel provides the technological clout and expertise necessary to put multivendor solutions to work.
THE MANY DIMENSIONS OF IT COST
Product cost, however, is only one dimension (sometimes the least significant dimension) of the IT cost universe. Configuration, installation, customization and support multiply acquisition costs. These additional costs can cripple small businesses that lack full-time IT departments or that have cut their IT staffs to the bare minimum necessary to run day-to-day operations. In those cases, the channel, with its many sets of qualified hands, is the only way to deliver technology solutions with a demonstrable ROI (return on investment). Even businesses and government organizations that do have the in-house expertise to successfully implement technology upgrades on their own often want and need the help of trusted consultants to smooth the process – they need VARs and their distributor partners to ensure the job’s success.
With most IT solutions, the value-added expertise of the channel is the only practical solution to major technological problems, but even with commodity products like generic PCs, the channel can compete on price alone. The warehousing and fulfillment capabilities distributors bring to the supply chain more than compensate for the single-digit overhead (i.e., 4 percent or less SG&A) the channel generates. Dell itself uses resellers to reach some of its own SMB customers, and it even relies on distributor partners to supply its third-party related IT products.
THE PRICE OF PARTNERSHIPS
While the price of products is always a factor in technology decision-making, so is trust and partnership. According to research conducted by RoperNOP Technology, resellers rely on distributor sales reps as “trusted information sources for a variety of pre-sales activities.”
The two-tiered distribution model involves partnerships at all levels: between vendors and distributors, distributors and resellers, and – most important – between resellers and their end-user customers. All of those partnerships and relationships stem from the skills and services distributors offer in the marketplace, including inventory and logistics expertise, credit and financing, multi-vendor solution selling, training and certification, and information dissemination. The services are invaluable, yet affordable, giving distributors an edge over direct sellers like Dell when it comes to multi-service offerings and extensive partnership capabilities.
The myth is that the channel adds costs. In reality, tapping the information, the resources and the expertise of the resellers and distributors that comprise the information technology channel can take costs out of the sales process. It’s the result of a well-oiled machine at work. Providing the products and services needed to continue the channel’s defined momentum is the distributor’s role in today’s information technology world.
| ONE DOZEN REASONS TO CONSIDER DISTRIBUTION | |
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Decades of fulfillment expertise |
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Product availability and shipment information |
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On-hand inventory |
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Post-purchase logistics like real-time order-tracking |
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Drop shipping transparent to the end customer |
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Reseller Financing: $36.7 billion in 2002 |
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Marketing expertise that yields reseller leads |
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One-stop shopping for resellers |
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Multi-vendor pre-sales support |
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Training and certification programs |
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Web-based product and marketing information |
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Configuration and assembly services |