CLOSE WINDOW
Perhaps the most daunting myth about "the channel" is the idea that the addition of "middlemen" adds cost. As surprising as it may sound, quite the opposite is true. The value that the channel, and specifically distributors within the channel, brings to the table is an end cost that is less than or equal to buying computer wares directly with an increase in efficiency, expertise and peace of mind. To understand how this works, you've got to understand what distributors, and their reselling partners, do and how they do it.
When technology vendors, resellers, or distributors talk about “the channel”, they usually mean the two-tiered (wholesale) distribution supply chain whereby manufacturers sell information technology (IT) products to distributors, distributors in turn sell the products to resellers, and those resellers sell the hardware and software to end-user businesses and individuals, as illustrated by the following diagram.
This linear supply chain model (“the channel”) is also called two-tiered distribution [Distribution's Role] because two kinds of businesses – distributors and resellers – handle IT products as they flow from manufacturers to end-user customers. By most estimates, more than half of all IT products bought and sold flow through the channel, perhaps as much as 60 percent. esellers bought more than $50 billion in IT products from wholesale distributors in North America in 2002, according to RoperNOP Technology.
THE COMPLEXITY OF THE CHANNEL
The IT supply chain, in reality, is far more complex than the linear channel model (diagrammed above) suggests. A more realistic picture is represented by the chart below from Raymond James & Associates.
As the chart illustrates, some distributors sell components to vendors in addition to buying finished IT products from manufacturers. In addition, some manufacturers and distributors sell directly to end-user businesses in addition to supplying resellers with their wares. Clear lines distinguishing one part of the supply chain from another no longer exist. Any given product can take multiple paths to market. The question is which path is best?
As the industry has evolved from a linear to a nonlinear marketplace, partnership and collaboration are more imperative than ever. Successful manufacturers, distributors, and resellers form, and re-form teams and partnerships in response to market trends.
THE FLEXIBILITY OF THE IT SUPPLY CHAIN
The one constant in the channel has been change as distributors and resellers continually discover new ways to take more costs out of the supply chain. In recent years, for example, distributors helped satisfy exploding demand for PCs by serving as contract manufacturers for vendors and, in some cases, by co-locating vendor manufacturing facilities inside distributor warehouses. When the Web became ubiquitous, distributors developed cutting-edge ecommerce expertise and passed that expertise along to their resellers. As technology has exponentially increased in complexity, distributors have moved from a focus almost exclusively on product to an offering that includes a broad range of services, yet they have always maintained their position as the industry’s logistics experts.
While the distribution industry has seen extensive consolidation in recent years, the remaining channel businesses are more efficient than ever, operating on razor-thin margins to configure and deliver technology for their resellers in days, sometimes hours. In addition, they do it cost effectively, even more so than direct marketers are able to do in many cases.
DIFFERENT KINDS OF DISTRIBUTORS
Over the years, distributors have evolved several different models to serve their customers. Full-line distributors such as Ingram Micro, Tech Data, and Synnex sell a broad product line to their reseller customers – from PCs to software, peripherals, and supplies. In addition to order fulfillment for a complete range of personal computer hardware and software, full-line distributors offer a variety of programs to help resellers develop complex solutions for their customers. However, the lion’s share of these distributors’ sales is comprised of lower-margin, higher-volume product sales.
Midrange server and enterprise (MSE) distributors is a term Raymond James & Associates uses for distributors that specialize in high-end systems (i.e., servers) typically costing tens of thousands of dollars and supporting enterprise-level networks in major corporations. Sales by these distributors usually have longer cycles and involve more complex, specialized solutions than the usual sales by full-line distributors. MSE distributors include companies like Arrow, Avnet, GE Access and Pioneer-Standard. Several of these MSE distributors are also known as “industrial” distributors because, in addition to supplying resellers with finished IT products and solutions, they have separate divisions that supply computer manufacturers with electronic components.
Specialty distributorsM include companies like Bell Micro, an MSE distributor specializing in storage solutions such as storage area networks (SANs) and network area storage (NAS). Other distributors, like Tech Data and Arrow, have divisions that specialize in sales of particular technologies (like storage) or particular vendors (like Sun Microsystems).
There is also a distinction in the channel between single-tiered and two-tiered distributors. While some distributors sell exclusively to resellers, others operate both single-tiered divisions that sell to end-user customers and two-tiered divisions that sell to resellers, who in turn service end-user customers. Distributors that sell exclusively through two-tiered models typically emphasize the fact that they don’t compete with their resellers. Distributors that have hybrid sales divisions emphasize the fact that they operate their divisions separately to avoid competitive situations, yet are better able to understand the challenges facing their resellers because they face the same challenges themselves in their reselling divisions.
DIFFERNET KINDS OF RESELLERS
Who are these “resellers”? Resellers range from very small businesses staffed by a handful of technology experts to giant discount sales operations that sell directly to end users through telesales and Web sites.
Corporate resellers specialize in Fortune 2000 accounts, delivering major technology implementations such as a corporate-wide hardware upgrade or a conversion to a new version of Windows. These corporate resellers often source their IT products directly from vendors. However, most value-added resellers (VARs) source their products from distributors. VARs specialize in providing tailored solutions for particular customer sets, from government to private enterprise. They add value by not only reselling hardware and software but also by ensuring that the technology solves a specific business problem for the customer. In addition, they are experienced with multivendor solutions, integrating products from more than one manufacturer into the best solution for the customer. VARs can sell to Fortune 2000 accounts, but more often focus on the small-to-medium business (SMB) and/or government markets.
THE CHANNEL'S SWEET SPOT: SMB
The two-tiered distribution channel is the most efficient sales engine for delivering IT solutions to industry, especially to the small-to-medium businesses that are at the heart of the nation’s growth today. There is no more efficient IT sales force than the thousands of VARs servicing the businesses, government entities, and educational institutions existing in every city in the nation. The core competency of distributors is to aggregate the many products and services that help VARs more easily provide total solutions to these businesses. For distributors, that also includes being a wealth of information for their reseller customers.
With the continually increasing complexity of technological solutions, the channel today is as much about information as it is about products. According to market research firm RoperASW, resellers cite access to an informed distribution account rep as one of the most important pre-sales services distributors provide. Pre-sales technical information is crucial to a smoothly implemented solutions sale and distributors can often be the only source of information about how to integrate a particular multi-vendor configuration properly. VARs, therefore, use that distributorexpertise to solve specific business problems for their end-user customers.
Knowledge is power in the IT business, and distributors, in addition to delivering the right products on time and cost effectively, in many cases also hold the key to delivering the knowledge needed to succeed. As a result, VARs tap distributors as a resource for both products and information, and vendors tap them as their best, and often most cost efficient, route to market.
| SIX THINGS YOU NEED TO KNOW ABOUT THE CHANNEL | |
 |
The channel provides a geographically dispersed, market-focused sales force at a lower cost than vendors can typically achieve on their own. |
|
The channel makes it easier – and often less expensive – for businesses to acquire new technology as opposed to acquiring that technology directly from each individual vendor in a multi-vendor solution. |
|
More than 70 percent of total IT purchases in North America reflect the resale of multi-product, multi-brand technology solutions, the channel’s specialty (RoperNOP). |
|
Resellers purchased the largest single share (40%) of their IT products through distributor telesales reps in North America in 2002 (RoperNOP). |
|
Distributors’ low (typically 4% or less) SG&A means no excess cost to the end user. |
|
The majority (57%) of resellers’ customers include businesses with one to 100 employees that (collectively) spend $20 billion+/year on IT products and services in North America (RoperNOP). |