B2B Distribution Explained
Part 2 breaking down distribution
Happy Turkey Week! Coming off an amazing week at the Innovators Summit, we wanted to do a deeper dive on the nuances of B2B Distribution as a follow up to our B2B Distribution 101 article a few weeks ago.
Types of Distribution 🚛
There are several different types of distribution channels, including classic distribution, master distribution, self-distribution by manufacturers, and VARs (Value-Added Resellers):
Classic Distribution:
● Description: Classic distribution is the traditional distribution model where products flow from manufacturers to wholesalers-distributors and then to retailers/business customers before reaching the end users.
● Advantages: Provides broad market reach, efficient for large-scale distribution, offers a variety of products to retailers and customers.
● Challenges: May reduce margins for manufacturers and sometimes involve additional warehousing and logistical complexities.
Master / 2 Step Distribution:
● Description: Master distributors are specialized intermediaries that purchase products from manufacturers in bulk and supply them to other distributors or resellers. They serve as a bridge between manufacturers and other players in the distribution chain.
● Advantages: Simplifies the supply chain for 1-step distributors, often handling highly specialized or difficult to stock products, and offers economies of scale, provides access to a wide range of products.
● Challenges: Adds cost due to multiple intermediaries, can lead to longer lead times, and less control for manufacturers.
Self-Distribution by Manufacturers:
● Description: Some manufacturers are forward integrated, choosing to handle their own distribution, while some retailers are backward integrated, providing distribution to their chain locations. By establishing direct channels to retailers or consumers, these vertically integrated companies bypass traditional distribution as a channel.
● Advantages: More control over branding, customer relationships, and distribution strategy, potentially higher margins.
● Challenges: Requires significant infrastructure, expertise, and investment in logistics and distribution capabilities.
VARs (Value-Added Resellers):
● Description: Distributors act as intermediaries between suppliers and VARs (Value-Added Resellers). VARs add value to products by providing customization, integration, and support services before selling them to end users (e.g., Installation, configuration, training, etc.). VARs are typically involved when the product is highly technical and requires high touch services alongside it.
● Advantages: Better positioned to create desirable product and support solutions.
● Challenges: Identifying suitable opportunities to target, and avoiding overreliance on commoditized products.
The choice of distribution model depends on many factors, including the nature of the product, structure of the target market, cost considerations, and the strategic goals of the manufacturer or distributor. Additionally, the distribution landscape is continually evolving, with e-commerce, digital platforms, and changing consumer preferences playing an increasingly significant role in distribution.
Key Value-Additive Activities Across Distribution
Horizontally across the many sectors of B2B distribution, distributors typically provide a few common functions. These core capabilities include:
Bulk Breaking: B2B distributors often purchase products from manufacturers or wholesalers in large quantities or bulk. They then break down these bulk shipments into smaller, more manageable quantities for resale. This allows retailers and businesses to purchase only the amount they need, reducing waste and inventory carrying costs.
Less Than Truckload (LTL) Fulfillment: Many businesses do not require full truckloads of products. Many B2B distributors offer LTL fulfillment services, which means they can efficiently ship smaller quantities of products to different customers in a cost-effective manner. This service helps businesses reduce transportation costs and optimize their supply chains.
Inventory Management and Bundling: B2B distributors often maintain extensive warehouses and inventory management systems to efficiently store and track products. They help businesses by ensuring that the right products are available when needed by aggregating products from multiple suppliers to provide a “one-stop shop” dynamic to customers.
Net Terms: B2B distributors offer flexible payment terms to their business customers. This service can include providing net payment terms to customers, allowing them to pay for products after they've received them. Net terms can be essential for business buyers, as it provides them with more financial flexibility and can help with cash flow management.
These are just a few of the value-added activities that make B2B distributors essential partners in the supply chain. Within specific verticals, B2B distributors also ofter product-specific expertise and supporting services.
As for challenges to the industry, there are several that have emerged in recent years. Most noteworthy is the marketplace model companies are pursuing, which have the potential to disintermediate distributors. A lot of venture capital money has poured into these disruptive business models over the last five years. Additionally, manufacturers are investing heavily into technology and software that enables them to “jump the channel” and sell direct to customers without a distributor in between.
The good news? Regardless of threats, distribution shows no signs of going anywhere, even producing positive returns through economic downturns, with +1.8% revenue CAGR 2018-’23. The industry itself is highly diversified due to its nature of operating broadly across all major sectors, catering to a wide array of customers throughout the entire economy.
Vertical Integration: Why Some Companies Self-Distribute
Auto Parts: Retailers that self-distribute, such as AutoZone, operate differently from traditional distribution models in the automotive aftermarket industry. Retailers like AutoZone are vertically integrated, meaning they handle both the retailing and distribution aspects of their business. They purchase auto parts from manufacturers and then distribute them directly to their own stores.