If a distributor loses its own unique function within the distribution channel, it loses its 'reason to exist' and any claim to a share of the profit in the middle of the chain. If results and service are worse than the manufacturer selling and marketing directly, end-customer (end user) complaints rise, and mistakes pile up in the distribution process, that distributor has no 'reason to exist' left. The corporate training market works the same way. If an intermediary provides no service and takes an excessive commission from the training fee, the end customer and the corporate instructor will simply deal directly. In this section, I will explain what functions a B2B distributor should provide for the manufacturer.
[ Functions for the manufacturer ]
1) Fewer points of sale (convenience): What risks grow when a manufacturer with little experience in marketing, sales, or customer service tries to sell directly, both offline and online? First, costs rise. Marketing & promotion, inventory management, shipping, after-sales service, and sales administration all add expense. Second, the company pours resources, money, and effort into areas it is not good at, making it more likely to neglect product development and production, which is where it should be focused. Managing all of this is also a considerable burden for owners and employees alike. Third, relationships with distributors that have strong market power will naturally sour, and sharply. Distributors who feel under attack may team up with the manufacturer's competitors and counter with price discounts, aiming to starve out a manufacturer that has suddenly invested heavily in direct sales. The manufacturer's risk and opportunity cost rise almost overnight. By contrast, if the manufacturer picks 'good' distributors and builds a lasting partnership, both sides can dramatically cut costs and friction. In particular, the manufacturer only needs to deal with a few distributor contacts, so points of sale shrink and the work becomes far simpler.
2) Order processing on the manufacturer's behalf (lower labor cost): Suppose Distributor A takes orders one by one from business customers, retailers, and consumers by phone, fax, text, KakaoTalk, or email. It does not share end-customer names, volumes, prices, or purchase terms with the manufacturer. Instead it orders in its own name, say 1,000 units of a KRW 10,000 (≈ US$7) product, hauls them away by truck, and sells them for KRW 15,000 (≈ US$11) to retailers and KRW 18,000 (≈ US$13) to consumers. The manufacturer's sales administration labor costs would drop, because the distributor handles everything related to orders. But there are pros and cons, since the manufacturer finds it hard to get market information. If a product has a quality problem on the end customer's side, for example, tracing the root cause is not easy. That is why, when the manufacturer and distributor run an integrated order system, they can follow the situation in real time and quickly give the end customer the right solution. The distributor, however, may hesitate to integrate order systems, since all its information could end up shared with the manufacturer. This only works when trust between manufacturer and distributor is high. It becomes possible, and the synergy can be strong, when the two have similar work cultures, communicate well, trust each other deeply, and run similar IT infrastructure.
3) Lighter inventory burden (lower cost risk) : The core value a distributor offers end customers is 'supply right when it's needed,' so distributors must hold safety stock. In the 2022 chip shortage, automakers that had not kept ample safety stock of automotive semiconductors took a heavy hit on sales. When a distributor buys generously from the manufacturer and holds inventory, the manufacturer's inventory management costs naturally fall. But there is something you really need to watch for here: the 'moral hazard' of the manufacturer's salespeople. The most common way manufacturers evaluate salespeople is 'sales performance.' A salesperson is a racehorse running to hit this year's sales target, set in the second half of last year. Here is an example. Your March target is KRW 1 (≈ US$1) billion, and as of March 31 you are at KRW 980 million (≈ US$733,200). Just KRW 20 million (≈ US$15,000) more and you hit the monthly target, right? You can't pull forward sales from the end customer (say, Samsung Electronics). So you go to a distributor you get along with and plead: "Boss, no, my brother! Please give me a bit more PO for safety stock. KRW 20 million (≈ US$15,000) is all I need. I'll support you hard from here on. Just this once, please." The distributor owner places an order with the manufacturer on their own, with no end-customer PO (Purchase Order) behind it, and the goods pile up as inventory in the distributor's warehouse. Then, at some point, a quality problem hits the existing product and the specs change. It instantly becomes 'bad inventory,' taking up warehouse space and turning into 'bad receivables.' So while distributors do relieve the manufacturer's inventory burden, run poorly they can turn into a ticking time bomb, so handle with care.
4) Providing market information (efficiency): Distributors are in constant contact with end customers, retailers, and consumers, and pick up a wide range of information on customer needs, pain points, and changes. General macroeconomic data and market research can be handled through KOTRA, but specialized market research (for example, how Taiwan's AA Semiconductor operates OO equipment, or its monthly usage of XX materials) is unlikely to come out right even from a market research firm. Just as intelligence agencies in each country use HUMINT (Human Intelligence), you can use a distributor's sales reps to gather specialized, detailed fragments of information and build them into meaningful intelligence. Trade shows are a common entry point when first entering a new market, and many candidate distributors contact the manufacturer then. The manufacturer should sort them by product line and region and choose the most specialized one. A wrong choice can carry an enormous opportunity cost. Criteria for choosing a good distributor include 'geographic location', 'relationships with key customers', 'sales and marketing capability', 'financial stability', and 'reputation in the market', but in the early stage of entering a new market you can also gauge their capability by 'accurate market information and knowledge'. I would choose as a business partner not a distributor who boasts of its network with flashy talk and lavish hospitality, but one who gives me reliable 'numbers' built on quantitative data.
5) Wider market coverage (higher market share): Let me return to the example from my earlier piece, 'Let's Sell Boilers!' If you sell boilers B2B, you first have to map the market, and the standard way is to segment by 'Industry' and 'Application.' Apartments need many boilers per building, so the B2B customers to target are 'construction companies that build apartments.' Suppose there are about 100 major apartment builders. As of 2022, the top five were No. 1 Samsung C&T, No. 2 Hyundai E&C, No. 3 DL E&C, No. 4 POSCO E&C, and No. 5 GS E&C. The boiler manufacturer can manage these as Key Accounts and pursue them directly over the long term. But what about the other 95? Your own staff cannot cover every customer. What if you group them by region and sign distributors? Even better if they come from major regional apartment builders. For example: Seohae Construction and Dongmun Construction for the Seoul metropolitan area; Dongwon Construction and Laon Construction for Gyeongnam; Chunggu Construction and Woobang Construction for Gyeongbuk (both Chunggu and Woobang went bankrupt); Keumsung Baekjo for Chungnam; and Jungheung Construction and Hoban Construction for Honam. The distributors would also handle the market for boilers in detached homes, not just apartments. If the manufacturer sells directly, wins the major apartment builders first, secures references (delivery track record) over a long period, and only then moves on to other customer segments, it will inevitably reach a smaller market than distributors could open up all at once. Used well, distributors let you expand a product's market coverage in a short time.
6) Expanded service for end customers: When I was posted to Hsinchu (新竹), Taiwan, I visited key customers every day. The day before, I would review each customer department's issues and confirm what the key person had asked for, then set up a meeting by email, text, and phone. Early the next morning I parked in the customer's lot, went through the security check where stickers go on your phone and laptop, and waited in the reception room. I waited 'a lot,' 'often,' and 'for a long time.' When the contact came out, we talked about everyday things like the weather, soccer, baseball, and industry news, and traded information. If I didn't bring fresh information, neither did the customer. It's give and take. When a quality issue came up, I checked the manufacturing unit (lot, batch, etc.) and swapped the stock in the customer's warehouse for an improved production batch. I also shared our plan to tailor our product to the customer's newly introduced US-made equipment and changes in Japanese-made materials. I shared good results our new product was getting with other customers, along with effective usage methods to extend product life. It would be great to give every customer this kind of end-customer service, but a manufacturer's resources are limited, so it is hard to do. A manufacturer's salespeople can't realistically visit distant domestic or overseas customers every day. But you can train and educate a distributor's salespeople to deliver the same level of service. (In practice, distributor salespeople with long field experience are often even better.) When many distributor salespeople strengthen service for end customers at the same time, the reputation and loyalty customers feel will inevitably be higher than if the manufacturer acted alone.
To be continued
To be continued