Distribution channels refer to the supply chain of businesses, services, and intermediaries that goods pass through and, of all the options available, indirect distribution advantages are easily overlooked. Direct distribution channels are often considered a less costly, more controlled route, but each type has its pros and cons. We’re going to cover both the distinction and definition of indirect distribution, as well as its advantages, through this article. But, overall, a business should know how and when to make use of them as a part of proper wholesale distribution management.
Here, we’re going to look at the indirect distribution advantages that set it apart and how it can help your business. Advantages such as lowering the costs of establishing or scaling distribution, expanding your reach to more customers, and gaining access to a pre-established distribution channel’s experience, infrastructure, and sales expertise all deserve to be considered. There are plenty of good reasons to Incorporate wholesalers, retail stores and other indirect distribution channels into your business.
With indirect distribution, there are one or more businesses, services, or intermediaries between the manufacturer of the goods and the end-user of the goods. In most cases, there is no contact between the manufacturer and the consumer. Instead, the distributors, be they retailers or wholesalers, take on the duties of sales, deliveries, customer service, and so on. With relying on wholesalers or retailers, manufacturers typically cannot sell their goods at market value levels. However, they can benefit from access to delivery, logistics, and sales channels they may not otherwise.
Indirect distribution channels are also often used as a means to pass off the responsibility of dealing with startup costs. Since the business may be able to benefit from the infrastructure of a wholesaler or retailer, they may not have to invest in it, as well. This can free up profit to be able to invest in their other core processes.
Advantageous as lower startup costs, access to established infrastructure and plenty of assistance and expertise in sales outreach can be, there is a cost to every method of distribution. Indirect distribution does add a level of bureaucracy and being prepared for some distribution management is essential. There may also be outside costs such as broker fees and commissions to consider, which may end up impacting the bottom line. However, for establishing a greater market reach by expanding your brand’s access to consumers further than you might otherwise be able to, it’s often worth the investment.
Naturally, the alternative to indirect distribution is direct distribution. This is the shortest, simplest supply chain, with the manufacturer or producer directly managing its own organization, logistics, deliveries, and sales. With the manufacturer or producer in control of their own distribution channel, they are able to have more control over how, where, and when their products are sold. A direct channel also makes it easier to get new products to market quicker and can potentially be less costly than indirect distribution.
However, there also comes a trade-off with these advantages. The startup costs of setting up a direct distribution channel are significantly higher, with warehouses, logistics systems, vehicle fleets, and delivery staff all being essential considerations. Furthermore, large scale direct selling can be very difficult to manage.
To summarize, here are the key differences between direct and indirect distribution
There’s no “correct answer” with which distribution management style is best for your business. Some businesses may benefit from the quick access to wide-scale sales and deliveries that indirect distribution can allow for, and the ability to outsource distribution to experts while focusing on their core business. Meanwhile, direct distribution allows companies greater control over their supply chain while lowering operating costs in the long run.
There are several types of indirect distribution supply chains that could fit your business. In many cases, the wider you intend to make your market reach, the more links there are going to be in your indirect channel. However, let’s start with the simplest example. In this case, the manufacturer sells goods to retailers, who then sell those goods to their consumers. Most consumer durables, such as electronics, industrial equipment, and automobiles, follow this sales model. For instance, car companies like Ford often sell directly to dealerships, a type of retailer that then sells directly to the consumer.
Another example of indirect distribution will involve another middleman in between the manufacturer and the retailer: the wholesaler. As such, the supply chain goes from manufacturer to wholesaler to retailer to consumer. Wholesalers can also sell directly to consumers, but more often they sell to retailers. In this case, the manufacturer or producer would choose a wholesaler who is known for established wholesaler-retailer relationships, helping to expand their reach, often to several retailers at once. Daily use consumer products, such as food products, cosmetics, soaps, and common household goods are usually sold through this channel. It has the benefit of allowing manufacturers to expand their reach quickly but also leaves the wholesaler in charge of a greater portion of distribution. An example of one company who uses wholesalers is Nestle, which is how they manage to get so many of their different brands into so many different stores across the globe.
Lastly, this example adds a sole selling agent into the chain between the manufacturer and the retailer. The agent then appoints wholesalers on behalf of the manufacturer, who sell to retailers, who sell to the consumer. By relying on an agent, the manufacturer or producer gives up effectively all control of their distribution channels, relying on the expertise of agents who, in theory, should know the best wholesalers to partner with in exchange. Agents are often used for companies expanding their offerings overseas. Ted Baker London, for instance, relies on agents to find wholesalers and retailers for their products in North America. There are other examples of indirect distribution, still, but this covers the majority of the most common types.
As mentioned, there is no clear-cut answer to the question of “which is the best type of distribution management channel.” However, there are advantages to each, and indirect distribution has some benefits in its favor that could make it the right choice for your business. To many, convenience and speed is the primary advantage of indirect distribution. Whether you’re distributing through retailers, wholesalers, or agents, you're relying on companies who already have the infrastructure and sales processes set up to help your goods get on the market and reach the consumer sooner. If you mean to set up a direct distribution channel, then you will have to spend more time establishing that infrastructure yourself.
With the time spent setting up that infrastructure also comes the cost. Indirect distribution does not demand anywhere near the number of start-up costs as direct distribution. There’s no need to apply for funding or to research and choose the parts of the infrastructure, such as vehicles, warehouses, and staff, needed to start distributing.
Lastly, the scalability of an indirect distribution model is one of the biggest advantages they have to offer. With direct distribution, scaling will involve taking the time and money needed to invest in your infrastructure all over again. Scaling through indirect distribution could be as simple and making a new contract with your current wholesaler or retailer or switching to a different intermediary instead. The flexibility of indirect distribution makes it an effective “first step” in getting your products to the market. It can allow you to outsource all the management that comes with distribution to seasoned experts and to focus on the core processes of the business. However, it also gives you the time to invest in direct distribution, if that’s the eventual plan anyway, without having to wait too long to get your products to market. You can build your own infrastructure while relying on distributors to sell your product at the same time.
Distribution and marketing intermediaries are the services and businesses that act as the link between the manufacturer or the producer and the retailer. A crucial part of establishing an indirect distribution channel is in choosing intermediaries who bring the marketing knowledge, infrastructure, and flexibility to implement distribution plans to meet your aims. Well-documented agreements with your intermediaries can ensure they’re aware of and will follow your expectations while providing their own expertise.
Some of the benefits of a well-chosen distribution intermediary can include the following:
Simply put, with intermediary distribution, you end up with a pre-made distribution chain ready at your command. They come with higher operational costs, but if getting to market quickly is your aim, a good intermediary can be a valuable partner.
Most distribution channels may fall under the definitions of “direct” or “indirect” but that does not mean that those are your only two options. Several businesses will combine both approaches into what is known as dual distribution, or will rely on advances in technology to open up new distribution channels. These other types of distribution each have their own advantages to offer, so taking the time to research your options is always recommended.
Some of the other, less common types of distribution are as follows:
Though dual distribution refers to mixing indirect and direct distribution methods, the truth is that it’s possible to mix and match all the channels mentioned above in an endless variety of combinations. Being creative with your distribution channels could unlock the best path to profit for your business.
Third-party logistics companies (or 3PL for short), often play a key role in indirect distribution. They are the ones who provide access to the pre-made infrastructure that a manufacturer or distributor may be looking for. They can handle outsourced procurement, transportation, distribution, and other responsibilities for client companies. There are 3PL companies which effectively handle each aspect of indirect distribution and others than can handle specific needs within that distribution channel.
Businesses can use 3PL companies for procurement, getting the products that they sell. This can involve contracting manufacturing facilities to handle part of the production process, or access to channels to access ready-made wholesale goods that can be resold or adapted. In terms of indirect distribution, however, it’s the process known as fulfilment they will typically help with most often. This can include warehousing and inventory, where they take, store, and manage inventory, often including climate-controlled and high-value storage spaces. It can also involve speciality packaging, order kitting and creating and assembling branded boxes for goods. Examples of other terms used for 3PL companies include B2C fulfilment, fulfilment companies, distribution warehouses, wholesaler logistics teams, and so on.
Finding the right distribution channel can be tough, and it’s a choice that should be made in direct alignment with your company’s goals and objectives. For instance, if your goal is to establish a certain amount of sales within the first year, then indirect distribution channels may help give you the startup speed you need to meet those goals. However, if creating long-lasting, direct customer relationships is a key part of your strategy, then it may be worth bearing the burden of an increased internal workload and higher startup costs in order to do just that. Largely, there are four factors to be considered when choosing your distribution channel: the market, the product, the competition, and the company.
The market refers to where your customers are, how many are in the market, what their buying habits are, and how best to reach them. For instance, indirect distribution methods might work better for customers that are stretched out geographically and require more infrastructure to reach. When it comes to the product, you need to consider their costs, perishability, and whether they are custom-made or sold in bulk. For instance, both perishable and custom-made goods are not a good fit for indirect distribution. The former will likely not last through multiple steps in a channel to reach the consumer in good condition and the latter requires too much direct correspondence between the manufacturer and consumer.
When thinking about your competition, you have to think about whether you’re able to reach your consumer with your products as quickly or conveniently as they can. If you don’t have any competitors with a direct distribution channel in your local market, then indirect distribution may have no real downsides, but you may not want to rely on it if you have competitors who can reach their consumers more directly. Lastly, you need to consider the role that distribution plays in your company. A healthy cash flow is necessary for the maintenance of indirect distribution channels, for instance, while more management expertise is essential for maintaining control of direct distribution.
If you’re uncertain of which distribution channel is right for you, or you want a better idea of how indirect distribution could benefit your business directly, R+L Global Logistics can help offer you the answers specific to your needs, including order management.
Having worked with companies in a wide range of sectors, providing third party logistics services and consultation, we can help owners of businesses of all sizes understand how indirect distribution could compare with other channels, and help you discover which is the best fit.
Whether you’re just starting your wholesale business plan and setting up distribution or you’re looking for ways to optimize your existing distribution, we can help you.
Get in touch today and get a closer, more insightful look at your distribution management plan.