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“Why not to buy directly from the productive
source, skipping the distribution channel and saving superfluous
costs?”
The answer seems banal but sometimes neither traders or producers
knows it.
“Because to reach each final customer there are costs
to sustain and services to give that a productive business
cannot afford, because those aspects are far from their core
business that is unquestionably Producing and not Trading”.
The Economics theory states
that trading middlemen intervene on the market to lower
products transaction costs and to bring products to
final customers at a price that otherwise would be higher.
This concept seems to be perfectly absorbed in the consumption
goods markets (you would not go to the Nestle’s
factory to buy one bar of chocolate!), it is still hidden
in Industrial Markets.
But let’s take a look at the main theoretic industrial
distribution functions and how it can lower transaction
costs, thanks to its characteristic activity nature.
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Each middleman must buy items
in order to sell them (buying
function); |
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They must contact potential customers, promote
products and press for order delivery (selling
function); |
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They have to source from different places and
get different related products together (assortment
function); |
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Investing in the assortment and extending credits
to clients, the middleman helps in financing the
exchanging process (financing
function) ; |
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The goods must be assembled in a convenient location
to ensure availability and to protect them from
deterioration and loss (deposit
function); |
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In various circumstances, the middleman buys big
quantities of goods and subdivide them in small
amounts to sell them (subdivision
function); |
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It can also be necessary to check, test and judge
the received products quality and to give them different
values (classification function); |
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Managing the products physical flow or the logistics
(transport function); |
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Typically the middleman has the responsibility
of giving market information both to customers and
to suppliers (market information
function). |
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The risk regarding to property
of a product that can deteriorate or become obsolete
(risks
assumption) |
Distribution is a key element
of the industrial products supply system, since it reflects
how important is the supplied material availability.
Because of this essential reason, long term relationships,
that are born and developed on mutual trust presuppositions,
assume extreme importance, much more in the industrial markets
than in the consumption goods market.
One stable supply source for many items, drives toward a higher
economic level of supply process, which too often get lost
in purchasing office archaic concepts.
This costs saving is related
to the fact that consolidating suppliers and reducing paperwork
puts business money to work for it because less time will
be spent in sourcing, writing fewer purchase orders, processing
less invoices and reducing receiving and restocking man-hours.
When businesses factor in the hidden costs of sourcing, generating
a purchase order, processing the paper work, receiving and
paying the invoice, their inventory costs are probably much
higher than they realize. And, those hidden costs can be doubled
by back-orders or duplicate orders .
For this main reason, actual
conception of advanced Customer-Supplier relationships gives
importance to consolidating long term relationship with few
suppliers, accurately selected basing on offered services
and trust elements, honesty and goods availability.
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