20 December 2007

New disintermediation perspectives

By Jim Pinto

Disintermediation is the removal of supply chain intermediaries: “Cutting out the middleman.” Instead of going through traditional distribution channels (distributors, wholesalers, brokers, agents), suppliers deal with customers directly, typically via the Internet. The key is to reduce cost of servicing customers.

The “supplier” is typically the designer and marketer (example, Apple). In this global age, manufacture is usually contracted out (iPod and other Apple products are made in China). Sales and distribution intermediaries service the consumer. Apple initially sells iPhone only through AT&T (Cingular), though iPod is now sold by several different intermediaries like retail stores and online.

Disintermediation is supposedly dooming distributors, retailers, wholesalers, and all other intermediaries between suppliers and end customers. Because the Internet allows customers to connect to and order from the primary source of a product, there is presumably no need for traditional distribution channels.

However, there is another side to the disintermediation story. Some products need a significant amount of support. Industrial automation is a good example: Selection from a confusing variety of available products and options, correct ordering with optimal pricing and delivery, selection and purchase of related accessories, which must be ordered separately from others suppliers, installation of the complete system, and services such as maintenance and calibration to assure optimal operation over useful system life.

Who will provide all this value? Certainly not the manufacturers. Even the largest automation suppliers cannot supply the multiplicity of products; and they cannot have “local” presence everywhere. So this value must be provided by intermediaries.

Distributors are necessary, and not just for “local stock.” The job of the distribution channel is to supply all the additional products and services needed to maximize value to the customer.

The distributor who provides products and services better than anyone else is the one who is immune to “disintermediation.” Any attempts by a manufacturer/supplier to disintermediate merely result in replacement by alternative suppliers. It is an interesting twist—suppliers becoming disintermediated.

Related links:

• The Myth Of Disintermediation:
  http://www.informationweek.com/794/94uwmh.htm
• Disintermediation Stirs up Industrial Automation:
  http://www.jimpinto.com/writings/disintermediation.html
• Services – Growth on a Slippery Slope
  http://www.automationworld.com/view-1597

Behind the byline

Jim Pinto is an industry analyst and founder of Action Instruments. You can e-mail him at jim@jimpinto.com or view his writings at www.JimPinto.com. Read the Table of Contents of his book, Pinto’s Points, at www.jimpinto.com/writings/points.html.