Manage Consolidation in the Distribution Channel

In almost every business-to-business industry, companies face increasingly powerful intermediaries in their distribution channels. As this handful of national, professionally managed distributors prunes its supply base, manufacturers no longer have guaranteed market access.

In this article, Fein and Jap discuss the strategic implications for manufacturers of the fragmentation-to-consolidation transition in the distribution channel, the dynamics of consolidation, and the indicators that signal impending consolidation.

Consolidators in wholesale distribution follow a standard strategy. They build a national network, leverage buying power with manufacturers, and reinvest profits to meet the emerging requirements of larger customers and manufacturers. In fact, consolidation among downstream customers often triggers distribution consolidators to embark on growth-by-acquisition strategies to react quickly to changes in customer purchasing patterns. They try to minimize their purchasing costs by reducing the supplier base, shrinking internal purchasing staffs, and applying supply-chain management technologies, such as EDI, to reduce inventory. The efficiency with which a product moves through the channel has become as valuable as the features and benefits of the product itself.

A manufacturer facing a potentially consolidated channel has four basic strategic options:

1. Partner with the winners and motivate distributor investments in support of the firm's products.

2. Invest in fragmentation by designing a channel that meets the challenges of consolidation and integrated supply, and develop relationships with horizontal alliances of smaller independents that can bid for national or multiregional contracts.

3. Build an alternative route to market by bringing the functions of an independent distributor in-house or by using the Internet as an alternate channel.

4. Create new channel equity to ensure that products are more attractive to the channel.

The authors look at postconsolidation conditions -- in particular, vendor consolidation and increased service requirements, which present particular challenges to manufacturers. Fein and Jap conclude by posing a few strategic questions for manufacturers and illustrate how companies use the strategic options they outline.