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Wholesale Start-Up Plan: Choosing the Right Distribution Channel

Aug 17, 2007
Any business needs two basic things to survive: customers and products.Products can be services or actual goods.We will examine the different channels for obtaining goods for resell in your business or marketplace, as well as examine two different scenarios to help you decide which channel is right for your business.

Obtaining goods is done primarily through four methods, or channels:

·Directly from the manufacturer
·Through a wholesaler
·Through a distributor
·Through a supplier

Each channel has different requirements and costs associated with it.For most businesses, they will deal exclusively with only one channel.Many times it is not the business itself that dictates what channel will be used, but rather the volume and size of that business as well as the channels available. Not all four channels are available for all products, and in some cases there may only be one channel available no matter what volume your business requires.

The first channel is the manufacturer who actually makes the product.Smaller companies often sell directly to other businesses because they are new to the market, or do not have business capital required to work through other channels.In situations such as this, you will deal with internal sales staff at the manufacturer who will handle all aspects of purchase, delivery logistics and billing.

A wholesaler usually works with the manufacturer to provide quantities of goods to other retail outlets or businesses.Often, they may also be the distributor of the product as well.A wholesaler is usually only interested in volume sales and does not sell single or low-quantity lots of the products.In situations such as this the manufacturer sells only to its wholesalers, who in turn sell to businesses or distributors.The manufacturer may be the wholesaler in some casesThey usually handle all logistics involved in getting the merchandise to your location, as well as billing for the products and delivery.

Distributors often sell in lower quantity lots and purchase the goods from a wholesaler.In some cases, the distributor is also the wholesaler. Often distributors may be regional in scope.A distributor may also act as a customer relationship manager between the manufacturer and the business purchasing the goods.They will often come to the business to suggest ways of improving sales, layout of the display and answer any questions or concerns that business has about the product.

Suppliers may sell to small businesses with low volume or to individuals directly.In some situations you may have to go to their showroom or warehouse to pick up the goods yourself. Suppliers are often used when distributors and/or wholesalers do not deal in small enough quantities for a business.They can also be used when there is no distribution method available to move goods easily through a fragmented retail environment with fluctuating sales and purchase patterns. Furthermore, some suppliers may act as a drop-shipper on your behalf warehousing the goods and shipping directly to your customers.

It is important to realize that with each layer in the distribution channel the cost of the goods increase.This is why large retail firms, such as Kroger, can purchase a can of tuna at a much lower price than a small, independent grocer can. Kroger is purchasing directly from the wholesaler, whereas the independent grocer is purchasing from a regional supplier or distributor who has purchased from the wholesaler.

Let's examine two scenarios to explain which method may work best for your business.We'll assume that all four channels are available to us.

Scenario #1:Large or Growing Business with Significant Up-Front Capital

The larger the volume you can purchase, the lower the price will be for each individual unit.This is why Kmart, Wal-Mart and Kroger can offer lower prices as compared to independent retailers.Doing so requires a significant capital investment as well as the ability to warehouse and move a large quantity of merchandise through your business.

In this scenario, you would deal directly with a wholesaler who would handle the logistics for delivery of the merchandise to your location.Often this be through their dedicated truck fleet, or through your own fleet who will pick up the merchandise directly from the wholesaler.

The key here is the ability to move those goods through your business or retail channel quickly.The longer an item sits on a shelf or in a warehouse, the less profit is made.Even if you purchase at a lower price by buying a larger quantity, if an item has to be warehoused for long periods of time then the cost of storing that item quickly erodes the price break obtained for that product.

Scenario #2:Small Business Wishing to Maintain a Low Overhead or Buy in Small Quantities

In this situation you have limited capital to invest in goods and do not have the resources available to purchase, store or move large quantities of goods. Here you would benefit more by dealing directly with the distributor or a regional supplier depending on your ability to turn-over the merchandise.

Though your cost per unit will be higher, you will have less overhead expenses (such as storage). However, caution must still be used especially when there are other businesses in your area that carry similar products.If they can significantly undercut your price because of the quantity they purchase, you have to rethink if it benefits you to carry that particular item.

This method also benefits businesses that are just getting started.As your volume grows, you will be able to purchase in larger quantities and can negotiate lower prices or move to a different distribution channel.

It is important to research and evaluate all the channels available to you when deciding to purchase merchandise for your business.Market factors, competition and availability will all play a factor in deciding what products to carry and how to obtain them.
About the Author
Joaquin Reveron is the President of Video Games Mystery Corp. Trainer and wholesale marketing consultant for online and offline purchases.
Video Games Distributor is one of the topics discussed at http://www.videogamesmystery.com
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