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.
- Each middleman must buy items in order to sell them (buying function);
- They must contact potential customers, promote products and press for order delivery (selling function);
- They have to source from different places and get different related products together (assortment function);
- Investing in the assortment and extending credits to clients, the middleman helps in financing the exchanging process (financing function);
- The goods must be assembled in a convenient location to ensure availability and to protect them from deterioration and loss (deposit function);
- In various circumstances, the middleman buys big quantities of goods and subdivide them in small amounts to sell them (subdivision function);
- It can also be necessary to check, test and judge the received products quality and to give them different values (classification function);
- Managing the products physical flow or the logistics (transport function);
- Typically the middleman has the responsibility of giving market information both to customers and to suppliers (market information function);
- 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.