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Of Movers and Shakers

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DQI Bureau
New Update

If not the ‘shakers’, IT distributors are definitely the ‘movers’ of

the IT industry. First tier companies including broad-based national

distributors like Tech Pac, Ingram Micro, Redington, specialized national

distributors like Rashi Peripherals, Aditya Promoters, Compuage, Neoteric, SES

Technologies, Wellwin, and some region-focused distributors, together account

for over Rs 10,000 crore worth of IT products being ‘channeled’ into the

hands of a multitude of resellers throughout the country and eventually reaching

the end-user.

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Are these folks needed? Why aren’t these products directly sourced from

vendors? After all, you have Dell Computers selling directly to the end-user

eliminating even the reseller. And the Dell model is touted to be the most

efficient way to be in the computer business. Yet how many Dells exist?

The truth is that the Dell model does not always work with vendors. This

model would require vendors to adopt a different mode of operation altogether.

It would entail a different approach for functions like sourcing, manufacturing,

support and product management as well as alter business dynamics like scale,

global reach, product mix, price sensitivity, and others. Without having the

distributor stocking up on finished goods, everything we buy from original

electronic manufacturers (OEMs) or vendors would either be forecasted orders or

products delivered just in time. This would substantially lengthen delivery

time. Distributors thus impart speed to the business.

Knights in Shining Armor
Using a distributor’s network could work better for everyone–the vendor, reseller and the end-user
Distributors impart speed to the business
Broad scale IT distribution is the most cost-effective way to reach your customers
A broad-based IT distribution model gives you the ability to manage a large customer base and yield efficiencies from the supply chain
Distributors help vendor organizations with active working capital support
Distributors play the role of information purveyors
Distributors ensure value-adds like tech-certified manpower, presales, and post-sales support
For resellers, distributors assure easy availability of products so that their investment in inventory is low
Distributors share high quality information and knowledge and logistics support
Resellers and solution providers can substantially cut down on procurement costs using distributors
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Says Tech Pacific India CEO K Jaishankar, "The Dell model apart, broad

scale IT distribution is the most cost-effective way to reach your customers as

it is based on the theory of economies of scale". The power and value of IT

distribution comes from leveraging cost efficiency over multiple brands and

products combined with physical access to wide markets.

A mature IT distribution model is the hallmark of the development of an IT

market. A broad-based IT distribution model gives you the ability to manage a

large customer base and yield efficiencies from the supply chain. Systems and

processes further add value to the supply chain. And the advantage for vendors?

Distributors take over the risk by buying and stocking up on their products and

clearing their inventories. In other words, it helps vendor organizations with

active working capital support. Apart from this, distributors play the role of

information purveyors to the IT reselling community. Without the distributors in

place, this exercise would not only be difficult but impossible in many cases.

Add to this, specific value-adds in terms of tech-certified manpower, presales,

and post-sales support.

For resellers, distributors assure easy availability of products so that

their investment in inventory is low. Distributors share high quality

information and knowledge like product roadmaps, selling aids and solutions

configuring tools for each of the product categories. The entire spectrum of

activities that falls under transaction management, (essentially answers to

questions like - what happened to my order, when am I getting it, can I get more

of it, can I get it at various stations, at what prices?) is tackled by

distributors. Logistics support follows where products are delivered in the

required format and configuration within the stipulated time. Avers Jaishankar,

"What happens here is that a lot of costs associated with a reseller

closing an order with the end-user, are taken off by the distributor so that

they can focus on business acquisition". Large systems integration

companies have purchase specialists in areas like networking, software, storage,

and others. The need for such specialists is obviated when distributors can take

over the function. Resellers and solution providers can therefore substantially

cut down on procurement costs.

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Resellers’ businesses largely run on the credit support provided by

distributors. Says Jaishankar, "We customize the credit policies for

different resellers depending on their business focus areas…Policies differ

even between products." Hence a 30-day credit period is given to a

corporate PC while a home laser printer gets only 15 days. For typical systems

integrators, the policy is ‘pay as you go.’ That is, one need not buy the

cable, the router, switches, and other gear all at once because all of these are

not required at the same time.

The entry barriers to a full-fledged national broad-based distribution

company are fairly high because of the investments required in building up the

channel, warehousing, working capital, and putting systems and procedures in

place. A good mix is a portfolio of volume products that help get cost

efficiencies and value products that contribute to profitability. The

distributor’s infrastructure is used to deliver other types of fulfillment

services like delivering training content in the form of CDs to students

attaining technical certification.

Says P G Kamath, VP-marketing, Ingram Micro India, "One cannot compare

national distributors and regional distributors. Each has its strengths and both

need to coexist. The slowdown in the industry impacted distribution as well.

Says Kamath, "When revenue is coming in, people go on a rampage to sell.

Only in a downturn do we see all the facets of a business." It is easy to

commit mistakes that weaken your operation when resellers try to push topline at

the cost of bottomlines. That’s when credit policies that were set to define

optimum profits and sales are transgressed and resellers are saddled with both

huge inventories and recoverables.

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Channeling, the Linux Way 
How does one pass a product which is in the ‘push’ mode? And that too, something like Linux? Here’s how Red Hat pulled it off...
All of Red Hat’s channel partners understand the Linux technology and are capable of adding  a lot of value to the sales process in terms of information, availability of products and solutions and providing services such as installation, onsite support etc, which the customer expects locally. Partnering with Red Hat, Linux delivers a lot of benefits to it’s channel partners:
When a Red Hat channel partner positions Linux as a technology with a tremendous price /performance solution to any IT manager, he gets an instantaneous acceptance and entry as he addresses critical concerns like saving huge costs, robust, scalable and universal technology etc. He is viewed as a consultant by the customer and gets into a fruitful relationship very quickly.
Once the customer adopts Linux, the channel partner gets additional opportunities of up-selling high end products from Red Hat like Red Hat High Availability Server, Red Hat Database, Red Hat Interchange etc with bigger product and service revenue opportunities from the same customer.
Red Hat also offers additional revenue opportunities on Red Hat services like support and training to its channel partners.
One of the highlights of Red Hat’s channel partnership is G T Enterprises. Starting as a channel partner and  recently being appointed as a distributor, GTE, Bangalore has build a very innovative and successful business model through the Red Hat relationship.
Defying the conventional VAR model of handling multiple products from multiple vendors, GTE has focussed only on Linux as a technology over the last seven years in business. Apart from products, GTE also partners with Red Hat through its affiliate Linux Learning Center (LLC) for training and certifications for Red Hat Linux for individuals and corporates.
By building such competencies and a portfolio of services around Red Hat, GTE has been the pioneer in inventing a new and innovative model in the competitive channel business, which could be role model to replicate.

In that sense, it is the distributor who tries to manage and rein in the

business that is going on an outward spiral. Here, he plays the role of the

shock-absorber. Vendors have different approaches towards distribution. Vendors

who attempted to dabble in distribution did not succeed. This is simply because

OEMs are not used to playing the classic distributor functions of demand

creation, order-taking, product fulfillment, support and service.

Distributors and resellers share a sweet and sour

relationship. Interdependent as they are, expectations from both quarters are

high. Resellers have the common grouse that "distributors often don’t

reveal their strategies." Responds Kamath, "We cannot give the same

deal to all. We always have the vendor’s interest in mind and act accordingly.

Therefore, very often our thrust areas come across as conflicting to the

resellers. More importantly, this issue is never raised during a business

upswing. It is only during a downturn that the distributor’s strategies

questioned."

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Resellers also feel that the distributor and vendor together

take away all the margins leaving wafer-thin advantages for them. Kamath

responds, "I would say, a reseller has to take the call. He stands to make

a profit when he takes the right quantity of stock at the right price and

manages his business fundamentals well. He explains that distributors typically

don’t push any product down the reseller’s throat. He also feels that

resellers are now taking efforts to reduce credit risk, do value adds, and limit

the size of their business in a healthy manner.

Storage, software, security, networking, and convergence

devices are the high growth areas identified by distributors. These areas are

expected to remain profitable for the next couple of quarters. Distributors feel

that resellers on the whole, do a poor job of forecasting their business, though

there are some who can do it well with a fine level of granularity. This, when

compared to the supposedly sophisticated forecasting that distributors do, leads

the market into divergence. Distributors also exhort resellers to engage in

value addition but haven’t been able to figure out the right pitch yet.

Distributors can organize a lot of resources like training, certification, CIO

interfacing, technology roadmaps and the like, to help resellers’ brace up to

doing the value add. Says Kamath, " The challenge is to get them interested

in the first place".

Web-enabling the distribution business has been done to a

limited extent by major distributors like Tech Pac, Ingram Micro, Compuage, and

Rashi Peripherals. But it is definitely not the dominant medium for business

interaction. A reseller still feel that if he calls up and speaks to the

relationship manager, he will get a better price. Some lessons from the global

distribution industry could be of help to Indian distributors. The year 2001 saw

a shakeout in the global distribution arena. The economic recession and

turbulent developments shook the bearings of the industry. The third largest

distributor, Merisel had to shut shop and so did Pinacor, another strong player.

But the stronger ones like Tech Data, Ingram Micro, and Arrow got into the

creative whorl and experimented with new markets and services. For example,

Ingram Micro tested the market for an ASP offering in which a two-level program

was drawn out to select resellers who could become ASPs without incurring the

infrastructure investment. And Ingram is said to have made money reselling

hosting services by giving ASP applications and training the reseller to sell

ASP services.

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Similarly, North American Computer Products came up with

initiatives in which solution providers teamed with ISPs and ASPs for selling

hosted applications in the SME space. Ingram Micro spotted the opportunity to

team up with e-tailers by providing logistics support. Some distributors like

Tech Data and Ingram Micro got into providing outsourcing services for their

resellers and solution providers for a fee. Such services included end-user

billing, recoveries, and call-center services to handle the entire transaction

process, from order to fulfillment.

Apart from this, leaders in the distribution industry were

ruthless in cutting costs and staff. The global market witnessed a peculiar

problem- with the shutdown of many dot-coms who had invested heavily in

technology, computer equipment was available in plenty and this filtered into

the channels via the gray market. The result was that the forecasts made by both

distributors and vendors got skewed. The community immediately swung into action

by forming an ‘Anti-Gray Market Alliance’.

Tech Data, the global leader is reported to have managed its

overheads very well. The company exhibited remarkable prudence in staying away

from opportunities that depleted cash. For instance, it desisted from buying out

a Unix mid-range company that was on offer, delayed plans to expand into new

territories, preferred to forego the putting up of new warehouses. And it had a

strict eye on the bottomline aided by activity-based costing (ABC) by which

P&L was drawn up for every customer and the price was set accordingly.

Ingram Micro was more adventurous…raising its prices in the

midst of the recession. The logic: competitors would not imitate this move and

there will be temporary loss of market share. But with continued investment in

enhancing value proposition in terms of specific services, the lost share would

be gained back. It happened exactly that way. These examples call for a simpler

distribution market. It would be good if these lessons are learnt in preparation

of not-so-good times that may arrive again.

Easwardas Satyan,in

Mumbai

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