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The Challenge of the Channels

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DQI Bureau
New Update

The IT distribution industry is very unique in its structure and to the best

of my knowledge, the only industry which has multiple national level

distributors selling exactly the same products from multiple manufacturers with

absolutely no geographical demarcation. In most other industries like white

goods, automobiles, pharmaceuticals etc the channel structure ensures minimum

conflict and less competitive pressure on pricing. This aspect makes IT

distribution the most challenging industry.

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The IT distribution industry in India has evolved over the past decade. It

has undergone major transformation during this period in terms of the number of

products, distributors and resellers, channel and vendor expectations as well as

the financial aspects of the business. Today, the IT distribution industry is in

a state of flux plagued by over distribution in most of the fast moving

products.

“The industry has changed from being a clearly linear to a totally non-linear marketplace, where partnerships and collaboration are critically important”

Jitendra Kulkarni

When the market was growing at a healthy rate, there was enough business for

everyone. With volumes dropping, margins coming down and fixed costs remaining

more or less same, most distributors had to rethink their business models and

strategies to remain viable.

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Interestingly, in IT distribution, anybody can sell a pull product if he

offers the right price and the right credit. Therefore profitable sales, more

than the sales volume, comprise the measure of success. There are several cases

where distributors / resellers are selling the same product, but some make

profit, some don’t. In an over distributed market, only those who understand

the unique needs of a particular business and fulfill them will succeed. The

real challenge for multi product distributors is to manage diversity in skill

sets and resources required for different businesses while keeping the costs

under control. There is no magic formula for success, which works across

products and businesses.

One good thing which happened to the industry last year was that all the

distributors/ resellers felt a need to not violate certain business

fundamentals, especially those related to credit. The results have been positive

for everyone. A similar need has been felt on the pricing front. Every channel

member needs to ask himself, "Is my value add in line with my margin

expectation? And is my cost structure in line with my value add?"

Those who are unable to be competitive in a multi distributor scenario are

likely to go for exclusive arrangements, develop niche areas, and focus on

developing other business models like services, value added distribution,

geography specialization, training, technical support etc.

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Much has been discussed and written about the emergence of a direct model

though the fact is that direct sales existed much before distributors came into

the market. Ironically, distributors came into being to a large extent because

manufacturers could not fulfill the overall end user or reseller demand. Just as

distributors do not exist to make products, manufacturers do not exist to

specialize in logistics and multi vendor solutions delivery. While some direct

sales will continue to happen, the emergence of a 100% direct model does not

seem feasible. One of the main reasons for this is credit risk management. None

of the manufacturers are geared up to manage this aspect, especially in the SMB

(small and medium business) and home segment.

In the coming years, the distribution industry will continue to change in

line with the needs of the market. However a lot will depend on the growth of

the SMB and home segment.

BY Jitendra Kulkarni



The author is CEO, Redington India

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