Distribution

Owned by Mike Deskis
Jul 17, 2024
4 min read

Overview

Product distributors are professionals who buy products to store and sell through a specific channel. They handle the movement of goods and services to the customer and often are the intermediaries between a manufacturer and the consumer. Distributors work in collaboration with one or more companies at a time to market, transport and sell items in various ways. A distributor can enhance a company's market and expose it to a larger audience of consumers, and sometimes offer service, technical support or warranty on behalf of an item or company.

Pricing Strategies

General pricing strategies used by the Distribution industry:

  • This is dependent on the nature of the product and markets served, and the acumen of the company doing the price setting.

    • Cost plus and inventory based (spot) – typical for commodity products

    • Market based - often used for both commodity and specialty products

Industry Transaction Mechanics

Below are the transaction metrics for the Distribution industry:

  • List prices – they exist but are not usually valid indicators of market pricing. Most chemical companies set customer pricing individually; not based on discount from list.

  • Price change mechanisms:

    • Mass price changes - applied to all customers in a product, market, customer industry, and/or geography.

    • Formula and index-based price changes – most often on a monthly or quarterly basis are driven by changes in publicly available information on raw material or finished product price levels and trends. Formula pricing is most often used in commodity product areas. Formulas are typically defined as part of a sales agreement of at least one year in duration.

    • Market price changes are agreed between suppliers and buyers. Changes can be part of a long term (1 year or longer) sales agreement or simply done on a routine transactional basis.

    • Spot or inventory-based pricing (pricing NOT based on a contract), changing as needed to move excess quantities of product out of inventory.

    • Price changes are frequently announced to the public with 30-90 day advance notice before becoming effective. This can serve to create an orderly competitive marketplace.

Industry Channel Models

Below are the different channel models in the Distribution industry:

  • Direct sales – typically handled by field sales personnel with buyers. In some cases, inside sales personnel will cover smaller accounts that are judged to be too large to give to distributors. Rebates are commonplace, and generally are focused with the direct customer.

  • Distribution sales – through an assortment of multinational, national, and regional distributors. Annual rebates, usually on a volume basis, are typical for producers to drive sales through distribution. Manufacturing companies will frequently utilize distributors to manage their “long-tail” customers who are too small to serve directly.

  • Tolling – this is a specialized arrangement where one manufacturer utilizes the capability or favorable location of another firm to process their goods. One company provides raw materials or semi-finished goods to a 3rd party provider who complete the manufacturing process on their behalf. This is typically used when a company wants to sell in another geographic region but does not want to or is unable to ship product in a cost effective manner to that region.

Marketing Plans

Companies with more specialized products may have sufficient insight on downstream markets and buying processes to establish pull-through rebates with 3rd party customers.

Supplier Network Depth

This varies by product area, normally through barriers to entry like control of technology and capital intensity required to invest in capacity. Products made with technology that is readily licensed or beyond patent life tend to have more suppliers and be more commoditized in nature. Those products with technology protection, no licensors of technology, and high capital barriers to entry are more likely to have a very small number of suppliers, or alternatives that are unlike products.

Use Case Catalog

In this industry, these are the Pricefx industry use cases organized by capability:

SUPPLIER COST MANAGEMENT

  • DISTRIB 01 - Automate execution of supplier cost updates with necessary approval workflow. 

  • DISTRIB 02 - Improve margin with complete visibility of supplier cost updates, cost trends and business impact

 

PRICE SETTING

  • DISTRIB 03 - Quickly calculate and publish new price lists based on supplier cost changes or changes to pricing strategy.

  • DISTRIB 04 - Improve price realization by simulating the impact of mass price change scenarios.

  • DISTRIB 05 - Design and deploy new pricing strategies using drag-and-drop “no code” configuration

 

QUOTING

  • DISTRIB 06 - Improve margin, speed and quote win rate with guided selling and decision support

 

REBATES AND AGREEMENTS

  • DISTRIB 07 - Setup and update customer specific pricing framework by customer segment and product.

  • DISTRIB 08 - Eliminate unearned discounting by utilizing automated rebates with accruals and payouts

  • DISTRIB 09 - Improve rebate performance with complete financial visibility via analytics KPIs

 

OPTIMIZATION

  • DISTRIB 10 - Achieve margin/revenue/volume goals with optimized pricing guidance and guardrails

 

ANALYTICS

  • DISTRIB 11 - Improve price effectiveness by monitoring market feedback via price realization analytics

  • DISTRIB 12 -  Identify and eliminate underperformance via customer/product insights analytics KPI

  • DISTRIB 13 - Plasma - Quantify process and strategy improvements using KPI trending and industry benchmarking