Photo by Svilen Milev
Photo by Svilen Milev

For distant observers, all that distributors do seems to be just buying at lower price and re-selling at higher price without adding much value to society. However, when examining the distribution business, we can uncover more of their not-so-apparent values and the important roles they play in global economy

Logistics

Photo by Keta
Photo by Keta

It goes without saying that if we all have to book flight to and hotel in Japan just to buy, say, a Nintento Wii, then the sales of Nintendo Wii worldwide will never have reached 100 millions in the 7 years after its release. Distributors help with the logistics and make us all travel a lot less to get what we need by providing the goods we want nearer to where we are. This aspect applies not only to acquisition of the goods, but maintenance of it too. If all the Nintendo Wii owners have to fly and stay in Japan to get their Wii fixed whenever there’s trouble with it, nobody far outside Japan will actually buy it. National distributors are often required to set up service centre in the country they operate in so that they buyers don’t have to travel overseas for repair

Increase quality of life

Photo by Jon Eben Field
Photo by Jon Eben Field

The earth was created in such a way that no one place contains everything. For example, 60% of world’s known traditional oil reserve are located in just 4 countries in middle east. Or take a look at how the highest quality diamond mines are mostly situated in African continent. As such, trading between different parts of the world make the human civilisation more advanced, as they can enjoy things that will make their life easier and more enjoyable that they won’t otherwise be able to enjoy since it’s only available in other parts of the world. Take a look at how the western civilisation initially consumes wheat-based stuffs for staple food for millenias until they came over to the American continent and chance upon potatoes. They found that potatoes can feed more people per square kilometre of plantation. So it was sent back to Europe and slowly became staple food of choice.

Needless to say, if distributors are not around to introduce the people in its area about things available in other areas, that particular area wouldn’t develop as fast.

Make it possible for quality products at affordable price

Photo by Axisadman
Photo by Axisadman

The business terminology for this is economy of scale. Economy of scale describe a condition where if the sales volume is large enough, the fixed costs per unit sold becomes small enough, hence profit becomes larger per unit sold. Fixed costs are costs which are incurred by producer regardless of the volume of unit produced and this covers cost for such things as factory and office construction as well as office workers compensation. By stocking the goods at distribution centre far away from the producer, distributors helps increase the inventory turn-over on the producer side. Inventory turn-over measures how quick the goods enter and exit the storage. Increased inventory turn-over on the producer side means that they can have smaller warehouse. This also helps the producer’s cash flow as the distributor will pay the producer when it’s stocking its distribution centre, so the producer doesn’t have to wait until an end customer buy the product before receiving money.

By having its own work force, distributors also relieve the human resources strain and costs on the producer. The producer no longer has the need to recruit work force on all the distant locations. All these above factors make it possible for a producer to grow bigger without the need for bigger investments in term of storage space, working capital, and human resources. This allows producer to reach economy of scale faster than without having distributors. In turn, this allows the producer to reserve enough money for research & development to develop the quality of the product as well as enable it to take the cost leadership mode of competition

Generate employment

Photo by by Sa'ad Jafar
Photo by by Sa’ad Jafar

At initial stage of a producer’s business, it’s imperative to build up critical mass in order to survive and grow. At this early stage, distributors come and share the risk with this new producer and help to accelerate the journey to critical mass in sales. This sharing of risks makes it easier for new producers to survive. It sustains entrepreneurship and new job creations. As the producer grows and its reach enlarges, the additional sales facilitated by the distributors accelerates the job creation in the producer side as well as the distributor and its counterparts in other countries/regions than would otherwise be possible

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