Why do retailers buy from wholesalers when you can buy from manufacturers at a cheaper price?
by Peter Baskerville
There is a reason why the following supply chain has developed over the past 150 years – it has proved to be the most efficient and therefore the most profitable way for businesses to convert raw materials into saleable goods and for consumers to purchase those goods for the lowest possible price.
Each participant in the supply chain provides a specific value-adding service that through focused specialisation in systems, equipment and management, delivers their particular service in the most efficient and cost effective way.
A retailer can skip the distribution/wholesale participant and go directly to the manufacturer, but that won’t negate the work that the wholesaler performs in the supply chain which must now be performed by the retailer who does not have the wholesaler’s specialised systems, equipment and management expertise. This lack of specialised skills and infrastructure adds a difficulty that may not be obvious at first to the retailer enticed only by the cheaper price.
Many retailers have looked at the cost/benefit of taking this step and the vast majority find it far more profitable to stay with the status quo (above) than to skip the wholesaler and go directly to the manufacturer. When the benefit of lower price from the manufacturer is weighed against the increased costs, quite often a less profitable result is the outcome.
Some advantage of wholesaler:
Here are the increased costs that the specialist retailer must face, if they go direct to the manufacturer:
- The manufacturer’s business model is built on selling high volume lots that are usually far greater than a retailer sells in a reasonable time – increased stock holding and storage costs is the result and in the most expensive space possible … retail space. Add to this the impact on your cashflow with your cash now tied up in inventory, putting pressure on your ability to pay other bills as they become payable.
- Manufacturing businesses are usually few, large scale and located remotely, away from typical retail zones, making lead times longer and delivery more expensive.
- Where wholesalers deliver good to a wide range of retailers via efficient daily small vehicle logistics, your purchase from the manufacturer will be a one-off costly one if you pick up the goods and a nightmare for the manufacturer’s semi-trailer when trying to deliver to a busy retail area. [Read more….]