Summary

Introduction:
Any IT vendor partner account manager, sales manager, program manager needs to understand the
distributor’s business model to be able to demonstrate the commercial value of the relationships with
distribution. Moreover, one of the major roles would also be to grow the business through distributors.
Understanding the business model of a distributor is important for the following reasons:

 It allows to be a trusted business advisor to the partners.

 It allows to understand several possibilities and propose value based on those possibilities.
 It helps in having a perception of how a vendor’s business model for their product will look
inside the roadmap of their partner and the specific role a vendor plays for their partner

The Role of the Distributor:

For any major technology vendor, distributors play a significant role in providing extensive market reach
and coverage which is why almost 80% of the revenue of the vendor comes from the contribution of the
distributor. Distributors provides service to several customers ranging from small independent resellers
to large multinational retailers. Regardless of the size, all these customers are looking to avail “one-stop-
shop” to source products and services of hundreds of suppliers whose offerings are like the one the
retailers and resellers are offering to end customers. The distributors can also offer many products and
services to leverage their own economies of scale (increasing production to decrease the cost).

A distributor plays a major role in choosing the right vendor and product to enable
the ‘one-stop shopping’ service to facilitate customers’ business growth. One of the
core elements of one-stop shopping service is availability – the distributor can
provide a significant proportion of products on demand, saving many of its
customers’ hassle to carry stock. IT distributors can largely benefit their customer
by providing same day shipping of thousands of SKUs (stock keeping unit – a
number; retailers assign to products to keep track of stocks level.

Another key role of a distributor is to break bulk i.e., receiving large pallets of products and then
breaking them down into quantities as required by the end user, reseller etc.

One of the core benefits that the distributors provide is provision of credit (for OEM) which means
customers can supply, configure, and install products without financing the whole work in progress and
receivables from end customer. It would have been costlier than the product for OEM otherwise.
Resellers source from multiple distributors to enjoy multiple credit. On the other hand, retailers
finance their inventories with the help of distributors and combining this with cash payment from
consumers results in a cash positive business.

Another key role of distributor is supplying delivery logistics. This means that customer depends on
distributor to deliver the product on either their business premises or to the customers premises in the
form of drop shipment (carrying resellers brand on labels and packing slips).

To minimize delivery cost, distributor came up with order consolation mechanism. Through this
mechanism, delivery charge of product is lowered by waiting until a complete order of products from
different vendors is ready to be shipped.

For stream of new IT products, distributor provides pre-sale and post-sale technical support for
resellers. Pre-sale support includes pointing out the differences of the new product from existing one,
and post-sale support includes resolving troubleshoot, configuration issues, technical training etc.

Distributor does product marketing on behalf of their customers which allows them to produce full
catalogue. Distributor also provides customers with market and business intelligence (analysing current
and historical data) enabling their reseller to make better strategic decisions and facilitating the business
growth.

Role for Vendors

Distributors play the role for vendors by providing a route to market for vendors seeking to reach a
specific segment of the market or an entire market. Distributor provides vendors market knowledge
and access i.e., knowledge about specific market in which they operate. For vendors, forming a business
relationship with a distributor means being in a relationship with multiple resellers and this gives them
an understanding of how to access different resellers for different part of customers. The vendor also
gets to know about several weekly/monthly reports such as sales out or inventory.

Distributors expand their market knowledge through demand generation activity

- working their existing network of resellers

- recruiting new resellers
- actively driving awareness and sales capability amongst them to promote sales amongst end
customers.

For vendors, the market data, marketing tools and resources a distributor provide, generates demand
for their product and makes it lucrative for market development funds (funds provided by companies to
sell through their intermediaries).
Distributor provides front office service

- supporting local office in a new market

- taking on the agent/vendor representative role
- providing channel development and account management services
- running end-customer marketing or lead-generation/management programs
- administering channel programs and funds on behalf of vendor

Distributor performs supply fulfilment activities on behalf of their vendor

- has extensive range of SKU IT vendors

- stocks complete range of SKU
- makes sure back orders (retailers order for a product that is not in the stock of the supplier) are
handled
- breaking bulk
- delivery logistics
- reverse logistics (taking back returned products)
- vendor stock warehousing
- vendor inventories
- consignment stocking
- taking credit risk of resellers and retailers

Distributor also provides back-office functions

- running debit notes

- providing quotation support
- managing pass-through funds

Distributor provides the following outsourced services for their vendors

- warranty management
- break-fix
- post-sales support
- specialist legal services (trademark, registration, protection)
Value-Added Services, Broadline Services, Fulfilment Services is mapped by margin and volume and is
related on the position of the product category on the Technology Adoption Lifecycle (TALC).

Value Added Distribution Services: focused on taking market to a newer, higher-value technologies
such as:

- data centres (a large group of networked computer servers typically used by organizations for
the remote storage, processing, or distribution of large amounts of data),
- virtualisation (creating a virtual version of something, including virtual computer hardware
platforms, storage devices, and computer network resources),
- secure networking (network with security measures in place that help protect it from outside
attackers), and
- open source (open-source software is code that is designed to be publicly accessible)

and supporting services delivered to larger and Enterprise Level customers (customer with annual
revenues that exceed $25 million or that employs more than 100 full time equivalent employees).
VADS also involves recruiting, developing, and supporting the final tier players by planning and
delivering complex IT projects.

VADS requires investments of time and resources in mastering products from a technical and
marketing perspective, building infrastructure for services ranging from demand building, proactive
sales (take control of the sales process instead of waiting for the potential customer to do so),
consultancy, extensive technical and sales training and certification, pre and post sales technical
support.
Broadline Distribution Services: They are required to cover all the channels vendors need by
establishing and supporting trading relationships with a full range of dealers within each segment.
Market access is clearly core to the offering, along with the provision of proven marketing and
communication tools such as catalogues, mailers, and websites. This type of services remains under
pressure with prices since there are a lot of providers already, therefore process efficiency and cost
control, volume discount, rebates are important.

Fulfilment Distribution Services: Distribution performs the role of logistics on behalf of the vendor
in this type of services. The core service includes – high volume, high efficiency logistics operation
stripping out redundant cost to cover infrastructure and operating cost. This model is comparable to
Fedex and DHL and differs because – distributor bears stocking risk, credit risk.

Logistics and Special Service Distribution: This is a blend of all the other models. An example would
be telcoms where distribution entails high-value configuration services with pack out and branding
services, repair and refurbishment and retail store fulfilment, category and shelf management.

Five Myths of Distribution

1. Giving up margin to the distributor:

Some vendors may feel that they are giving up their margin to their distributor but what they
forget is they are also logistics and credit infrastructure that would have required to reach
retailers/resellers served by distribution. Economies of scale reached by distributors means that
they are saving the cost of the vendor which are considerably higher (3% to 5%) than the
average additional discount given to the distributor.

2. Distributors are just order takers:

Almost all the products need pre and post sales service. Distributors inform the retailers
/resellers about the technical specs, configuration, and compatibilities of the product without
which new technology would move slowly through the adoption cycle

3. Cloud has removed the need for Distributors:

There is no substitute of for the specialized skills and capabilities of distributors to drive sales
and fulfilment processes. IT products require a physical logistical infrastructure, and all products
need a credit infrastructure backed by financial strength and credit insight of distributors to
provide the liquidity needed by the channel at the lowest cost.

4. Retailers and Resellers prefer to deal directly with vendors:

Though most retailers/resellers directly want to communicate with vendors, they insist that the
distributor handles the supply chain, and transaction processing infrastructure and course credit
provision.
 5. Distributors move you one step away from market signals:
With the use of technology, vendors now have an online visibility of sell out data from their
distributors. This benefits both vendor and distributor ensuring that the supply chain is running
while there is sufficient inventory to meet demand.

How the Distributor Model Works

Characteristics of IT Distribution:

1) It is a difficult business to get right. Suppliers could change their decision of using intermediaries
and could possibly deal directly with their end user without the need for a distribution channel.
2) Distribution businesses are fast-moving businesses consuming significant amounts of capital, or
people or both.

Distribution Business Model:

To understand the distributor’s business model, we need to look at their financial statements (Income
statements, Balance sheet).

Balance sheet – It is the summary of asset and liabilities of a business at any given time. Three
important numbers in a balance sheet are:

 Inventory – products held for resale

 Accounts Receivable – amounts due from customers for sales made on credit
 Accounts payable – amounts due to suppliers for products bought on credit

Inventory, Accounts Receivable, Accounts Payable together make up the working capital – capital
needed at any point in time to operate the business. Working capital is calculated by adding inventory
and accounts receivable and subtracting accounts payable.

Managing working capital:

Too little – distributor risks stock outs

Too much – cost of capital damages profitability of the businesses.

Income Statement – it is the summary of the distributor’s incomes and expenditures over a given
period.

Gross Profit – it is the difference between the price the distributor pays for its product (the cost of
sales) and the price it receives for them from its customers (sales). In distribution it is usually a very
small number between two very large ones, which explains why it is such an area of focus and the
subject of so much negotiation.

Distribution also must pay for all its overheads (business expenses not directly attributed to creating a
product or service e.g., utility bill, travel expenditure)

Operating Profit – it is the difference between what the distributor pays as overheads from gross profit.
Net profit – deducting the interest charge and tax from operating profit gives net profit.

Managing Distribution is a Balancing Act:

The balancing of profitability and working capital is the essence of the distributors business model. The
aim is to maximize margins and minimize working capital, without affecting the products that are
available for customers.

Margin Management – blend fast-moving, low margin products with slower-moving but higher margin
ones. 80:20 rule applies here i.e.,20% products make 80% volume or 20% of products account for 80%
of profits and distributor should know which 20% customers drive the bulk of their profits.

IT distributors make their cost more variable by outsourcing elements of infrastructure such as
warehouse, transport, call centres etc.

Working Capital Management – managing finite resources: money tied up in product A is not available
to stock product B, cash expected from Customer X is not available to extend credit to customer Y.

In times of growth distributor:

1- increase the working capital to match increased trading volumes or improve the cash-to-cash
cycle.
2- accelerating the working capital cycle

Margins & Profitability:

Gross Margin % = Sales – (Cost of Sales / Sales) X 100

Gross Margin is the difference between the price obtained from customers and the price paid to
suppliers. Gross Margin is the Gross Profit expressed as a percentage of sales.

Considerations while calculating Gross Margin

- Sales & cost of sales should exclude any sales taxes (e.g., VAT)
- Cost of sales should include all cost incurred getting the product for sale e.g., inbound shipping
- Cost of sales should include any work done on testing, configuration, assembly and packaging
- Discounts, rebates, and other price reductions from the vendor reduce cost of sales (therefore
increase gross margins)
- Shrinkage and obsolescence cost should be added to the cost of sales
- Discounts reduces sales therefore reduce gross margins.

Blended Margin% = (Gross Profit/Sales revenue) x 100%

Contribution Margin% = (Sales – Cost of Sales – Variable Costs)/(Sales) x 100%

Operating and Net Margins

Fixed cost tends to be related to infrastructure elements such as warehouses, storage racking, IT
systems, call centres, and payroll.

Two measures for Distributors:

1- Average order size

2- Average processing order cost

Cost efficiency can be improved through automation, up-selling and cross-selling.

Automation – use of technology to reduce human intervention.

Up Selling – persuading customer to purchase similar product with higher specifications and features
rather than going with the original choice.

Cross Selling – persuading customers to make an initial purchase and then recommending
complementary or additional products.

Operating Margin % = (Sales – Cost of Sales – Overhead costs)/(Sales) x 100

Net Margin % = (Sales – Cost of Sales – Overhead Cost – Interest)/(Sales) x 100

Working Capital
Working capital is the capital needed to fund the cash-to-cash cycle i.e., time taken from the point cash
leaves the business to purchase product from vendors to the point at which customers pay the invoice
for the product after the credit period. There are three components of working capital: inventory,
receivables, payables.

How quickly capital can be converted back into cash determines how much capital is needed so
measurement in this area focuses on converting financial amount into days: how many days vendor
allows the distributor before they pay for the products, how many days the products will be in
inventory, and how many days the customer take to settle their debts.

Vendor Credit:
Days Payable Outstanding (DPO) – time taken to pay supplier or supplier days or creditor days. It shows
the accounts payable as a proportion of cost of goods, then expressed as a fraction of the year.

DPO = (Accounts payable/Cost of Sales) x 365 days

DPO = ($1,550/$18,308) x 365 = 31 days

Inventory:

Days Inventory Outstanding (DIO) - After purchase, the product stays in the inventory of the distributor
waiting to be sold to customers. The time the product stays in inventory is known as Days Inventory
Outstanding (DIO).

DIO = (Inventory/Cost of Sales) x 365 days

DIO = ($1408/$18308) x 365 = 28 days

If inventory days are too low, distributor risks a stockout, back order or lost sale.

Customer Credit:

Days Sales Outstanding (DSO) – Once products are sold to customers, they leave inventory. For cash
sale, it is the end of the cycle. The time customers take to pay for the products is known as Days Sales
Outstanding.

DSO = (Accounts Receivable/Sales) x 365 days

DSO = ($1897/$19316) x 365 days = 36 days it means the customer of the distributor is taking 36 days to
pay for their product to their distributor.

Putting all these three elements back together gives us the working capital = DIO + DSO – DPO

33 = 28 + 26 – 31

It means it takes 31 days for the distributor to cycle its cash through working capital and back into cash.

The faster the working capital turns, the less cash is needed to finance the operation of the business.

Productivity Measures:
Gross Margin Return on Inventory Investment (GMROII): it is used to generate a portfolio view of the
business or a part of the business.

GMROII = (Gross Profit/Inventory) = (Gross Profit /Sales) x (Sales/Inventory)

Earn x Turn
Contribution Margin Return on Inventory Investment (CMROII) =

Contribution Profit/Inventory = (Contribution Profit/Sales) x (Sales/Inventory)

Earn x Turn

Winners are high-margin, high-turn SKUs. Focus is on establishing why they perform so well and on
maintaining their performance.

Traffic Builders products with high turn but low contribution – tend to be strong brands which
customers buy in volumes, but which distributors need to price aggressively to establish price
positioning and maintain their competitiveness.

Sleepers have high contribution potential for small increments in sales. Some maybe products early in
the lifecycle, which will respond positively to sales stimulus. =

Losers are those who drag down contribution and turn slowly. These SKUs need to be reviewed regularly
to take action to address poor performance.

GMROWC (Gross Margin Return on Working Capital) – how many gross profit dollars are generated for
each $1 invested in working capital.
GMROWC = Gross Profit/Working Capital = (Gross Profit/ Sales) x (Sales/Working Capital)

CMROWC = Contribution Profit/Working Capital = (Contribution Profit/Sales) x (Sales/Working Capital)

Sustainability Measures
Distributors measure the contribution of their vendor in the business. Though it varies from distributor
to distributor, but the key ratios are:

RONA (Return on Net Asset) – measures the return on assets employed in the business so it is useful
when comparing distributor business units, subsidiaries or divisions.

RONA = (Operation Profit)/(Cash + Working Capital + Fixed Assets)

ROCE (Return on Capital Employed) - measures the return on all the capital employed in the business.
Used by investors to compare investment in the distributor with other opportunities.

ROCE = (Net Profit After Tax) / (Total Assets-Noninterest bearing liabilities)

ROIC (Return on Invested Capital) - focuses on the operating components of the business model and
relates them to the relevant portion of shareholders’ funds.

ROIC = Operating Profit after Tax / Invested Capital

= (Net Profit after Tax + Interest) / (Total Assets – Excess Cash – Non interested bearing current
liabilities)

Value Creation – also known as Economic profit or Economic Value Add (EVA) – aim is to make profit in
excess of the cost of the capital they used to make profit.

Value Creation VC = (Operating Profit after Tax) – (Invested Capital x Weighted Average Cost of Capital)

Managing Growth
Vendors can evaluate how well a distributor can finance growth using the resources that the distributor
have. The potential growth capacity can be calculated by the following formula:

Potential Growth Capacity % = Net Margin after Tax % x Working Capital Turn
How to Sell to Distributor as a Vendor
Vendors plan on having a distributor considering the below aspects:

1. Distributor are giving vendors a route to the market and are promoting the products to the
customers on behalf of the vendor
2. Most successful sales operate through partnerships that deliver win-win results for both parties.

If you are a market leader

1. Focus on gross profit dollars

2. Focus on contribution margin (% and $)
3. Shift the focus from return on sales (margins of all types) to return on assets/capital

If you are a smaller vendor or a new entrant in a category

1. Focus on gross margin%

2. Emphasize growth, especially %
3. Highlights connect/ attach opportunities

The Value of Distribution to Vendor

The key elements of a distributor’s value to a vendor are given below:

 Market Access, Reach, Coverage, Channel Building

Distributors offer the ability for vendors to reach a large part of the target market segment.
They have established trading relationship with a good number of partners in the market and
have the right resources to engage with partners of varying size. Most vendors do not have the
resources to work directly with the vendors, so they look up to the distributor for product
support and compatibility.

 Speed to Market for Brands and New Products

For vendors, it would take a lot of time to do the research, select and appoint the right partners.
For distributors, it takes only a few days to provide the right partner for the vendor based on the
criteria that the vendor has set. This is saving a lot of time for the vendor.

 Economic Efficiency
The distributor is geared up to serve many partners at very low cost because it can reduce the
cost of operation by handling large volumes of product from several vendors. These economies
of scale cannot be reached by one vendor and the distributor provides the below mentioned
economic benefits to their vendors:
- Lower cost to serve - cost of warehousing, order processing, inventory logistics, product
support, account management, warranty claims etc are all reduced when outsourced to a
distributor.
- Variable cost, not fixed or capital investment – by going through distributors, all the operating
costs become directly related to unit volumes meaning they are fully variable.
- Balance sheet effectiveness, minimize working capital –
- Risk Minimization – Distributors have established partner trading relationships, credit histories,
knowledge of the people in the sector and understand the strength and weakness of their
partner base. All these insights enable the vendor to avoid potential bad debts, frauds etc.