Collision Course

e-Business strains channel relations between manufacturers, distributors

Philadelphia  August 6, 2001  Manufacturers and distributors face strained channel relationships as e-business makes its way into marketing channels and supply chains, according to a new report sponsored by the National Association of Wholesaler-Distributors.

According to the report, "Facing the Forces of Change: Future Scenarios for Wholesale Distribution," manufacturers are still unsure whether the Internet can replace distributors as a way to provide product information to customers. By contrast, a majority of distributors believe the Internet will not replace their sales and communication functions.

"Manufacturers and distributors are at odds about the impact of e-business on their channel relationships," said the report's author, Adam Fein, Ph.D., president of Philadelphia-based Pembroke Consulting. "This will slow the adoption of e-business solutions because both groups are approaching technology investments with divergent perspectives."

Of the manufacturers surveyed, 56 percent expect online exchanges to generate loyal customers by 2006. Yet 60 percent of distributors express serious doubts about whether online exchanges will attract customers.

Meanwhile, 67 percent of manufacturers in the study said they thought distributors would stock less inventory and rely on other supply chain partners to drop-ship to customers for them by 2006, while 47 percent of distributors believe they will outsource logistics by 2006.

"The combination of existing channel relationships and Internet-resistant buyers has brought a new degree of market sobriety to e-business in the supply chain," said Fein. "Existing ways of doing business will remain the greatest competition for new supply chain technologies since customers and distributors are reluctant to disrupt supply systems that work.

"Successful distributors are expected to provide customers with online ordering, bidding and product information," he continued. "As the technological capabilities of distributors develop, manufacturers must make themselves more effective channel partners."

However, the study found that distributors are uncertain about whether their manufacturers will be investing in traditional channels during the next five years. Forty-four percent of distributors expect manufacturers to take significant measures to help them become more effective in the channel, while 34 percent believe manufacturers are unlikely to make such investments.

Manufacturers must carefully evaluate the business needs of their channel partners before implementing new technologies, the study concludes. However, current supply chain participants are unsure which channel will dominate because manufacturers have expanding choices of intermediaries to perform marketing channel functions.

"Many third-party logistics companies now have thriving materials-management businesses performing traditional wholesale distribution functions," noted Fein.

To help manufacturers and distributors with channel strategy planning, the report provides four distinct scenarios of the future of B2B distribution channels and supply chains. Each scenario models the supply chain and marketing channels under varying assumptions about the functions of intermediaries, the mix of online and off-line activity, customer adoption rates, manufacturer channel strategies and the compensation model for supply chain participants.

"Our scenario methodology provides four detailed viewpoints on the future," Fein said. "Executives can use this report to build sales and marketing strategies for the uncertain future."

The National Association of Wholesaler-Distributors (NAW) is a Washington, D.C.-based trade association that represents the wholesale distribution industry.