Central perks

Centralised stocking cuts costs, but the case for in-country warehouses is gaining ground in the Middle East IT distribution channel. Senior figures at the region's top players line up to discuss the optimum distribution model.

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By  Stuart Wilson Published  June 28, 2004

Are you local?|~|distichammas.jpg|~|Jacques Chammas, managing director at Mindware|~|Opening a warehouse in every major city across the Middle East and stuffing it full of IT stock would make a distributor very attractive to local resellers. Some major vendors would love to see their distributors pursuing this path. Unfortunately, given the slim margins of IT distribution, this model is just not practical. A pressing need to keep operating costs under control means distributors are striving to find the perfect blended model; combining the efficiency of centralised stocking points with the benefits of building local presence. There are no hard and fast rules regarding the best model to use when distributors decide whether to centralise their stocking points or start opening in-country warehouses. In the Middle East a whole host of factors influence this decision-making process. Some products, such as PCs, lend themselves to having a readily available local stock, while others, such as components, demand the efficiency benefits of being held centrally. When you consider the Middle East’s powerful re-export channel, the complex duty and customs systems currently in place, the impact of grey market product and the barriers to setting up local operations in some countries, it is plain to see why some distributors are wary of setting up an extensive network of local warehouses and offices. Adnan Al-Falah, Tech Data Middle East’s new managing director, is in no doubt that combining the best of both worlds is the right route to take for now: “It is about evolving a mixture of the two where you see fit and driving efficiency in whichever model you choose. We would like to see vendors move closer towards evolving this model and we’re driving them to eventually drop ship into our hubs. This would save us costs and allow us to invest in other parts of the business.” Tech Data currently operates three warehouses in the region: one in Bahrain, one in Jordan and its main facility in Jebel Ali, UAE. “If the logistics challenges were straightforward, country boundaries open and you did not have customs duties and regulations, it would make sense to have stock in central areas and distribute across the countries,” adds Al-Falah. “We have customs, we have duties and we have paperwork. That is why a true centralised model is not efficient today.” These reasons for moving stock into specific countries are not in question, but as soon as distributors go down this path they can expose themselves to greater levels of risk. Almasa IT Distribution has taken the concept of centralised distribution to the extreme. It envisages serving the Europe, Middle East and Africa (EMEA) region from three stocking hubs: Dubai, Amsterdam and Morocco. Freight forwarders will be used to deliver in country after picking up from the regional hubs. Mehdi Amjad, group managing director at Almasa, explains the logic: “The duty structure is very complex in Saudi Arabia and other places, plus we have to contend with product ageing. So Almasa has pursued the idea of centralised warehousing…this is not perfect compared to holding true local stock, but the advantages of this model in the Middle East today outweigh the in-stock in-country model. With that model you might bring stock into a country, be stuck with it for two months and find the customer can get it at a better price than you offer.” Aptec currently has operations in multiple locations across the Middle East and Africa including the UAE, Saudi Arabia, Egypt, Lebanon, Turkey, Kuwait, Uzbekistan, Kenya and Nigeria. The extent of activities run out of each location is decided on a case-by-case basis. “Not every location is a fully-fledged operation with warehousing, accounting and sales operations,” explains Dr Ali Baghdady, president and CEO at Aptec. “In some cases we only have a sales entity in country with warehousing and shipping operated from a location nearby. In Nigeria and Kenya we only have a sales operation. While we have warehousing and sales operations in Kuwait, all accounting and invoicing is handled out of Dubai. The decision on whether or not to run a full operation is determined by many factors including the size of the market, safety concerns and also security.” ||**||'Value-added logistics'|~|distiadnan.jpg|~|Adnan Al-Falah, managing director at Tech Data Middle East|~|Taking stock into a particular country can be a risky business for a distributor. The Middle East IT channel still has its fair share of traders and re-exporters buying in bulk out of Jebel Ali and moving product into other countries. The fact that some of these companies avoid the paperwork and costs involved in moving kit from country-to-country is the worst kept secret in the Middle East IT channel. Some of the distributors that play by the rules jokily refer to their less scrupulous channel colleagues as ‘value-added logistics’ providers. Joking aside though, it is this movement of product that can leave authorised in-country distributors holding stock they cannot sell. Unable to move it out of the country, these products end up being written off and dumped on the market at low prices. Dr Baghdady explains: “Some products can be undermined in local markets because of the re-export channel. Some products that tend to be small in size, such as components, memory and hard drives, can be smuggled and this is the big threat to local operators.” It is the re-export channel and the movement of goods between companies and countries at a second tier channel level that frustrates attempts by vendors and first-tier distributors to create a clearly defined two-tier channel in the Middle East channel — one that would allow them to build closer links to the resellers serving end-users directly, sell to them and support them through local stocking points. So long as distributors keep selling to these players out of Jebel Ali, the impediment to building local touch remains. “Aptec is against supplying anybody using methods to avoid paying customs and duty,” says Dr Baghdady. “When we sell centrally from Jebel Ali we ensure it is not to one of these companies. We have our own blacklist of smugglers, dodgers and bad payers.” Redington operates a similar policy and keeps a close eye on where customers buying from Jebel Ali are selling. With warehouses in Riyadh, Cairo and Dubai, and plans to open a facility in Kuwait next, Redington does not want its Jebel Ali customers undermining its investment in local stocking points. It is a similar story at Tech Data, which refuses to sell to certain companies and will only sell popular products, or those in short supply, to reputable resellers. “By doing this we will move away from the trader mentality where someone from Saudi Arabia comes to Dubai, does a deal in Jebel Ali, takes the product out of Jebel Ali, ships it into Saudi and then sells to resellers who take it to end-users,” explains Al-Falah. “That is the inefficiency of the model that Tech Data is trying to take out of the system by investing in places like Bahrain and Jordan to serve the small and medium sized resellers direct.” Eroding the role of sub-distributors and brokers in the Middle East IT channel would bring greater predictability and stability to the IT market. By effectively removing one tier of the IT channel the route-to-market between vendor and end-user is shortened allowing better management of stock availability and the opportunity to reduce inventory levels. A classic two-tier model involving distributor selling to reseller selling to end-user is the end game desired by many. The big names in distribution believe this would benefit second tier resellers. “They need a supplier who can sell them what they need, not what he bought,” says Al-Falah. “The trader mentality is, ‘Let me go and buy something, bring it here and exploit systems inefficiency and then I will find my buyers’. This is not really distribution. What we do is work with the customers, segment them, help them focus on the market they are addressing and work with them to try and create the activities, marketing and push and pull message the vendors want. So when the customer wants a solution to their problem, the reseller knows where to go to get it. This is not like doing a deal with the trader next door because he happens to have 3,000 widgets that he is trying to get rid of.” ||**||Customer breadth|~|distimehdi.jpg|~|Mehdi Amjad, group managing director at Almasa IT Distribution|~|Large resellers re-exporting to other countries out of Dubai typically have to consolidate orders to create a large enough economy of scale to justify the logistics costs involved. While a few players are capable of moving these volumes to serve their own needs, others are taking goods in-country with only a vague notion that a viable market exists to quickly sell them on to. This problem is only one of a series of factors that major distributors contend with when examining where to locate stocking points in the region. “I believe that every country deserves local stock,” says Jacques Chammas, managing director at Mindware. “But there are some legal procedures to deal with in this region such as finding local sponsors. We also have to look at the size of the economies. Saudi Arabia justifies holding local stock; the Gulf countries justify holding stock in Dubai and Lebanon justifies stock to serve Jordan, the internal market and Iraq in the future. Mindware now has a representative office in Egypt because of the size of the market. But because of the financial situation and currency devaluation we do not yet have a warehouse there.” One of the major buzzwords being pumped out by vendors to their distributors is customer breadth — a term implicitly linked to local stocking points. Pushing distributors to go in-country and develop direct relationships with the local resellers offers vendors greater predictability in the supply chain, less grey market headaches and better visibility of the end-user market. For Redington, local stock offers the potential to supply partners using a just-in-time delivery model. This not only makes it easier for the resellers, but also healthier for the distributor’s risk exposure. Instead of exposing himself to large credit lines with a small number of resellers, the distributor is instead running small credit lines with a much larger customer base. “You cannot have customer breadth unless you have local stock,” says Chammas. “It is important to make sure the breadth is healthy as well. Mindware has some 4,000 resellers on its books and we work with around 600 on a regular basis. Of this 600, about a third are big customers.” “Vendors have realized they need to invest in the Middle East on an ongoing basis not on a one-off basis,” adds Al-Falah. “Even the vendors were looking in with a trader mentality before. They have had to change and now we are engaged in pushing for customer breadth with every single vendor we work with. Tech Data programmes, rebates and promotions are all based on vendors asking us to touch as many resellers as possible and delivering product in-territory.” While customer breadth and local stocking points are hot topics in the channel, it is important to realise that a product dimension also exists in the market. Some IT products lend themselves well to local distribution infrastructure, while others — by virtue of their pricing volatility and high volume purchases — still demand the efficiencies of centralisation. “Components is a very centralised model,” says Dr Baghdady at Aptec. “All the product is purchased centrally and is supplied to the divisions within the subsidiaries very rapidly. It is almost run like a trading desk on a stock exchange. Everything is monitored centrally including what is in stock, how it is sold and how quickly it is turned around.” ||**||Lean and mean|~|distithomas.jpg|~|Mathew Thomas, general manager sales at Redington Gulf|~|The ability to operate a lean and mean centralised distribution model for components has also spawned the emergence of focused specialists in this sector such as eSys. Pavan Gupta, general manager at eSys Middle East, splits vendors into two main categories: ‘air’ vendors that fly in high value key components such as hard drives, memory and CPUs, and ‘sea’ vendors shipping in products with more stable pricing such as floppy drives, casings and monitors. “Air vendors definitely do not want too many stocking points because inventory management is critical to them,” says Gupta. “They need a distributor that can effectively manage the inventory and hence sell at a lower cost. If a hard drive vendor says it wants 20 stocking points in the Middle East, then it is not for us. In contrast, sea vendors selling products where prices do not change as much want more and more stocking points. At the end of the day it is all about cost. Any distributor can hold stock at 20 locations but it means extra cost that has to be absorbed by the customer. Each individual vendor has to find the optimum solution.” The dynamics of the components market allow eSys to base its entire Middle East operation out of Jebel Ali and sell to a targeted customer base offering deep penetration of the fragmented national markets across the region. “This regional operation serves 45 countries so we find a suitable customer in each country to extend our grip on the market,” adds Gupta. “Our model is to focus country-by-country and pick up customers with the muscle to target local resellers and support them. I don’t like to call them sub-distributors but prefer the terms wholesalers or importers.” This model works well for the components channel in the Middle East. But it is vital that distributors such as eSys, and its vendor partners, ensure that the ‘wholesalers’ are actually moving the product into pre-determined countries and serving the local resell channel efficiently. Vendors have a vital role to play in driving the channel forward and giving major distributors the incentives and market conditions to justify the development of local stocking points. This means clamping down on distributors and resellers feeding the grey market by supplying product for cross-border transactions that undermine their authorised channels. Long-term, such actions will also play a role in driving the eventual consolidation of the channel landscape in the Middle East. “It will happen if there is a concerted push to do the right thing and the whole environment changes,” concludes Al-Falah. “Vendors can play a major part by consolidating their channel and consistently approaching the market with high standards of business, behaviour and reporting. Vendors cannot just say I sold it to a distributor, it is their problem.” The wisdom of local stocking points depends heavily on whether second tier resellers choose to buy on price or look to build a quality link with a local distributor. Mathew Thomas, general manager sales at Redington Gulf, says: “The customer who can wait for next day delivery from a distributor working remotely will also wait for four days to get product from Jebel Ali. The whole idea of local stock is to offer same day delivery. Redington has three facilities in Saudi Arabia and offers same day delivery in Riyadh and next day for the rest of the Kingdom.” Building a local distribution infrastructure adds a great deal to operating costs and major distributors are understandably cautious. There are massive benefits to local stocking points: closer links to true second tier resellers serving end-users, the erosion of the role of sub-distributors and brokers, the opportunity to hold less inventory in the channel and an improved ability to control the flow of grey market product. For now, vendors and major distributors alike appear to be stuck in the grip of a complicated hybrid channel model. Both want to go in-country but know they cannot afford to miss out on the re-export business being done out of Jebel Ali. Trying to run these two models in parallel causes administrative headaches and makes channel management a complex affair. Changing the status quo looks like being a long and drawn out affair. Vendors and major distributors need to open up to each other and work together to get a better understanding of the mechanics of the second tier reseller level. Without this knowledge transfer and a common agenda, the channel shenanigans that are part and parcel of the Middle East IT supply chain will continue unabated. ||**||

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