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Channel Middle East asked routes-to-market expert Julian Dent to explain the business mechanisms that distributors must understand and utilise to make it through these challenging times in one piece.

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By  Julian Pletts Published  April 15, 2009

Try as we might, nobody has the answer to how long the financial crisis will persist, nor what lasting effects it will have on the region's technology channel. But it is clear that in order to survive, IT distributors need to have their wits about them. Channel Middle East asked routes-to-market expert Julian Dent to explain the business mechanisms that distributors must understand and utilise to make it through these challenging times in one piece.

You are working six days a week all day and night. The main vendor on your books is a well-known brand that commands the attention of end-users and delivers an acceptable volume of business. Your salesman has the gift of the gab and customers are willing to place orders. Then why - you might find yourself pondering upon review of your quarterly results - is your business not marching ahead as emphatically as it should be?

Well, one reason could be that you have not fully understood the true value of the vendors you work with, and with the economic situation as it is that is an oversight which distributors cannot afford to take lightly. Although the majority of IT wholesale companies in this region have not experienced a serious downturn before, the advice from experts and senior channel sources is that distributors have to protect their financial health first.

The challenge is distributors don’t really know the true cost of the capital in their business, so they don’t know if they are creating or destroying value. They tend to think any profit is good.

That does not necessarily mean slamming the door to reseller and retailer credit, but taking an analytical look at the financial contribution of each vendor partner. Now is not the time to be investing in brands that fail to adequately compensate your bottom line for the hard work carried out on a daily basis.

Julian Dent, chairman of VIA International - a trusted and established channel consultancy - believes many distributors lack an understanding of how to assess if a vendor is making an acceptable contribution to their balance sheet. But over the next two pages he reveals some simple steps that distributors in the region can take to measure this.

At a time when Middle East wholesalers must scrutinise every dollar that goes in and out of their business, now is the time to establish if a vendor really has a positive influence on the balance sheet or if it is actually dragging the operation down.

There have been instances of deadlock in the channel between what distributors are willing to offer in terms of credit and what resellers can work with. What should distributors do when this occurs?

That is a really tough one. It really depends who the reseller's customer is and if they are going to get stretched. They need to have a properly structured balance sheet to be able to do the business they are trying to do and up until now they haven't had to do that.

You will see a real shake-out and those resellers and dealers that have got strong balance sheets or are part of a group that is well-funded will endure. They are going to have to realise that they have to get serious about the business and properly finance it. Distributors have not been properly costing credit into the price of deals and now they are going to have to work that out.

Typically a distributor does basic work for its margin, availability, a bit of credit and a bit of pre- and post support. Right now, margins are probably approaching 6% and 7% and if sorting credit and paying for credit is tough then they are going to have to factor that into the price of the deal, or alternatively offer a cash price and a credit price. If they can't get the credit then they are going to go out of business. Distribution is capital intensive. If you don't have capital, you don't have business.

How can distributors improve their capital management?

You have to look at it by vendor first of all. For instance, up to now HP has been quite capital intensive for most distributors because they had prompt payment terms. You would buy your HP kit and if you paid in 14 days, you'd get roughly an extra 1.5% to 2% discount. Now, if you're trading on 6% margins, you can't afford not to have that. So you had to pay in 14 days.

Let's say that with all of your other vendors you are paying in 25 days. Your working capital investment in HP is 31 more trading days than all of the other vendors. So HP was locking up a lot of the working capital of distributors. They could do that with the power of the brand and the net result is, all of the other vendors end up subsidising the HP business.

How about making sure that they know what a vendor really does for them in terms of contribution margin?

Contribution margin is the profitability side of things and you need to properly understand what the manufacturer does for your profitability. So if you buy inventory at one price and sell it at another, you might make, say, a 5% margin. But most manufacturers provide some marketing funding that might be worth 1% or 2%. They might provide price protection, they might take back returns, it depends on who bears the warranty cost.

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