Volume control

Channel talks volume distribution with three of the region's largest distributors

Tags: Emitac GroupMindwareUnatrac IT Distribution (unatrac-itd.com/index.html)
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Volume control Mario Gay, Mindware.
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By  Andrew Seymour Published  January 6, 2011

It’s universally accepted that to survive in the volume distribution business you have got to be highly efficient at what you do. With that in mind, we sat down with the GMs of three of the Middle East’s largest IT distributors (Emitac’s Patrick Mulligan, Mindware’s Mario Gay and Unatrac’s Ismail Abdel Aziz) to ask what else it takes to prosper in a field where few dare to tread.

Channel: Successful volume distributors have always insisted that size and economies of scale are needed to survive in this business. Is that still the case today?

Ismail Abdel Aziz: You should have sufficient stock available, as well as a list of active partners that are continuously buying from you and credit insurance that covers the services you offer the market. This is the key to success for an authorised distributor — not a small company importing products from abroad to redistribute locally or regionally.

Mario Gay: If your business model is purely based on volume, economies of scales are a must in order to reduce your fix cost and to have an efficient cost structure.

Patrick Mulligan: Yes, it is true. Margins are under pressure like never before and many vendors wish to deal with a fewer number of distributors enjoying a broader reach into regional markets.

Channel: What sort of logistics and warehousing infrastructure do you need to be a volume distributor these days?

Mario Gay: Logistics is still an important function, but it can also be outsourced with marginal impact on the bottom line. It’s a difficult decision to take because it means losing visibility on a key internal function of the company. However, the future will mainly be one of centralised warehouses with many small satellites spread across the territories. In this context, it is important to understand whether a third-party logistics solution can be more efficient and provide a faster response.

Patrick Mulligan: You need to have a flexible and cost-competitive infrastructure to support the physical distribution of goods, but it is by no means clear that this needs to be an ‘in-house’ capability. Success in distribution requires capabilities and expertise in many other areas, such as cost of finance, credit management, forecast accuracy, buying expertise and customer retention.

Ismail Abdel Aziz: There is a need for a warehouse equipped with tools to enable the delivery of orders on time and so the distributor needs to have a logistics support team which is fully aware of the market and customs systems in different countries. They must be familiar with the shipping companies and have strong relationships with them to get the best prices.

Channel: Resellers often buy from volume distributors because they offer a wide selection of brands. How many brands or products should a volume distributor be offering and what considerations should they be giving to the type of vendors they work with?

Patrick Mulligan: We feel that it doesn’t really matter how many brands we have as long as we provide a meaningful product mix that includes networking, hardware, components and business solutions, which will differentiate us from the competition.

Ismail Abdel Aziz: The diversity of brands offered by the distributor is undoubtedly a good thing, but I recommend that distributors are careful and work with manufacturers which are able to provide sufficient support. We do not work with a manufacturer that does not provide service and warranty for the products we sell. If a distributor does do that then it would bring down the work they do and affect their sales.

Mario Gay: Profitable distribution should allow for a mixture of both high volume-lower margin and lower volume-higher margin products to ensure the coverage of fixed operational costs as well as the delivery of net margin.

Channel: Volume distributors are also known for their ability to provide credit to the reseller market. How are you managing this side of the business given the obvious financial and credit risks that now exist in the channel?

Ismail Abdel Aziz: When we are dealing with any business partner in the channel, we consider the end-user they are selling to. Working with a government sector-focused company, for example, ensures we get the payments on time, whereas if we found out that a company was selling to non-guaranteed or non-trustworthy parties then it would create reason for concern. There is no doubt that offering [credit] facilities remains essential and extremely important, but it cannot be at the expense of a distributor’s profit.

Mario Gay: This is indeed a very tricky part of our business and the recent economic crisis has created a significant climate of fear, uncertainty and doubt when it comes to credit lines. A large part of the business needs to be insured and insurance companies have drastically reduced the limits, meaning the distributors now have to carefully identify and measure risk in that area. It is now almost like managing a ‘portfolio’ of various risk levels and then trying to make sound management decisions from that.

Patrick Mulligan: The short answer is carefully. The cost of insurance has increased significantly and the level of coverage has reduced, so the burden on distributors has increased. Greater due diligence, information sharing and a more structured management of risk are the key operational areas of focus.

Channel: Can a volume distributor survive on pure transactional margins these days? Or is it imperative to provide supplementary services?

Mario Gay: You can survive on pure transactional business if you scale your revenue to a point where it is viable to cover your expenses and make a profit. But that point is quite high — at least US$200m a year if you want to turn some profit. So every distributor in this business has only two options: increase the top line or start looking at value added products and services. Even a growing market such as the Middle East has its limits, so a lot of people look at the second option. Software products associated with specific support or services are a good way to do this, for example.

Patrick Mulligan: Survival on transactional margins is possible, but it is neither easy nor pleasing. In order to provide an acceptable level of return on investment, growth is key. The development of new markets and new vendors, as well as diversification into new business areas, is essential to the future health of the business.

Channel: What capabilities will be required to survive in the volume distribution channel going forward?

Ismail Abdel Aziz: Having strong financial capabilities is a must, as well as a diversity of products and specifications that must be available at the warehouse. Distributors still need a qualified sales team that is familiar with the products they are selling and has a robust relationship with a strong list of targeted partners.

Mario Gay: Processes need to be standardised and made simple, but at the same time ‘bullet-proof’. The ability to manage a large database of customers, segment them quickly and provide an efficient response is becoming even more strategic than a strong logistics structure capable of moving a large amount of products.

Patrick Mulligan: To start with, you need the best people, a strong financial base and an excellent enterprise management capability. Then you need a loyal customer channel and the skills to defend that.

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