By : Jim Pinto,
By : Jim Pinto,
Controls Intelligence & Plant Systems Report, March 2000
What is it?Disintermediation is the elimination of the intermediary in a business process whose cost exceeds the value they provide.
In the post-internet world, businesses such as real-estate agents, stockbrokers and travel agents are disappearing rapidly. The information and services they provide are now freely available at minimal cost.
Let's review how and where disintermediation affects the industrial controls business and, with a positive perspective, how those most affected can "reintermediate" - recover from getting disintermediated.
Who are the Intermediaries?In a sense, we (companies and individuals) are all intermediaries - middlemen between our suppliers and our end-user customers. We add value, which is measured by the price (and profit) paid by the customer. The manufacturer adds marketing (selection of customers and products), engineering (design knowledge and resources), manufacturing (component assembly into finished products) and inventory (availability).
The industrial automation intermediaries are the sales channels - the links between the manufacturer and the customers, providing the coordination, selection, communication and exchange functions. It must be noted here that this reference to "sales channels" includes not only independent Sales Representatives and Distributors, but also people in larger organizations that do the sales and support functions.
The Reasons WhyProblems arise when customers demand competitive price reductions, forcing analysis of costs of all the links in the chain. As direct relationships develop (between manufacturer and customer), the value of the initial sales-link diminishes. Higher order quantities and fast-changing variability of requirements are cost and knowledge intensive, and the original intermediary has little to contribute. To become more competitive, the business is forced to become flatter - more disintermediated.
In the past, the independent Sales Rep did not invest in local "stock", but merely acted as the company "representative" and was paid 10-20% "commission", usually covering an exclusive territory. Distributors, on the other hand, stocked products to accommodate fast delivery and purchased at a "discount" - typically 35%, but often as much as 45%. The Sales Rep looked after the technical information exchange, while the Distributor was responsible for delivery and financial exchange. And, the Sales Rep usually got a commission on Distributor sales, to accommodate their knowledge contribution and exclusivity status.
High-tech Distributors then came on the scene, with no need for the knowledge intermediary. In response, the Stocking Rep. emerged and the two types of intermediaries were virtually the same, the only difference being the level of exclusivity and discounts. The whole thing became convoluted and is perpetuated today simply as a relic of the past.
The problem is that typical Reps and Distributors tend to skim and do not penetrate large segments of fast-changing available markets. Also, when key Customers move to larger volumes (and discounts) and product variability (which demands supplier-direct interaction) the need for the intermediary is minimized.
The emergence of the Internet (easy information dissemination), effective email communications (directly between customer and supplier) and e-commerce (easy product selection and purchase) exacerbate this already tenuous situation. The position of the intermediary is untenable and disintermediation occurs.
If you are a Sales Rep or Distributor, or support staff within a manufacturer, you must be feeling the pressure. At ISA/99 in Philadelphia, many of the attendees at discussions on this topic were petrified, like deer in the headlights of an approaching locomotive.
Who are the prime targets?Is this disintermediation of sales and distribution channels inevitable? What can be done to reintermediate - not only survive, but thrive in the new environment. My advice: understand the causes and effects, and adapt to the changes.
How can you tell if you are ripe for disintermediation? Are your customers computer literate buyers? Are your products and systems assembled from commodity components with a non-asset-intensive conversion process? Are your products and services of high value? Can the products be shipped overnight, by air? Take a deep look at how you operate, what you sell and how you sell. Determine whether or not your position in the supply chain could be eliminated with networked Internet connections and appropriate database-sharing software between your suppliers and your customers.
The prime targets of disintermediation are those distributors who still believe that their core competency and number-one selling technique is: "I've got it in stock!" It doesn't matter on whose shelf the product resides anymore; what really matters is making the transaction seamless and making sure the customer has access to the product. Accessibility of the product is not the role of today's distributors. Instead, to avoid disintermediation, a smart distributors must switch its approach to more consultative selling and a focus on applications engineering and systems design expertise.
Re-intermediationMove towards products that are not stockable commodities, that need application-specific knowledge before they can be installed correctly; that need service, calibration, maintenance and upgrade. Work with and invest in knowledge-intensive businesses like Systems Integrators. This is a tough choice - because you probably sell to many of them already and they may compete with each other. But, that is a choice that can me made intelligently - you can align with SIs that are complementary, with different specialties and industry-focus.
Intermediaries must become "Infomediaries"Find ways of adding value to your customers' businesses that none of your competitors can, through your engineering and design abilities. You have the opportunity to use to your advantage the new technology many distributors see as a threat. Share your database files and knowledge with your suppliers and customers - this will give you a closer relationship and competitive edge. Don't push after the specs are out and everyone is bidding; adopt a pull-order management system that involves customers and suppliers in the design and specifications.
Move away from price-sensitive commodities and markets. Move strongly towards knowledge and relationship management. Think in terms of creative programs that will help you to become an extension of your customers' technical staff. If each of your customers sees you as a valuable resource, then there is no way you can be removed from the supply chain. Your customers simply won't let it happen.
If you are being constantly hassled about price, then that is merely a signal that your relationship has deteriorated and is in need of a tune up. In spite of all your efforts, if a particular customer (or supplier) is still harping on price, then you must boldly abandon them to the arms of your competitors - let them fight the rat race and dog-eat-dog syndrome. Like all threatened species, they will either adapt to new circumstances, or perish.
Building RelationshipsTake a look at how booksellers are thriving in the days of on-line discount sales - not merely by selling a book they have in stock, but by offering cinnamon rolls and donuts and café-latte and a comfortable couch to sit and browse. Find things that make your customers - and your suppliers - feel warm and fuzzy about your relationship. Do regular training sessions, early-morning coffee-and-donut software demonstrations, lunch-and-learn discussions on useful topics. Organize regular technology seminars and charge an entry-fee - you'll be pleasantly surprised how many customers are happy to pay for the value you provide. Develop warm relationships and stimulate your business.
Plenty of room for winners....It remains to be seen whether or not the companies that are already disintermediating will be successful. Few can afford to replace their rep/distributor channels completely. There is plenty of room at the top for good relationships - and for winners!
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