Be a Manufacturer or Distributor?

Many people want to manufacture their own products because of the perceived control it gives them. People also have an inherent want to create something. Being a distributor is also sometimes looked upon as you mostly have to deal with customers which could be at times taxing and irritating if you are not a people person. So who would you be?

The Samsung Model

It case you did not know Samsung started out as a trading company. Trading companies stock different products and sell them to their customers. They do not manufacture the products themselves. From a trading company Samsung was able to know what the Korean consumers wants. Now they are still growing but this time as a manufacturer also on a global consumer market basis.

Amazon Model

Who does not know the world famous company Amazon. It is the biggest distribution company in the world. It did not start as a big company at the onset and only sold books online. The company was so small during its early years that Jeff Bezos the CEO of Amazon and arguably the richest man in the world had to help his employees pack the books for delivery.

Times have changed and Amazon also began selling its own products through its distribution network and they are successful at it. For example sales of the Amazon Alexa virtual assistant device has been growing that they carve up the market with mega rival Apple which is also in the intelligent devices market.

This is not an all too uncommon strategy as big supermarket companies for example are known to stock their own products in their own shelves while also stocking up products from their suppliers. These are known as supermarket generic brands which competes mainly on a price level with the supermarket’s own suppliers/manufacturers.

It might seem unfair for distributors to sell their own products while also selling their supplier’s products since they are basically competing with their own suppliers. However under the law this is legal and it is left upon you to decide whether this practice is ethical from a business point of view.

Be a Distributor First Before Becoming a Manufacturer?

So is this the right strategy to do? Let us take a look at both the Manufacturing and Distribution Business to know the advantages and disadvantages of both of them.

Manufacturing:

The greatest advantage of manufacturing is that the manufacturer has almost total control of the product creation. If you are the manufacturer you can decide how the product should look like and how much you would price it. This is of course a total myth. A successful manufacturer has studied what their customers want and have tailored a product specifically for their target customers.

So manufacturers have no total control or almost no control in the way their product is made. Sure during the onset they largely dictate the terms of their products but for a manufacturer to continue to survive they should adapt their products based on what the customers dictate.

There would be distractors who would say that Apple dictates what they would sell to their customers. While on the outside Apple seems to dictate the terms of what they would sell to their customers we should take note that of late especially when the mobile phone market is becoming oversaturated they also now release mobile phones based on market demands and not what they want to dictate to their customers.

The greatest disadvantage of manufacturing is the high setup cost of creating the products. You need to buy expensive tools and equipment to create your products. You need to spend money on trial and error until you have a marketable product. Only companies with big pockets can afford such indulgences.

This is especially true now that China has become the factory of the world and is the hub of manufacturing globally. The years that the world has given China to nearly perfect its manufacturing capabilities means that unless you manufacture using China standards of low investment but high output then you are not likely to win in manufacturing.

I have worked in a manufacturing company myself. I can attest that not only do you have to contend with the high cost of starting and maintaining a manufacturing facility but you also have to contend with government regulations. This limits production capabilities but also increases your cost. You are also not also allowed by law to disturb your neighbors in any way.

Distribution:

The main advantage of distribution is that if you set your business right enough you can start it at a relatively low cost even though your products might be expensive by themselves. For example the concept of Dropshipping has made many once ordinary people rich. With this business setup a person does not need a manufacturing facility.

All that people need to do is market their products and the manufacturers they are dropshipping with will create the their products and send it to the customers themselves. The manufacturer can also customize the way they manufacture the product based on the specifications given to them by the dropshipper.

The greatest disadvantage of a distribution business however is that unlike manufacturing the distributor has to contend with much more logistics problems. They could be undelivered products, the wrong products being delivered, the product being delivered to the wrong address, scammers and so on.

Having worked in a distribution company one thing you would learn about distributing is that you are mostly dealing with the final customers of a product. This can be very taxing as unlike manufacturing where you have to deal mostly with business professionals you are now dealing with the final customers who are less understanding and more emotional which can be bad.

The Importance of Getting a Paying Customer First

In the preceding section I talked largely about the problems of manufacturing and how difficult it is to become a manufacturer. I have also talked about how being a distributor is easier to start but can be very taxing in terms of customer relations. But what is important is that they are both businesses and businesses need customers. This is the most important part.

I have been talking about Amazon, Apple and Samsung which are all mega companies in their own right. However this could be applied to small businesses.

For example we had a neighbors who were so enamored with the cupcake craze that they watched courses about the cupcake business and even bought themselves an expensive oven and new kitchen tools and equipment.

At first their business went well but after the cupcake craze died down so did their business. This is similar to big scale manufacturing where big companies invest in expensive buildings, equipments and workers trying to capitalize on a trend. When the trend died down so did their business. Millions of dollars worth of business investment down the drain.

This is where being a distributor works out to your advantage. By being a distributor you are logistically nearer to the final customers of the product and you would have a keener sense of what is happening to the market as compared to a manufacturer who are more concentrated in letting the manufacturing process go as smoothly as it can.

For example if you are involved in the sale of books and you sell many titles of books you get a retail level view of the market. You get to see how the customer interact with the books. You get to see it in the faces of the customers whether their eyes widen with excitement for the books they are reading or whether they yawn while reading the books on sale.

You can use this information in two ways. You can distribute the same type of books that excite customers so much so that they want to buy them or you can try to make the same books yourself. The usual way that companies proceed is to search from their suppliers the products that are selling more than the others.

Then after a while they would begin to manufacture the same products themselves and sell it to the same customers all the while copying the successful traits of the successful products their successful supplier/ manufacturer does. The distributor just saved on research and testing costs courtesy of their supplier/manufacturer.

While this sounds unethical from a business standpoint just take note that many people are doing this including normal people. For example the potato chips story. A cook at a restaurant invented the potato chips which are just very thin sliced potatoes cooked deep fried. Once people tasted it and found out it was delicious they made their own potato chips of which the original creator has not been able to stop.

The simple truth is people were paying to eat potato chips or trying to make them on their own. The clear issue is that there is demand for it and businesses knew that they would make good money from it. Even though businesspeople and everyday people know that they were taking another person’s creation without compensating the creator they still did what they wanted with the potato chip invention.

Amazon and Counterfeiting

While harsh this happens to a lot of manufacturers. The manufacturers spend a lot of financial resources in creating a marketable product. They additionally spend a lot of financial resources marketing it to consumers trying to make it successful. Once the product is commercially successful competitors duplicate their products without compensating them.

This is why distributing could be a less expensive way of entering an industry as against manufacturing. This is especially true today that there are many companies who are never punished or stopped by law from producing counterfeit or duplicate products. Just look at the counterfeiting situation online in Amazon.

There are many counterfeit products in Amazon and if Amazon were also the manufacturer of these products then it is very much assured that Amazon would lose billions of dollars in revenue from these criminal companies. However since Amazon is mainly a distributor of varied products rival companies may be able to copy its business model but not its distribution infrastructure.

A Distributor Can Be More Powerful than a Manufacturer

Speaking of Amazon again it has become so popular that many sellers/manufacturers not only derive a large portion of their income in the online platform but might not even survive without it. This is the power of Amazon as a distributor of almost everything now. A distributor also has the leeway of selecting which products to sell and can control the terms of distribution.

Let us go smaller for a while and look at the plight of farmers. Many farmers manufacture farm foods such as grains and meat products. They then sell their produce to supermarkets. If a supermarket decides that they would buy from one farmer over the other they can do so. They usually even dictate the price on how much they would buy the produce of the farmers.

For example the production of chicken in the US is largely controlled by only a handful of chicken distributors. These distributors dictate to the farmers many of the terms on raising the chickens which may not be to the farmer’s benefit. However the farmers cannot do much but to abide by the terms or risk losing their chicken raising business.

Even a small distributor can dictate a much bigger manufacturer. It just depends on leverage. For example an exclusive soda distributor in a building might reject a soda brand and favor another. There is nothing that the soda manufacturer can do because their influence does not exist in the building.

On the other hand the soda distributor in the building has considerable influence in the building. This could happen anywhere in any setting because the distributor has more contact with customers and have a better relation with them unlike the manufacturer.

Conclusion

We have reached an age when manufacturing has almost matured to a point where competing manufacturers have little differentiation with each other and competing products can be very similar to each other. Customers are spoiled in product choices and cannot really differentiate from one competing product to another.

Distribution is altogether different. Distributors can decide which competing products to promote over the others. They usually also have a lot of information today about the customers which can effectively match them with the products they are most likely to purchase thus influencing the customer purchasing behavior.

With the ever growing number of people spending more time purchasing online the power of the distributor over the manufacturer and also over the customer is increasing. This is because distributors like e-commerce platforms have become so integrated in the purchasing process that society mostly now cannot buy and sell without using them.