Despite often being labeled �middlemen,� dealers play a key role in the home building industry. But to profit and succeed you need to clearly define and follow your company's role and implement sound strategies and services.
It seems that dealers and distributors tend to come up in economic conversation whenever the subject of “getting rid of the middleman” surfaces. With a sales value of $2.8 trillion in the U.S. economy alone, we know distribution remains big, but it still gets less attention than manufacturing or retailing in management journals. For example, Fortune's 2003 feature on “Global All-Stars” didn't include a category for distributors or dealers.
Yet despite this lack of attention, we know this: Whoever thought they were “getting rid of the middleman” failed to do a very good job. Why is this true in home building? Dealers and distributors play an essential role in the fragmented, complex home building supply chain. Considering this proposition, I'm using this column to set the stage for a series of future articles that will focus on strategies for building a successful distribution business in the dynamic home building industry. It is quite possible to remain a profitable, growing dealer or distributor despite the sometimes fierce pressures from manufacturers, larger end-customer builders, and competitors. But it takes more than size, hard work, a sales campaign, or even deep supplier relationships.
Rather, success will come from focusing on one of three distinct strategic roles for dealers or distributors, and providing new services to customers and suppliers by leveraging the Internet and using innovative concepts of collaboration and coordination.
Luis F. Solis, President/Managing partner Symbius Corp., Boulder, Colo.
Courtesy Symbius Corp.
Distributors are favored in industries where upstream and/or downstream fragmentation exists among their suppliers and customers. The insertion of a distributor between suppliers and customers reduces the number of transactions and interactions from A x B to A + B (where A equals the manufacturers and B equals the end-customers such as contractors or builders) and thus increases the size of the average business transaction. The overall average transaction costs decrease because fewer transactions are handled with more volume. The distributor brings other benefits, as well, such as fewer deliveries and one-stop shopping. The greater the industry fragmentation among product suppliers and trades, the greater the value of the traditional distributor or dealer role. Despite the various industry trends, I see no measurable reduction in the fragmentation we must deal with to build homes. This is good for all of you.
High product variety is favorable to distributors. Competent operators have the skills and systems to handle tens, or in some cases hundreds, of thousands of stock items. The greater the variety of products and information required by the distributor's customers, the greater the attractiveness of the “one-stop-shop” offering of the distributor. Fortunately for dealers and distributors, increasing product proliferation is a major trend in production home building. If anything, manufacturers are refusing to drop lines and will continue to add more.
Growth markets for new products are not necessarily the most attractive opportunities for distributors. Distributors' optimum timing can occur later in the product/industry life cycle by promoting existing products to new customer bases. Presently, dealers or distributors still enjoy favorable home building industry conditions because new trade contractor and builder segments are emerging, product variations are becoming more numerous, and housing production is seeing no trend of slowing down.
In short, the “middleman” is here to stay in home building because supplier, trade contractor, and builder fragmentation remains high, a wide variety of products and information are required to build homes, and new segments of potential customers are emerging that open up opportunities for dealers or distributors to add value in the supply chain. —Symbius Corp. (www.symbius.com) is a leading supply chain management consulting firm for the home building industry. The second installment in this series, appearing in June, will focus on three business models that dealers and distributors can use to improve business value.