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Global Supply Chain
By Debra Dunn

The United States of America use to be the major manufacturer of goods distributed to the world. The USA was known worldwide and highly regarded for the large array of products made available for supply to the world. As that manufacturing is now expanding to countries throughout the world, the channels of distribution are changing and the role of the USA is changing as well.

The “channel of distribution” use to be much longer. Goods were manufactured and then distributed to a main distributor who basically had all control and distribution rights and decided who could be part of the distribution channel from there. It was common for 7 or more middlemen to be part of that channel before goods reached the end user. The number could be much higher.

With the addition of each middleman the price of the product increased as each middleman took their cut of profit. When the product reached the end user, the price could easily be many times the original cost. In fact markup margins were often set at 100% markup of cost at the final distributor level with a 50% markup being considered a low markup margin.

The channel of distribution is shortening with many manufacturers willing to connect directly with suppliers or even to service the end consumers themselves. As new manufacturers in countries throughout the world enter into the GSC (Global Supply Chain) the effect on channel distribution and on our economy is astronomic.

Those businesses connecting directly with the manufacturer need a much smaller profit margin to make a good profit. Some elect to add a large and comfortable margin; others add only the needed margins for a fair profit.

There are still many distributors that are passing the product down through multiple middlemen along the way. As each takes a cut of profit along that chain the product price increases. The end supplier is now in a precarious position of price competition with a direct supplier selling directly to the end user such as a front line distributor right under the manufacturer or the manufacturer themselves.

There was a very carefully controlled check and balance of distribution set up with the past distribution model utilized by our nation. Now those checks and balances are skewed creating chaos in the distribution process.

If front line distributors or the manufacturer priced items high for resale, then those distributors layers down in the distribution channel could actually compete in distribution price. As it is, there can be a huge discrepancy between the price a front line distributor can offer to the end user and what a distributor farther down the chain can offer to the end user. In fact many distributors are finding it almost impossible to compete in offering a product at a price that the end user will pay.

With the addition of eBay and other motivators to offer the best-discounted price, margins are being butchered. Only those with direct connections are getting the margins needed to thrive.

More and more products are entering the distribution channel and flooding our country with affordable, accessible, products easily obtained at low prices. This may sound like a dream come true for the consumer but it comes with a high price indeed. It is a nightmare for our economy and for the business owners trying to offer products for profit.

The USA is now part of the distribution channel for the products manufactured by other nations. They are the middleman and then distribute the goods on down the channel. As more direct distribution relationships are formed by business owners with foreign manufacturers more and more business owners will be cut out of the supply chain with the ultimate control resting in the hands of the manufacturers.

Large corporations who have the foresight to position themselves between foreign manufacturers and the end users will fare the best. They have the buying power to negotiate extremely low pricing on products and will grow in power as they soak up more and more supplier advantage. By muscling competitors out of the picture with the shear power of their channel position they will take a stronger and stronger stranglehold on all distribution of goods.

If you are starting to feel a little nervous as you are reading this article you should. What will take place in the future should the suppliers (foreign manufacturers) decide not to supply us with the goods we have become so accustomed to at such a low price? What will happen if the huge worldwide distributors choose to increase pricing? Without the competition of other distributors to keep pricing in check it could escalate out of control.

All it takes is a look at business patterns that have already been exercised to see the picture more clearly. Let’s take a look at an example. In some of my business affiliations I have been introduced to some of the tactics that small business owners have encountered.

More than one business owner has described the practice of a well-known company agreeing to purchase products from them on the condition that they have exclusive distribution rights.

The business owners are ecstatic that a big company will be the sole distributor of their products only to find that the company then sits on the product afterward and doesn’t sell it. After time has passed the business owner had no choice but to then sell the product to the large company at pennies on the dollar. They were muscled out of fair profit on their products in this manner, their businesses ruined. Take this example to a worldwide level and you can see the unavoidable outcome.

Large companies such as Wal-Mart have positioned themselves in the world market. Goods from multiple countries (10 currently) flow through them and they also buy up local goods in each country for distribution into the USA, as their policy is to “ procure over 95% of local products whenever a store is opened”.
http://www.wal-martchina.com/english/walmart/wm_world.htm  
http://www.wal-martchina.com/english/walmart/index.htm  

They even have website contact pages for those wishing to become suppliers to Wal-Mart. http://www.wal-martchina.com/english/service/asiasourcing.htm  

Wal-Mart is positioning themselves at the center of distribution worldwide with partners consisting of both large company suppliers and small suppliers as well.

One of my brilliant professors in business school said, “ put yourself in the middle of business and you will make money.” He was so right. Being the middleman is where the money is made.

As a small business owner you are part of that distribution channel and are a middleman. How close you are to the manufacturer will determine your profit margins. If you are the supplier of your own products you stand to make the highest profit of all.

As the Global Supply Chain continues to shift and change, it will become significantly more important for business owners to understand and create supply relationships that will not only allow for sufficient profit margins, but will also have a positive impact on our world wide economy.

© Debra Dunn
Written by Debra Dunn Master Internet Business Mentor and Business Coach.
Creative Business Enterprises LLC http://www.ibusinesstips.com  
For more articles written by Debra Dunn please visit http://www.bydebradunn.com  
You may contact Debra via email at bydebradunn@yahoo.com