In this series, we will look at the businesses in the various stages of the Supply Value Logistics Chain, instead of looking at specific businesses, we will take an abstract look at the value chain in this link of the supply chain. This can be used as a guideline or framework to choose a business idea.
This is part of a series on How to Start, Run, Grow & Fund a Business in South Africa. These pages have to be read in order:
- How to Start, Run, Grow & Fund a Business in South Africa (using what you currently have)
- Choosing the right Business Idea for You
- Writing the Business Plan
- Supply Value Logistics Chain – Research and Understand Your Industry
- Raw Materials Business
- Equipment Business
- Skills Business
- Manufacturing Business
- Distributor Business (This page comes hereafter the manufacturer in the Supply Value Logistics Chain)
- Test if Business Idea is right for you
Today we will look at the distributor business. A simple Supply Value Logistics Chain will look something like this:
Now not every business or industry uses distributors but it is included here as we completely traverse the supply value logistics chain looking for opportunities.
What is a distributor?
A distributor sits between a manufacturer and everybody else (wholesaler, retailer, consumer). Think of them as the middleman sales force of the manufacturer but usually not owned by the manufacturer.
Why do we need a distributor?
A distributor works with the manufacturer to take their product to market and usually other after-sales services. Most large manufacturers specialise in manufacturing, they have maybe one big factory but they can’t have an office in every country or city so they use a distributor to represent then in that region. This agreement between manufacturer and distributor is not always formal.
The most common term you might have heard locally is “import and distribution”, this is a business model where a company imports certain products and sells it in the domestic market, they are not usually an official distributor but what will happen is, if you want a product, let’s say coffee from Italy, you email the guys in Italy and it’s not worthwhile for them to sell you the kilo of beans you need. So they will tell you that you can buy it from Cape of Good Hope Coffee in Cape Town even though Cape of Good Hope Coffee is not an official distributor, Italy Coffee Bean Co. knows two things: 1. it is not viable to send a kilo of beans from Italy to Cape Town and 2. the more beans Cape of Good Hope Coffee sells the more they will reorder from Italy Coffee Beans Co. So it’s a win-win.
Starting a distributor business
To start this business you do not need to have a formal or official agreement with the manufacturer. Obviously, if it is not formal or official you will not end up being the exclusive distributor in your region. That being said to have a formal agreement you usually need to have sufficient capital to place large orders and warehouse space to store it (as well as other obligations).
This is a fairly straightforward business, you identify products that you would like to introduce to South Africa, and you find a manufacturer of that product (the manufacturer does not necessarily have to be overseas). This is an important business because it is how many products are moved from the manufacturer through the supply chain. It is core to understand the mindset of the manufacturer in this business.
If my speciality is manufacturing, I run a three-shift operation 24/7 pumping out thousands of packets of chips (like Niknaks). My target market is lower-income consumers. I already have a large workforce in manufacturing, now I need to get that product out there, I can hire a salesforce in every province to go into townships, but remember my job is tending my factory. So I sell via distributors. They have their own warehouse where they store the product. Remember I make tens of thousands of packets a day, I can’t be selling that 50 at a time from my doorstep. I use a distributor.
Distributors are often used by manufacturers of appliances but it can be in any industry, food, sweets etc.
In other industries, distributors have a more involved role, including honouring warranties and handling repairs etc.