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Disintermediation is "cutting out the middlemen" in the supply chain i.e. instead of going through traditional distribution channels such as a distributor, wholesaler, broker, or agent, companies now interact with customers directly.

 

An application-oriented question on the topic along with responses can be seen below. The best answer was provided by Sumukha Nagaraja on 28th May 2024.

 

Applause for all the respondents - Sumukha Nagaraja, Abhijeet Sonake, Radhika G, Hardik Joshi, Nethaji.

Question

Q 673Disintermediation is the removal of intermediaries in a supply chain, or "cutting out the middlemen". While it may seem logical and profitable to do it, however there are companies that have decided not to cut out the middlemen (the most recent name is Parle). Build a case as to why a company should go or not go for disintermediation? Provide examples to support your point of view. Let's debate.

 

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Disintermediation in supply chain refers to the elimination or reduction of intermediaries, often referred to as “agents/brokers/middlemen,” within the supply chain process. Disintermediation involves eliminating unnecessary steps or participants between the manufacturer (supplier) and the end consumer (buyer). This enables a direct interaction between the supplier and the buyer, bypassing intermediaries such as wholesalers, brokers, agents, or retailers resulting in shortened supply chain. In Summary, disintermediation aims to optimize the supply chain by removing unnecessary layers and fostering direct connections between suppliers and buyers. It’s a strategic decision that balances efficiency, cost savings, and customer experience.

  • Advantages - The Case for Disintermediation
    • Cost Efficiency: Disintermediation can significantly reduce costs. By eliminating intermediaries, companies can avoid paying their margins or fees
      • Example: Online retail giants like Amazon and Alibaba serve as prominent examples. They enable producers to sell their products directly to consumers, bypassing traditional retail stores.
    • Speed and Efficiency: Eliminating middlemen often streamlines processes, leading to faster transactions.
      • Example: Digital music and video platforms such as Spotify, Netflix, and YouTube have eliminated traditional music and video distribution channels. Consumers can access content directly without intermediaries.
    • Direct Relationships: Disintermediation enables direct relationships between producers and consumers. Companies gain better insights into customer preferences and needs.
      • Example: Consumers booking hotel rooms directly through hotel websites rather than travel agencies.
  • Challenges - The Case Against Disintermediation or Case for Reintermediation
    • Complexity and Resources: Going direct requires substantial investment in resources. Companies must handle fulfillment, shipping, and customer service. Losing out access to specialized knowledge.
      • Example: Not all companies offer wholesale options directly to customers because fulfilling and shipping large orders demands additional staffing and resources.
    • Risk of Overstretching: Disintermediation can lead to overstretching by some functions. Companies may struggle to manage the entire supply chain effectively.
      • Example: Some businesses prefer to rely on established intermediaries to handle distribution and logistics.
    • Value of Intermediaries: Intermediaries often play a valuable role in getting products from production to consumers impacting customer service. They have networks, preorders, and distribution channels.
      • Example: Producers work with wholesalers who ship products to retailers. These intermediaries employ sales representatives to score orders and facilitate distribution.

To conclude, the dynamic landscape of business, the decision to disintermediate or not depends on various factors. Companies must weigh the advantages of cost savings and direct relationships against the challenges of resource allocation and risk. Ultimately, a thoughtful analysis of the specific industry, market, and company context is essential to make an informed choice.

 

Reintermediation is an intriguing concept that involves the reintroduction of intermediaries into a business process or supply chain. Reintermediation refers to the movement of investment capital into secure bank deposits or the reintroduction of a middleman between a supplier and a customer. It stands in contrast to disintermediation, which involves removing intermediaries from the supply chain. In summary, reintermediation is a dynamic process that adapts to market conditions and business needs. It underscores the importance of finding the right balance between direct interactions and intermediary assistance.


 

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Pros of Disintermediation

  • By selling directly to customers, there are reduced distribution costs, enabling companies to offer competitive prices
  • Lower costs can lead to lower prices for consumers and higher margins for the company.
  • This direct relationship allows companies to gather customer data, personalize experiences, and quickly respond to customer feedback.
  • Direct relationships gives better understanding of customer needs and enhance customer satisfaction and loyalty.
  • brand consistency and customer experience is enhanced
  • This allows to introduce new models and updates without the delay associated with traditional dealership networks.

Cons of Disintermediation

 

  •  Parle has chosen not to bypass intermediaries like wholesalers and retailers. This decision gives advantage to the company with extensive and well-established distribution networks that ensure wide reach and penetration into different markets.
  • Existing distributors/dealers have the infrastructure and local knowledge to reach a broader customer base efficiently.
  • Utilizing intermediaries allows companies to focus on resources and core competencies like product development and manufacturing.
  • Intermediaries makes sure the products are available where and when customers want them, enhancing sales.
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A great question, and a perfect time when Parle G case studies are flooding the market.

 

Parle has been one of the key Indian biscuit brands since its inception in 1928, and it is important to understand what the founders perceived as value. This so much is similar to Toyota, and in so many respects.

 

 

Companies need to understand their core value (like Toyota's "Best quality to society & company"). For Parle, catering to the masses aka being India's favorite has been their core driver of marketing and advertisement strategies since 1980's when Parle Glucon was christened Parle-G. Their core value is "Family, Unity, and simplicity", and comes out so in their campaigns and final product produced for the consumption. They retained the INR 5 per pack of Parle G as their value that they offer to the masses, across the classes, ages, purchasing disparity, geographies, languages, values & festivities. With this value as the key driver, it is important to reach different segments of the population, categorized but not limited to the above.

For this, they needed brand ambassadors, intermediaries to ensure content is made to suit the various identified categories, which they did.

So, as per their value, it was essential to keep intermediaries to reach to masses and retain presence in all parts of India.

 

Let me answer the question around disintermediation or intermediation as a business strategy through few key pointers

 

1- Disintermediation makes sense if companies are trying to save costs. Many a times, this deteriorates the value. Keeping in mind that the same value can't be reached unless you are reaching out to the masses as per various categories, and using variety of channels to reach the masses; intermediation is the only way to go for Parle.

 

2- Integration is another way to eliminate intermediation, but it comes with an increase in complexity of operations. Example Toyota has a set of integrated suppliers producing components only for them, and have been developed, or handpicked by their procurement teams to build-in-quality in the systems. So there will be decisions made as per what is "Value" to a company, and hence this needs to be looked at case-to-case basis.

 

3- In the end, no matter what value is core to a company, the shareholder's weath, aka market share remains important. And must remain a KPI to measure the overall success of the company.

 

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Disintermediation is the removal of intermediate between manufacturer and customer. It is also called as B2C model. By this step, both (end user and manufacturer) are impact. This impact can be beneficial to both but its all depend on type of business company have. There are two scenarios in which company should go for disintermediation or not.
(1)    Go for disintermediation:
Major driving force for disintermediation is internet. In recent years, internet has reached to almost all corner of world. Business which has high potential to go along with internet will have high potential to grow more with disintermediation. 
Below are factors which should be considered for disintermediation:

 

Cost saving: This is a major benefit of disintermediation. In today’s world, profit margin is decreasing day by day due to competition. By removing commission, fees or markup, company can save some cost and increase profit.
Increasing efficiency: Lead time of product delivery is reduced.

 

Quick decision: Companies will have greater control on decision making and implement easily without taking concurrence from supply chain.

 

Customer satisfaction: If company is giving commitment then there will be more confidence in customer mind and feel safer for buying product. 
Example: 
a)    Apple/Dell: Both companies sells product directly to customer via avoiding traditional retail model. These companies have their own online and offline store to cut down commission and markup fees.
b)    Airbnb: Airbnb provides lower price rooms to customer directly through its website.
c)    Amazon/Flipkart: Amazon sells wide variety of product to customer though its website and provide low cost product to customer.
d)    Google/Facebook: These two platforms hits traditional advertising companies via providing a digital advertisement service to manufacturer which reaches to large crowd easily. 

 

(2)    Not to go for disintermediation:
There are certain businesses where disintermediation not required or negative impact on business. For these businesses, intermediator provide support for better reach to customer.
Below are some cases where disintermediation has negative impact.

 

Direct marketing cost: High cost product where a direct marketing is not possible or customer base is low then direct marketing cost will not suffice. Companies must need intermediator to reach specific customer base.

 

High volume products: Sometime product cost is too low and customer base is large then it will be difficult to reach each and every customer. In this case service to customer will be largely impacted.

 

Low shelf life product: If product having low shelf life then reaching to each and every customer will be difficult.

 

Display of product: Business where a display is needed and customer must visualize product before purchase.
Example: 
a)    Automobile Industries: Customer will always like to see and try product before purchase.
b)    Food industries: Food products (eg. Frozen foods) have low shelf life and require controlled temperature to transport product to customer which will cost more to manufacturer.
c)    Common stationary: Generally stationary items have low margin and volume are high. It will be difficult to send each pencil/pen/rubber to each customer.

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  • The Intermediaries are adding value/reduce value based on the situation and type of the business. Primarily distributors, suppliers, vendors referred as the middle man in the business
  • Let us assume that ABC company producing a packaging product (B2B or B2C) in large quantities (~1000 tons). But the customers are very scattered and the required quantities are in range of 100-2000 Kgs. Assume that, if ABC company stared distributing the products in market by themselves, it will become hectic job i.e., many transactions will happen, more people needed to sell, receivables & recovery will be difficult problem, order book will be unpredictable. In summary the cost will increase drastically.  Hence company’s look for Middle man handles this tedious task. So, the company sell the bulk quantities (5-10 tons) to middle man. From him it will get distributed to smaller players.  It is very difficult to get the orders from these small players in the market. The middle man can gather all these order from market and place the bulk orders to this ABC company, which is viable to the company to produce as well. The middle sometimes helps the ABC company to get the new customers and develop new business (win-win) situation for the middleman and ABC company.
  • On the other hand, Middle man play a key role in the value chain. Company sometimes may not realize the full value of the products, ad the major share will be kept by the middle man, because they are helping the business. ABC Company will also not know, what the end customers are doing with the packaging products. If the end customer is using for illegal product, ABC will be in trouble legally, as they are the supplier of the products to end-customer.
  • The same ABC company is procuring some material from XYZ company to produce the packaging material. In this case, the XYZ is large scale company, they cannot sell smaller quantities material to ABC. Hence middle man plays a role of selling smaller quantities to ABC company. ABC company will pay little more price than buying directly from XYZ company. ABC can easily switch between the middle mans rather than the companies (Supplier, customer)
  • In both side of supply chain, middle play a major role in terms of streamlining of supplies, cash flow. But with this company will pay some money to middle to handle these disturbances. Many companies keep middle man to safe guard them financially (ensure smooth cash flow).
  • If ABC company is large capacity, even the supplier & customer for this company are operating on large scale then they could avoid middle man to save the money spent on middle man.
  • Some of the times, middle man doesn’t reveal the customer, which will become Gray area for company ABC. Maybe he is charging premium from them, but paying less to the company (Value will lose to the middle man). Middle will also help companies in connecting larger pool of customer, different supplier. Companies can take better decision with such kind of information
  • If the company have clear visibility of where the customers are located, what purpose they are using this paper and what is the value of the end product, they the company can take better position in deciding the price of the product by giving a nominal margin to the distribution. Similarly on other hand, company should have the clear visibility of the procurement process of the vendors.
  • By removing the middle man, both company and the customers can perceive better value. Sometimes they bring lot of value on to the value. Depending on the scale of business, type of the end products, company need to decided if adding middle, whether they gain or loose. 
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Very intriguing answers from all respondents. It is recommended that one should go through all the answers to get different perspectives.

 

The best answer for this debate question has been given by Sumukha. Well Done!!

 

P.S. - while the question did not ask it. But there is a very strong case for companies to have both direct and indirect sales channel i.e. for both to co-exist. Food for thought :) 

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