When building an ecommerce business, it’s tempting to put all your focus on the one stakeholder that can make or break your business: the customer.
But while the customer is clearly important, we can’t forget about all the stakeholders working behind the scenes to get the finished product into the customer’s hands.
Your supply chain — the network of organizations, people and activities that work together to produce and distribute goods — relies on three other parties to make your business function: manufacturers, distributors and wholesalers.
Especially if you’re new to the industry, these terms probably sound oddly similar, and you may have even thought they were all the same thing. But whether you’re a small business or a large enterprise, understanding the difference between these three parties is crucial to choosing the right partners and ensuring a smooth-running supply chain.
Before discussing the differences between manufacturers, distributors and wholesalers, let’s first make sure we understand the order of the supply chain.
Here’s a quick rundown: The supplier (typically a manufacturer, packager or processor) provides the products to the distributor, who has a direct relationship with the supplier. Then, the wholesaler buys large quantities of products from the distributor and sells them to retailers. And finally, the retailer sells goods to the customer.
It’s a simple process, but it’s easy to get confused about who does what and when. That’s why we’re going to lay out, in the simplest terms, the role of each stakeholder and what to expect in each step of the process.
To kick off the process, the supplier provides the raw materials to make the goods or services. They may either purchase these products from a manufacturing company, or the supplier may act as the manufacturer themselves. As the source of all goods and services, the supplier then sells products to distributors and wholesalers.
While they do have the resources to manufacture goods, the supplier doesn’t often sell these goods directly to the retailer or customer, which is why they need a distributor or wholesaler to act as an intermediary.
So, if you’re a wholesaler or B2B organization, you may find yourself working with a supplier, but if that’s the case, it’s less likely that you’ll be selling directly to consumers.
When choosing a supplier, you’ll want to set your criteria to narrow down which suppliers meet your standards and will work well with your business. Here are some factors to consider:
Suppliers can include manufacturers, packagers or processors, and they supply the raw materials to distributors and wholesalers. For example, a manufacturing company that makes shoes would need the materials that make up the shoe. So, they might need to purchase from a supplier that produces leather, thread or rubber.
If you’re a manufacturer, you have two options for your next step. You can either sell directly to the end user, the customer, or you can partner with a distributor to sell your product for you.
Of course, if you prefer to have more control over the selling aspect of your business, you can feel free to skip over the middleman. However, that means you’ll be in charge of managing orders, packaging and marketing, which can be difficult to juggle along with other business activities.
On the other hand, a distributor can act as a point of contact between you and the customer, using marketing strategies and inventory management to move your product along the distribution channel. Their role is to find wholesalers or retailers and then distribute the manufacturer’s products to them.
Being familiar with your products and business model, the distributor can hopefully expand your customer base and distribute your products to areas you might not be able to reach on your own. Sometimes these distributors will act as a liaison for one geographic area and can only sell in that region, or they can assist with international distribution for global companies.
Choosing the right distributor is a vital part of successful supply chain management. Here are a few key steps to ensure you land the right one:
After the product has gone through the supplier and distributor, the wholesaler purchases large amounts of the product to then sell to retailers. Because they purchase in bulk, the wholesaler can often buy at a discount from the distributor and subsequently sell in bulk at a discount.
Wholesalers don’t often sell directly to consumers, but instead sell to retailers at a wholesale price. Then, the retailer will make a profit by selling the product at a retail price.
But not every retailer goes through a wholesaler to purchase their goods. If you buy directly from a distributor, then you likely won’t have contact with wholesalers. However, it can be beneficial to buy directly from a wholesaler so that you don’t have to worry about going through multiple manufacturers to secure your products.
When searching for the right wholesaler, here are a few questions to ask yourself:
While it’s important to nurture and maintain every business relationship, not every manufacturer-distributor relationship serves the same purpose. Depending on the needs of your business, your relationship with one manufacturer or distributor may look completely different than that of another.
So before choosing a manufacturer or distributor as your partner, make sure you know which of the following two relationships you’re looking for.
We get it — signing off on a committed partnership with a manufacturer or distributor can be nerveracking. It’s an important decision that’s bound to have major effects on your business and its results, good or bad.
If this sounds like you, perhaps a tactical relationship is a safe move. A tactical relationship is all about dipping your toes in the water and seeing whether the partnership is something worth investing in long-term.
But even if the partnership flops or you’re simply not ready to commit, you’re not obligated to stick with the same manufacturer or distributor past the first transaction. It could simply be a means to an end for you and the other party.
However, if you’ve found a manufacturer or distributor you really trust, and you’re ready to take it to the next level, a strategic relationship is the way to go.
In a strategic relationship, the manufacturer and the distributor work as a team, communicating frequently to implement customer feedback and improve product lines. This is typically a long-term relationship in which you and the distributor work to expand into new markets and reach new audiences.
Thus, while you each may have your own business goals, working as a team allows you to support one another toward those goals more effectively than if you were working independently. A strategic relationship fosters collaboration, opens the door to new opportunities and ultimately leads to an enhanced customer experience.
According to Forrester, the US B2B ecommerce industry is expected to reach $1.8 trillion by 2023, which would account for 17% of all B2B sales in the country. With Amazon and other B2B companies transforming the way we think about buying and selling, manufacturers, distributors and wholesalers are constantly working toward new ways to improve their supply chain.
Whether you’re a B2C retailer or a B2B organization, understanding the differences between these three parties is key to getting your product to market quickly and successfully. Although you may not work directly with all three, knowing the function and purpose of manufacturers, distributors and wholesalers will help you to better understand the flow of the supply chain and choose the best partner for your business.