Wholesale distribution is a vital link in the global supply chain. Learn the basics of wholesale distribution and get examples of top distributors in the industry.
The process of wholesale trade fills a crucial function in modern commerce and manufacturing industries for both B2C and B2B markets. The workings of this vital industry may be something of a mystery to those outside of it, however. So how does wholesale distribution work?
Let’s break it down.
How does wholesale distribution work?
First, we need to understand what wholesale distributors do.
- Wholesale distributors buy products in bulk directly from manufacturers or suppliers
- They redistribute them to their customers, which are usually commercial establishments, business professionals, or retail stores
- They often specialize in a product, industry category, or subsegment
- They also usually offer services
Selling the suds: Examples of how wholesale distribution works
The companies that manufacture quality products for sale must rely on other businesses to move those goods through the supply chain, where they ultimately reach a business or customer that purchases them for use or consumption.
Take the example of a brewery. If this brewery is a small business, crafting only a few hundred cases of beer a year, the best distribution model will involve a direct approach to local retail and specialty stores. The stores purchase the cases of beer directly from the brewery, then sell them to individual buyers who then consume them. The individual buyer in this scenario are end users, and they purchase directly from the retail establishment. This method would likely work well for this microbrewery.
Cost management is a top wholesale distributor challenge. How can distributors streamline management of the cost of goods sold (COGS)?
However, if that same brewery ramps up its capacities, producing millions of barrels each year, this distribution method will no longer work for two main reasons.
First, the brewery will no longer have time to directly oversee the process of selling and building the distribution channels to meet the needs of retail stores in such high quantities. Second, the retail stores currently selling the beer will not be able to handle such a drastic increase in inventory. More retail stores will need to be persuaded to carry the product, likely across several states or regions.
This is one area where skilled wholesale distributors can add value to suppliers.
2021 wholesale supply chain trends reflect lessons learned from COVID-19 as distributors focus on supply chain planning.
Connecting the global supply chain
Wholesale distributors typically have strong customer service, sales skills, and industry expertise to connect suppliers to interested parties.
In the brewery scenario described above, wholesale distribution companies can optimize their business processes by contacting potential new retailers or leverage existing relationships in the restaurant space to open net new markets.
In this example, the wholesale distribution business is a separate entity providing sales and distribution services to the manufacturer. It purchases large quantities directly from the manufacturer at a reduced price and stores the inventory in its storage facilities – usually one or more warehouses that the distributor either rents or owns.
Meanwhile, the wholesale distributor maintains direct relationships with retailers or other businesses that may be interested in purchasing the products. The distributor often provides these businesses with inventory guarantees and quality control, while selling the products from the manufacturer at an increased price.
The products are then sold by the retailer or other business to end users.
Altogether, the wholesale distribution industry serves as a conduit between the makers of products and the shops that sell them to end users (or in this case, beer connoisseurs!). This type of distributor is often called a traditional wholesale distributor, but could also be called a wholesaler, distributor, supply house, importer/exporter, and master distributor.
Other types of distributors include buying/selling groups and wholesale trade companies.
While the industry is thriving, wholesale distributors face plenty of challenges, including growing competition, product complexity, and pricing. I’ll examine these challenges in my next post.