Due to various factors, companies do not distribute their products directly to the retailer or to end consumer. One of the common factors is convenience. If a region has 100 retailers, and if the company is selling to 1000 regions, then you can imagine the number of retailers the company has to handle. This is practically impossible.
This is why many companies have Wholesalers who have their own benefits and advantages. Wholesalers are one of the important middlemen for many companies. There are many functions of wholesalers which makes them important. Each of these functions of Wholesalers is discussed in detail in this article.
The 9 Functions of Wholesalers
1) Responsibility for Sales and Promotions
One of the primary function of a wholesaler is promoting the product in their locality as well as taking charge of the sales of the product. A wholesaler is generally given targets for sales and he has to achieve these targets. Because the company cannot cater to each individual retailer, the wholesaler takes care of the sales in his own territory.
Furthermore, because the wholesaler regularly supplies in one particular area, he builds much stronger relations over time and retailers and other buyers begin to trust him. He also gets word of mouth inquiries regarding bulk requirements.
Example – If P&G appoints a wholesaler in a region, then all sales in that region should be the responsibility of the wholesaler. Naturally, P&G will want that the wholesaler sells more units then last year especially if the population in that region is increasing and all consumers require basic FMCG products.
2) Managing the inventory
A key Function of the wholesaler is to manage inventory at all times so that the region does not fall short of the same. This can be called “Assortment” wherein wholesalers are involved in asserting the right goods.
If a company has 100 different type of SKU’s, all SKU’s will not sell at the same speed. SKU A might sell 100 units a week whereas SKU B might sell 10 units a week. Thus, the inventory of both needs to be maintained at all times. So the Wholesaler will track which inventory is moving faster and which is slower and accordingly they will order the goods to the main company.
As a result, the company does not spend much by overstocking in one area or worse – under stocking a particular SKU. The wholesaler keeps proper inventory of all products thereby ensuring supply at all times.
3) Breaking the bulk
Just for a moment, imagine the city you live in. There are so many small shops there. Now, if a soap manufacturer was planning on supplying soap to the whole city HIMSELF, then he will have to hire a big truck. This truck will then have to navigate all the traffic to deliver small quantities of soap to small shops. Doesn’t sound logical right?
That is why manufacturers deliver their goods in bulk to their wholesalers. The whole truck is unloaded at the wholesaler. This wholesaler then “breaks down the bulk” into small cartons or packages which are then delivered to all shops in smaller vehicles. Hence, this process is commonly known as Breaking the bulk and it saves a lot of money for the manufacturer and gives a huge inventory in bulk to the wholesaler.
Furthermore, because the wholesaler is buying in bulks, he gets a good discount and good margin to distribute the products.
As discussed above, because the company wants to supply to a whole region, it needs to save enough material in that region so that the supply is constant and the company can meet any spike in demand. As a result, the warehousing is done by the local wholesaler who then supplies to individual shops. Off course, the cost of warehousing is considered when considering the margins for the distributor. Or alternatively, a company may honor separate claim by the distributor for warehousing cost.
Example – Domino’s pizza has wholesaling warehouses where the pizza base is transferred to the wholesaler or the company warehouse. This whole warehouse is actually a cold room where the pizza base is stored. As there are multiple Domino’s outlets in any town, the domino’s warehouse delivers the pizza base to each of these outlets in a refrigerated van.
Because the warehousing is being done by the distributor, the transportation is also the responsibility of the distributor. This makes sense because the distributor knows all the retail outlets, where they are located and what time they are open. As a result, planning the delivery route becomes easier and it is more cost effective too.
Furthermore, because wholesalers are much nearer to the buyer then the manufacturer, they can provide faster delivery during season time or time of need. That is why transportation is also one of the major functions of wholesalers.
6) Arranging credit and Financing
A top retailer comes to the manufacturing company and says he cannot pay in advance for the product. He will pay every 30 days but will buy and sell huge lots of the product. However, the manufacturing company cannot entertain this retailer because it is not in the policy of the company to give credit. On the other hand, if the manufacturing company accepts such a request, every other retailer will come in the scene and ask for additional credit.
Thus, the manufacturing company does not entertain credit requests. However, a wholesaler is not bound by any such policies and he can entertain such requests. Generally, wholesalers give a small amount initially to retailers who demand credit. If the credit is settled on time, then retailers can demand more products and get more credit. The wholesaler is a guy with deep pockets and he can afford the financing and he also gets huge sales from the retailer.
Because financing requires a good touch and relation with the retailer, it is one of the functions of the wholesaler to arrange financing and credit for individual retailers. On the other hand, the wholesaler might arrange his own financing from banks by showing the huge amount of sales he is doing in the market.
7) Bearing risk of small operations
Now continuing the above topic, if there is a dealer who took credit from the wholesaler, and then he defaulted on a huge payment, Is it the loss of the wholesaler or the manufacturer? Legally and ethically, it is the loss of the wholesaler and not the manufacturer. This is because it was the wholesaler who approved the credit to a wrong kind of retailer. The company is safe here.
Thus, most manufacturers want that the risk of small operations to be borne by wholesalers who can fight it out locally instead of getting the manufacturer involved who is looking at a regional or national market. Besides this, there are other areas where the risk is borne by the wholesaler. These include theft, fire, damages or any other causes which result in a loss. All these risks are borne by the wholesaler.
A smart wholesaler will take measures to avoid such risks and he will have fire insurance and damage insurance in place. He will also be strict with his credit control and not allow a major payment default to happen.
8) Market Information
One of the common functions of wholesalers in all companies is to give information on the market size and the market potential of the manufacturer or the main company. They can also give information about the competitor’s movements which will give an insight to the company regarding which competitor is strong in which territories.
Most matured marketing managers, in fact, take a 360-degree feedback from their distribution channel. Not only is the wholesaler considered during sales calls, he is also considered during the planning of BTL activities and other promotions so that his sale increases and in turn the company’s sale increases.
Finally, the development of a territory is the responsibility of a wholesaler. Not only the territory, the wholesaler can also be responsible for employee development and customer relationship management. A wholesaler who is efficient and productive can expand his business along with the business expansion of the company.
The wholesaler can also use his expertise by helping retailers sell the products better. He can train the in-store team, improve retail displays and contribute his overall market knowledge to improve the overall business in a territory. Regional development is one of the functions of wholesalers which shows the potential of the wholesaler to the company’s management.
Above were the various Functions of Wholesalers which make them a very important element in the channel design.