DISINTERMEDIATION

                                                                          HOW MANUFACTURERS CAN INCREASE MARGINS BY ELIMINATING THE MIDDLEMAN

     The rising loonie, competition from Asia, pricing pressures from the Big Box stores; we hear about the problems our manufacturing sector is having all the time and the resultant plant closures they lead to.  Up to now unfortunately, the principal responses of Canadian manufacturers has been to try and become as lean as possible in the operations, invest in more efficient equipment,  move some or all of their operations offshore, and ask for government intervention.  While these approaches have some merit, none are very revolutionary in their approach.  In addition, the massive difference in labour rates and material prices between Asia and Canada mean that becoming "Lean" will only stave off the inevitable for a short time.  Focussing on the BACK END process side of their operations are what manufacturers are used to doing as a "kneejerk" response to their problems and its just not working;  as evidenced by the job losses in the Canadian manufacturing sector the past 5-10 years. 

     I think its high time that our manufacturers begin to shift their focus away from how they make their products towards how they distribute and sell their products.  Remember, every layer of distribution will on average add at least 100% to the eventual selling price of a product.  An item that a manufacturer sells to a retailer for $40.00 will sell to the consumer for $80.00-$100.00 or more.  Disintermediation is just a fancy way of saying that if a fabricator can sidestep the middleman, be it a retailer or a distributor, and sell their product direct to the end customer, he will overnight at least double his margins.  This dramatic increase in profitability will give producers a lot more wiggle room to compete with offshore manufacturing when combined with high levels of customer service, quality, and production efficiency.

     Having sold machinery to industry for the past 35 years I have always been struck by how little my customers received from the eventual selling price of  their product to the consumer; notwithstanding that they are the ones renting the building, hiring the people, and incurring all the costs and risks of actually making something.  The old saying "He who has the gold makes the rules" just doesn't seem to apply in manufacturing where the rules are made by the marketing and distribution giants like MacDonalds, Nike, Home Depot, Canadian Tire,  Loblaws, Fastenal, Sports Check, Toys are Us, etc.

However there is a way around these giants that some forward thinking manufacturers are already doing.  Its called E-COMMERCE.  Here are a couple of examples:

1.     A group of enterprising lobster fishermen from Maine, whose livelihood was being squeezed by rising fuel prices, global competition and low prices from seafood wholesalers have created their own online retail website www.catchapieceofmaine.com.  Via this website, consumers(individual and corporate) can purchase fresh, ready to eat lobster dinners, shipped to them via courier overnight in special refrigerated containers.  Its been a raging success, in its first year totalling over ½ million dollars of lobster and garnering several entrepreneurial awards for its novel approach to selling their product.  If you check out their website, you will see how effective it is in creating a direct connection with their customers using videos, blogging, photos, sound, and testimonials.  Its almost as if you are on the boat in the Atlantic catching your lobster.  The customers love its since they can identify directly with the fishermen, not to mention the great quality and service they receive.  They actually get a call the next evening from a fisherman to make sure their lobster has arrived safe and sound and talk about recipe tips, cooking suggestions etc.  The fishermen love it because they are getting a much better price for their lobster, allowing them to continue the livelihood they have always known.  They have become not only captains of their boats again but masters of their own destiny, using the most up-to-date methods of web design and marketing to brand their Maine lobster as the tastiest in the world, bringing their lobster direct from the sea to our pallets.

2.     A Toronto Felt Manufacturer who was being squeezed by its retail and industrial customers has invested over $250,000 the past few years to create their own online Virtual Store presence on the web that is beginning to pay big returns.  Besides their own online store they have also used Amazon's website portal because of its much higher visibility and traffic volume that it generates.  Amazon takes care of the sale, collects the money minus a 15% commission, downloads the details of the order to the Felt Company who guarantees shipment in 3 days or less.  Internally, the company has created an efficient order fulfillment process and has hired a couple of web saavy "techies" who keep the sites up to date, accessible, and refreshed.  This is critical since a stale website is almost worthless.  Over the next 5 years this company predicts their volume of online, direct to the consumer sales will grow to perhaps 1/3 of their total sales which will have a dramatic effect on their overall profitability since they are selling online at RETAIL PRICES.  THIS IS A KEY POINT.  Consumers buying online do not always get a better price than in the store(although if they do all the better) but do get Convenience(they are time starved), Service(they don't have to drive to the mall, fight traffic and rising gasoline costs, and deal with untrained staff), and Product selection, not to mention that they prefer dealing direct with the manufacturer.  On the other side of the coin, the manufacturer selling online wants to keep their traditional distribution channels happy by not undercutting their retail prices.  This means that typically manufacturers selling online charges the FULL retail price for their products; a huge margin increase of 100%-200% over what they are used to.

3.     An enterprising E-commerce student from Seneca College in Toronto who was born in Trinidad recently created an online store on Facebook to sell hard to find electronic items like Apple I Phones, Rim Blackberries, Speakers etc. to waiting customers in Caribbean countries.  In 6 months he has sold over $15,000 worth of product.  The items are packaged and shipped to friends he has hired in the Caribbean who check they have arrived in tact before shipping them to the customer.  All sales are via money order or credit card.  His use of Facebook as his online portal of choice has given him the added boost of "viral marketing" given the way in which Facebook operates to update the entire invited community on new items, blogs, etc.  Not to mention it is virtually cost free.  His professor of E-Commerce, Tim Richardson makes the point that virtual selling is growing rapidly and is the way of future for all manufacturers.  I have used this example also to illustrate that Canadian manufacturers should be seeking out these young, computer literate, tech saavy, web experts from the community colleges and universities that can change the focus of how they sell their products to their customers.  Its not enough to hire traditional production, administrative, finance, and marketing staff anymore.  Young I.T. people are a critical asset as well.   

For both the lobster fishermen and the felt manufacturer, investing in effective online E-commerce systems is no different than buying a new lobster boat or felt-making machine except that in today's world of global commerce it may mean the difference between survival and failure.  Obviously, large companies like Dell Computers and Net Flix have always used e-commerce to reach a portion or all of their customer base directly.  What the above examples illustrate however is that you don't have to have the market clout and financial power of a Dell to level the playing field and sidestep the powerful middlemen who bleed you dry.  All you need is a new way of looking at the world of business.  Using your own website and/or those of Ebay, Facebook, Amazon, Craigs List and the numerous others that todays young people know about, your company can create a worldwide presence that will pay big returns.  Its simply a matter of redirecting your focus to the "FRONT END" of your business.