The Impact of Disintermediation in Retail Supply Chains

The Internet is having an impact on businesses in various industries in good and bad ways. Sometimes, it is not clear if specific impacts are good or bad, and sometimes it very much depends on the perspective taken. One such impact is disintermediation, or the elimination of members of supply chain. This article does not seek to rationalize disintermediation as either good or bad, but rather to characterize disintermediation in its’ various manifestations. Disintermediation is an important issue in supply chain management. Companies must consider disintermediation as part of the larger supply chain design question. In their quest to meet the needs of demanding customers, companies have restructured, reorganized, and reengineered to increase organizational effectiveness and better satisfy key customers. The goal may be to build the very best supply chain team possible, which sometimes requires that old channel members be eliminated or replaced by new players. Thus, disintermediation can be an important part of designing a world-class supply chain.

Disintermediation is the elimination of stages of the supply chain. The first relative dimension is how much of the supply chain is eliminated. One way to characterize this is by considering the “value added” of steps which are eliminated by the process–a surrogate of which is the percent of the final cost of the produce to the consumer which was previously captured by the eliminated supply chain stages.
An interesting observation about such a measure is that if the step is eliminated, one wonders if the value added was indeed commensurate with the avoided cost. Further, the value that was added by the eliminated steps may be replaced by other value-adding players at a cost– perhaps more in line with the actual value added.
For example, Compaq Computer Corp. offers to sell consumers direct to end consumers, which previously were available through wholesale-retail channels. Hypothetically, the wholesalers may have added ten percent to the overall product price, and the retailers may have added another 20 percent. By selling direct, we might say that the extent of disintermediation is 30 percent–the portion of sales price that was eliminated. However, part of the disintermediated process was distribution, which is now accomplished by previously external entities such as United Parcel Service and Federal Express. Those third-party logistics companies add value–in the form of “place” utility–but at a cost which inflicts a 15 percent increase in the overall price to consumers. So, the 30 percent disintermediation might be considered to include a 15 percent reintermediation.

This second dimension of disintermediation identifies the instigator of the disintermediation. Disintermediation may originate from a manufacturer, such as Celcius (http://www.celcius.com), a manufacturer of jackets and other outdoor items, selling directly to end consumers. It may originate from the consumer. So-called “reverse auction” sites that allow consumers to specify an item they wish to purchase, allowing producers and others to bid on the item. Disintermediation may be instigated by the author or creator of a work, such as Steven King selling his books directly to the public or musician Peter Breinholt selling his music directly to consumers. (http://www.peterbreinholt.com/). On the flip side, the online book retailer Barns & Noble touts the service to “Publish Your Book,” encouraging authors to bypass traditional publishers in favor of online publishing. Also, disintermediation may originate from third party aggregators or “buyer’s clubs” that link consumers with producers for lower prices.

Perceived Motivation of the Disintermediator

This dimension considers the motivation of the disintermediator who was identified in the prior dimension. It also captures the objective of the disintermediation. Various motivations can be involved in a specific case of disintermediation. Nevertheless, some motivations will tend to dominate. The following are some motivations we suspect will carry weight in many situations:
Cost reducing - disintermediation to eliminate (or replace) cost-incurring steps of the supply chain. For example, Dell Computer has been successfully competed in an industry with frequent margin squeezes by eliminating the traditional retail model and instead selling directly to consumers.
Competitive response – disintermediation because of the actions of a competitor. For example, the rapid growth of Amazon.com as an on-line bookseller appears to be the major motivation for the Barns & Noble bookstore chain starting to sell books on-line. For Barns & Noble, this was a responsive, albeit somewhat cannibalistic, act.
Value improving – disintermediation to provide greater value to consumers, even at the same cost. Another way to consider the success of the Dell on-line model is to see that perhaps their prices are not much better than many brick and mortar retailers, but that Dell offers custom configurations of more state-of-the-art models (experiencing less obsolete or dated inventory).
Relationship capturing – disintermediation to form relationships where alliances were not previously possible. For example, Oakley fashion sunglasses can be purchased at retail locations, but can also be purchased on-line directly from Oakley. (http://www.Oakley.com) Oakley usually has no idea who consumers are in retail sales (assuming that there are no product registration cards or that they are not returned).
However, the on-line sales directly from the company allow Oakley to gather customer data that may potentially be the best target market they could have (i.e. former purchasers).
This, of course, is not a mutually exclusive list–cases of disintermediation will generally involve a variety of motivations of various weights. The dimension focuses on “perceived” motivation, since in most cases it is opinions that can only be observed through secondary data such as management surveys.

Benefits Assigned to the Retailer

The fact that a retailer is bypassed through disintermediation does not imply that the retailer is given no consideration in the process. In fact, the disintermediator may provide benefits to the displaced retailer for either benevolent or self-serving reasons. In the case of a partial disintermediation, the retailer may be publicized by the disintermediator, as with the Barns & Noble example just described. Another example is Radio Shack’s online store, which includes a service to help customers locate a physical store near their home.
Further, the disintermediator may refer customers to the displaced retailer for similar or other product, as with the Barns & Noble case. Complex products that require installation or other support might be best handled by physical retailers. (Hammer 2000) In that case, it can be to the disintermediator’s advantage to refer those purchases to the traditional retailer, and focus on low-support products for online sales.
In extreme cases, the disintermediator may actually compensate the displaced retailer for lost business. This, for example, is a consideration of major insurance companies like Metropolitan Life, who would desire to retain good will of sales agents who lose commissions to online insurance services. The insurance company still has an advantage of lower costs through direct sales, but retains the option of interpersonal sales through agents.