How to Start a Distribution Company
The distribution business model is ripe with opportunity. Starting a distribution business requires a niche selection and the ability to bridge the gap between retailers and manufacturers. Distribution companies usually work on contracts with manufacturers, but they can also operate in an independent and flexible manner.
How Distribution Works
Distributors are an essential element in the supply chain. The distributor forges relationships with manufacturers and house inventory while distributing the product to retailers. The manufacturers often do not want to manage orders with individual retailers. Manufacturers are focused on production, while distributors accept bulk inventory at one location, where they parcel out individual orders.
The distribution model can work on either a tightly- or loosely-controlled level. For example, distribution in the beverage industry is tightly controlled: In many cases, a single distributor manages numerous territories for a large beverage company.
The beverages ship to the distributor warehouses, and the distributor manages deliveries, and even displays and sales in some cases. While the distributor is independent, contracts are important. The business is often built around these contracts — they protect the distributor and the beverage company alike.
Selecting the Niche
Niche selection is vital because managing the relationships on the retail and manufacturing sides is a significant aspect of the distribution business model. The beverage industry is an excellent niche, but securing contracts is exceptionally difficult in such an established market.
Focusing on a narrow niche is a good idea because you can specialize in locating the best manufacturers and products while selling inventory to retailers who trust your abilities to deliver quality. One example is a restaurant supply distributor. The distribution business sources the napkins, utensils, toiletries, and all products associated with a restaurant. The distributor holds that inventory and sells it to the restaurants as needed.
In this case, the restaurant benefits because it receives a consistent, trusted supply of inventory from the distributor. It is not burdened with ordering numerous different supplies from a suite of manufacturers to meet basic needs. The distributor is a major benefit to the supply chain in this instance.
Selecting a niche creates tighter controls by minimizing the connections required. A broad-based distribution company requires you to source supplies from new manufacturers regularly, which adds a layer of difficulty to the business model.
Sourcing and Selling
Outside the basic business entity formation as an LLC or corporation and a license to operate in your state, sourcing and selling are the two primary elements to the business. Define your proposed niche first and then contact the retailers to gauge the market. This process is essentially market research as you interview retailers and begin making potential sales connections.
Go out and source the products by creating relationships with the manufacturing companies. You need to set rates, work through the transportation of the goods to your facility and set contracts if the option exists. Gaining exclusivity in a market is a great way to obtain a competitive edge. An exclusive deal with manufacturers means interested retailers must order through your distribution company.
Provide a catalog to retailers and position your prices to encourage ordering through your distribution company. You are selling the products to the retailers, and that means you must develop the relationships and compete with competitors. Regular communications about your inventory and the retailers' needs ensure they are happy and are not missing opportunities to order.
References
Resources
Tips
- Maintain a computer database of your retail or wholesale customers. Send a monthly sales letter or newsletter to some of your best clients. Offer these clients discounts on orders. Continue to keep all clients apprised of any new products.
Writer Bio
Zach Lazzari is a freelance writer with extensive experience in startups and digital advertising. He has a diverse background with a strong presence in the digital marketing world. Zach has developed and sold multiple successful web properties and manages marketing for multiple clients in the outdoor industry. He has published business content in Angling Trade Magazine and writes white papers and case studies for multiple corporate partners.