A common cliché is ‘let’s cut out the middle man’. Removing the middle-man (a wholesaler) from the channel will provide a higher per unit margin for a manufacturer, but will it result in a higher profit overall? For this activity, help the following manufacturer decide whether or not they should use a wholesaler?
Olive’s Olives is a producer of olives in a number of different varieties. Their factory is located in Sydney and their products retail throughout smaller supermarkets, fruit and vegetable stores, and deli’s throughout Australia. Traditionally they have used a wholesaler. On average, they sell a jar of olives to the wholesaler for $1, who resells it to a retailer for $1.50. As Olive’s Olives sells around one million jars of olives each year, they are now considering cutting out the middle-man and selling their products directly to the retailers (thus generating around $500,000 in extra revenue).
One of their senior managers has identified that for the firm to do this they would need to:
- Organize for the transportation of the product to the retailers,
- Set-up a ordering/billing team (to handle orders from many retailers)
- Set-up a sales team (to maintain existing retailers and generate new ones)
- Establish a warehouse area for the storage of stock (as it is normally stored by the wholesaler)
- Be able to withstand a reduction in short-term cash flow (as most retailers will take longer to pay their invoices, as compared to the wholesaler), an
- Be able to deal in smaller quantities of the product (as opposed to simply sending full truck loads to the wholesaler).
- What appears to be the main advantages of using a wholesaler?
- What appears to be the main advantages of dealing directly with the retailers
- Would you recommend that Olive’s Olives start dealing directly with a wholesaler? Why/why not?
- What kind/type of manufacturers would probably benefit the most from dealing directly with retailers?