Disintermediation

The Production Chain and Disintermediation

What problems might arise from shifting sales to the Internet? To understand the issues in EC, particularly B2C, you need to think about the role of retailers. In a traditional model, manufacturers produce products and then sell them to wholesale dealers. These dealers then handle any export-import issues including shipping and customs. Eventually the products are delivered to retailers who sell to customers. Companies at each step in the process increase the price—sometimes by doubling it. Three or four steps removed from the manufacturer, a retail price for an item might be four or even eight times higher. For instance, a Chinese manufacturer might sell a tool to a wholesaler for $6 but when it hits the retail shelf at an American store, it might sell for over $35 or more.

This large price difference gives incentive to the manufacturer to sell directly to consumers. This disintermediation of the wholesaler and retailer becomes possible with e-commerce because consumers can easily find the manufacturer. Some companies do make a point of “cutting out the middleman to sell directly to consumers. With EC and global shipping, it is possible to take individual orders and ship directly to the consumer. However, what purpose is served by retailers?

The current system of manufacturers, wholesalers, and retailers came about for more reasons than just distance and searching. In particular, a key reason for manufacturers selling to wholesalers is because they produce items in bulk and wholesalers purchase the items on contract as they are made. Selling to consumers means waiting for individual sales to trickle in, which also requires storing products.

Additionally, many manufacturers do not want to deal with thousands (or millions) of individual customers. It is easier to specialize in manufacturing and let large retailers handle the details of payment methods, returns, and customers who cannot make up their minds.

The situation is more complex for service industries. Consider the situation of airlines. In the 1960s and 1970s, airlines created giant reservation systems to handle flight bookings. The system consisted of the airlines’ massive central computers and databases and travel agent terminals connected by a custom network. It was too expensive for customers to connect directly. Also, the systems were hard to use and travel agents needed special training. Agents were paid a commission based on the value of the flights booked through the reservation system paid by the airlines.