Two-tiered distribution systems move products from manufacturer to wholesaler, then from wholesaler to retailer where the products' final distribution to end-users takes place. While there has been a pervasive trend toward direct distribution in many industries, two-tiered distribution has many benefits that cannot be recreated with other supply-chain structures.
Fast Incremental Expansion
With two-tiered distribution, it is not incumbent upon the manufacturer to develop new distribution networks. Wholesalers are sales and distribution organizations that specialize in the development of efficient retail distribution networks. One wholesaler, for example, may have developed a comprehensive retail distribution channel throughout the Midwest for a certain type of product. Manufacturers who make such products may be able to greatly expand their market reach in a single point of contact by contracting with the wholesaler, rather than trying to develop the supply chain on their own.
Nimble Market Shifts
Just as two tiers allow for quick, incremental expansion, it also allows for nimble changes in direction. For example, a manufacturer may find a new application for a product it already makes. It redevelops and repackages the product slightly, then sells into a market that's completely new to the company. A product it has historically sold through home improvement centers may, with a single wholesale relationship, expand to hobby stores or auto parts stores.
Focus on Product
Adam Smith, father of modern economics, authored the concept of "specialize and trade". This is a tenet of economic theory that says you're better off concentrating on areas in which you have a competitive advantage, which tend to be those things you specialize in. So, instead of being an expert manufacturer and an expert supply chain management company, you can focus on the unique world of manufacturing, letting distribution experts who may be much better at it, use their increased efficiency to your benefit.
Time and Logistics
Sometimes logistics favors streamlined distribution, but not always. Consider the kind of products people want in stock. From milk to produce to hardware like nuts and bolts, consumers want to walk into a store and fulfill their needs immediately. If a manufacturer has direct distribution, it has to ship a carton of milk. If, instead, it uses two tiers, it ships a quantity of milk to multiple regions, which is in turn distributed to local stores, facilitating the instant demand of many retail goods.
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