How to Start a Distribution Business
Basic Guidelines on How to Start a Distribution Business
The product distribution industry is big. In America alone, there are about 300,000 distributors that bring into the American economy about $3.2 trillion every year. The product distribution business is growing, and despite a large number of players, opportunities still abound in this industry.
This means that product distribution is profitable and there is still room to accommodate new entrants. With the spirit of an entrepreneur, anyone can succeed in this fragmented and competitive industry, and you too can.
If you have decided to go into the distributive trade, having left a full-time job either because the prospect of future promotion is slim or you don’t like your current job. The important thing is that you are going to be in the right business, and with this guide right in front of you, you are going to make a success of the new distribution business. But before you start, you are going to give your new business thought, find out what the industry is like, plan the business and execute your marketing programmes; you won’t be disappointed. Here is the guide you have to follow to achieve your dream.
- Research the following:
- Distribution industry
- Product for distribution
- Competition
- Products’ manufacturers
- Prepare a business plan to include:
- The start-up cost and cost of running the business.
- How the business is to be funded?
- Projected income and expenditure
- How to promote your business?
- How to market your products?
- Who are your potential customers?
- Choose a name for your business and register it.
- Find a location (office and warehouse) for your business
- Register for taxes, obtain permits and procure insurance
- Set up your website or blog
- Contact manufacturers for products
- Create products’ catalogue
- Purchase stocks
- Start marketing your products
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1.Research
Do extensive research on the product distribution industry and learn how the game is played. What does it require in terms of experience, product knowledge, level of capital investment, available profitable products, and products that are constantly scarce and which ones are seasonal? The criteria for choosing products to market, which are the manufacturers, and the methods of obtaining supplies.
What is the competitor’ modus operandi? Where do they obtain their stocks and which methods do they use to pay suppliers. Do they obtain credit facility and for how long? What tools do they use for promoting their business? How do they generate leads and convert them to customers? What method of selling do they choose –online or through physical stores?
Which manufactures sell the product of your choice, and where are they located. What is there terms of trade?. The research will cover all these issues raised and more.
- Prepare a business plan
Some intending entrepreneurs will want to skip this section in the belief that it is not important, but it is the most important because it shows you the direction you are going to follow to accomplish your goals. It can even serve as a document required by the lending institutions before granting a facility. For example, you need to estimate your initial and ongoing costs of running the business. How much is required, how much is available and how much will need external funding?
How is the business going to be funded – savings, bank facility or other financiers who may or not have a stake in the business? What is the projected income and expenditure required before the business breaks even?
You may even have the option to invest in existing distribution business by way of merger or acquisition. In both cases, you must do extensive research to make sure you are investing in the right business in terms of reputation, experience and large market demand. The risks involved may be high if you don’t conduct enough research. The possibility of the business being insolvent or even going into bankruptcy may only be uncovered if you conduct research.
What method are you going to adopt to promote the business? Which selling strategy are you going to adopt and which promotional tools are you going to use to promote your products. Which method of selling should be adopted to bring cash as soon as a sale is made, and which method will attract buyers from everywhere? The plan should be detailed showing the projected annual cash flow and the periodic cash surplus and deficit.
As a distributor, your customers may fall into the following categories:
Retail stores: These include established stores such as grocery, high street retail stores, supermarkets, etc.
Retail distributors: This is the large retail stores like Wal-Mart which may be very difficult to break in but it is possible to sell to one of its distributors.
Exporters: These include exporters who buy for export purposes
Other distributors: As it has been said, it’s economical to buy from the source, but may prove difficult sometimes because of exclusive contract terms. This means that the producer is under an obligation not to sell to other distributors.
- Choose a name for your business and register it.
The next hurdle in this exercise is to choose the name that fits the distribution business and register it. Only available names will be accepted by the authorities. Before registering the name, choose the form in which your business will take – sole proprietorship, partnership or Limited Liability Company (LLC). If you decide to own your business alone, then choose the sole proprietor type of ownership. If it is going to be jointly owned, choose the partnership type but if it is going to have a limited liability status, choose the LLC. The three forms of businesses above have their merits and demerits.
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- Find a location (office and warehouse) for your business
Business location is very important particularly the warehouse since it is the actual place the physical product will be dispensed. Therefore you must choose a location that is closest to retailers and other customers. For the administrative office, it may not be too far from the warehouse to facilitate easy flow of business. Make sure there is an access road to the warehouse, adequate security, lighting system and permissible temperature for the goods in the store.
- Register for taxes, permits and procure insurance
Register for both federal and state taxes, and obtain the necessary permits if you are to start and run your business to avoid being at odds with both the federal and state laws. It is also necessary to be ensured particularly for the goods in the warehouse. If you are going to hire workers, additionally, you are going to obtain the employer identification number (EIN)
- Set up your website or blog
In addition to the distribution of flyers, word of mouth and advertising in the local newspaper and radio, you should design an interactive website and use social media to drag traffic to your site.
This is particularly important if you intend to sell directly to other customers such as exporters. The website should layout prices; describe your products with tags and full photo of every product item.
It is also a good idea to invest in search engine optimization (SEO) to be able to link potential customers to your site by enhancing its discovery in search engine results.
- Contact manufacturers for products
While identifying your market, the level of market demand and the products you intend to satisfy their needs, it is time to decide on the companies you will represent in the distribution business. Find out the necessary financial and legal requirements involved.
Breaking into the big manufacturers as a newbie might prove difficult because of the financial implications, so target new manufacturers that have good products. But you may have the opportunity to become sub-distributor if you are attracted by the high standard and popularity of their products. But you must try to buy from the source if you want to obtain the best price.
- Create products’ catalogue
Products’ catalogue is crucial in distribution business since you may be selling online and products need to be identified on the catalogue before an order is placed. Produce a colourful catalogue with quality photos of your products, serial numbers (means of identification) and a brief description of the products.
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- Purchase stocks
The level of stocks you keep is crucial to the success of your distribution business. The inventory should meet immediate demand and also serve as a buffer stock in case of a sudden rise in demand. But generally, the stock level should depend on the following:
- To meet anticipated demand.
- Taking advantage of bulk purchase discount, e.g. reduction in ordering cost.
- Variation in sales demand. To meet demand during seasonal fluctuation in usage — greeting cards calendar, umbrellas, etc.
- A deliberate policy of management to maintain adequate stock when the government places such stocks under an import licence or complete ban.
It is also important that management avoids both the cost of overstocking and under stocking which includes the following:
- Interest on capital tied up in stock.
- Storage costs – rent, rates, light, insurance, etc.
- Insurance premium on materials.
- Cost of deterioration.
- Pilfering and protection costs- security.
- Obsolescence – out of date stocks
- Start marketing your products
Begin to unveil your promotional campaign by distributing your catalogue to potential buyers. Also, hand out your flyers and advertise in the local newspaper and radio.
Offer generous discounts to orders placed within the first 30 days or thereabout. Always be truthful to your customers, even when you don’t have a particular line, offer them an alternative and direct them where to obtain the stocks.
During product scarcity, allocate available stocks fairly and counsel your customers when stocks are likely to be available.
Use your online presence to market your products and use all available means to drive traffic to your site. Don’t forget to use SEO properly for online searchers to find you on Google search.
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Conclusion
The distribution business is a big business even when you are not big at the start-up. With good planning, selection of the right niche and market: together with back-up funding, the business will break-even within the first six months and begin to make a profit thereafter.