Sunday, November 13, 2011

Independent Distributors, Brokers

In recent year the term independent distributors has arisen. While the name was clearly intended to make them sound like authorized distributors, what they really are is brokers that purchase and carry inventory speculating on future demand or shortages. Whether you call them independent distributors, brokers and grey market sales the terms that all refer to the same type of activity. They are companies that purchase and resell products from unauthorized channels. The source of their materials may be from companies that sell off their excess materials. The source may be:
1. authorized distributors that purchased in excess of their demand to drive a greater discount on their purchases.
2. other independent distributors or brokers.
3. from shipments that were damaged in transit.
4. from irreputable supplier’s who had quality problems with a lot where it would cost too much to screen out the good parts, but don't want to lose the value in what may be good ones. Those sales are strictly as-is.
5. counterfeiters.

The simple fact is when you buy these you don’t know:
a)where they have come from,
b) how they have been handled;
c) how they were stored;
d) or whether they are the real thing or counterfeit.
Counterfeiters have also become so adapt at counterfeiting products that most suppliers can’t determine whether the product is real or not simply from a date or lot code. They would need to do destructive tests.

Since you are not purchasing the product from the supplier or one of their authorized distributors, the original manufacturer of the product has zero obligations to you in the event there is a problem. You have no privity of contract with them and an unauthorized channel has no right to pass through any supplier warranties that an authorized distributor can provide. Any agreement or purchase order that you write is strictly with the specific party you purchased the product from. That company is only a buyer and seller of products. They do not have the capabilities that the original supplier has when it comes to correcting a problem or defect. They may be able to provide you with a replacement if they have one. If they don’t the best you can get is a refund of your money. They also will not have the financial strength that the supplier has in standing behind any contract commitments. Your ability to enforce any terms or recover any monies with a foreign independent distributor or broker would be both difficult and costly.

I would also be very leery when the suggestion to use and independent distributor comes from the contract manufacturer. I’ve run into situations where a contract manufacturer that was having problems getting supply suggested that we use an independent distributor.I did some checking found out that the “independent distributor” was not really independent. The independent distributor that was owned by the contract manufacturer. I then realized that the contract manufacturer may have been purchasing more quantities than we needed under our authorization and contract price and probably was selling those to their distribution company. They were counting on the fact that there would be times when we had inaccurate forecasts and couldn’t get it from the supplier in time or there would be a shortage where in both cases they could sell those products at a premium. That meant we would be losing in two ways. We would not get any warranties or protections from the original supplier and we would also be paying a significant premium price to get the products.

Independent distributors, brokers and grey markets should be a last alternative in sourcing products. They should never be used to try to reduce the cost.I’ve seen people do this and wind up with counterfeit products that failed in their application. The net result was millions of dollars in service calls, rework costs and huge customer satisfaction issues and a claim against a broker that simply didn’t have the assets to get any significant recovery against.

The old Latin saying "caveat emptor" or buyer beware is a must any time you consider dealing with unauthorized product channels.

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