Emergence of the grey market and its disadvantages

AN increasingly competitive marketplace, the importance of strategic partnerships is vital. They add value, extend capability, save time and money, and help keep focus on the main game. For this reason, busi nesses frequently enter into a range of mutually beneficial strategic relation ships — usually to deliver a solution to the end-user that is more than the mere sum of its parts.

Modern distribution network models are a great example of just such strategic partnerships. They involve a great deal more than merely wholesaling equip ment to anyone who applies; ‘authorised’ distributors act not as commodity dealers, but rather as an extension of the team. In the case of technology providers, authorised distributors will most likely have extensive product training and expertise, even a team of dedicated product specialists. Moreover, they are generally in the unique position of being able to offer the standard manufacturer’s warranty, technical serv icing and more.

Illegal practice
Despite these advantages, some compa nies source technology solutions from outside the authorised distribution network. This is not an illegal practice, nor are the solutions purchased illegal or counterfeit. However, the goods obtained via this so-called ‘grey market’ will typically not be sold with the stan dard manufacturer’s warranty and full technical support; additionally they could be outdated, used or salvaged.

The simplest description of a grey market is the buying and selling of goods that are not what they purport to be. Grey market goods enter the market place in a variety of ways. In some cases, companies seeking a certain number of a particular component may order a greater quantity in order to qualify for a cheaper price. The excess might then be resold as discrete items for a profit. Other potential entry points are liquida tion of stock by companies that have over purchased, perhaps for spare parts; or insurance liquidators trying to make a profit on fire or water-damaged goods.

If these products appear online for sale, they may be acquired by a company searching the Web for a component that has just failed on a production line. Purchasing online is seen as fast and easy, but it is not always possible to discern that the source is not authorised.

Many people are unaware they are purchasing grey market goods, but those who do so knowingly should be aware of the risks they are running. The most impactful scenario is significantly greater downtime — either due to the failure of products that would not otherwise fail, or longer lead times and expense on repairs. If a company’s products and success depend on production lines working reliably, is the risk of increased downtime worth the few dollars that might be saved?

In some cases, failure might have more catastrophic impact. The loss of productivity associated with a produc tion line disruption, arising from a failure caused by damaged or out-of-date product, could lead to the loss of client relationships and costly large-scale repairs. The imagined saving from sourcing product outside authorised distribution channels is often quickly forgotten, while the cost associated with unintended and unwelcome conse quences lingers long after.

Quality assurance
A large part of the selection process for a technical solution often comes down to the reputation of the technology provider. Reputations here are under pinned by a commitment to reliability and quality assurance, service and support, ethics, as well as functionality and usability. Yet many of these attrib utes are worth little, unless the technical solution is sourced through authorised channels. Technology providers select their distributors carefully to help ensure each distributor is able to uphold the company’s core values and reputation. This means ‘authorised’ distributors make a significant commitment.

They commit to being knowledge able about their clients’ businesses, protective of their competitive edge, and invested in their success.

This extends to assistance with several different business aspects — such as management of electrical supplies spending, minimisation of risk, provi sion of extensive training for personnel, and deliverance of quantifiable cost savings. There is the potential to develop a highly valued business relationship that allows individual companies to focus on core competencies.

Underpinning the role of the autho rised distributor is generally a true tech nical expertise, and familiarity with the most up-to-date products and technolo gies. This allows them to partner with clients throughout the decision-making process to help with the design, imple mentation and support of the invest ment, including management of the electrical products supply chain.

For example, authorised distributors can guide the selection of the right product or solution for a specific appli cation, and advise how to use it correctly for optimum performance. They are trained to understand the application and fit the equipment to the project, which is not always the case for end- users, who may order incorrectly speci fied products if using unauthorised grey market channels. Technical specialists can assist in the commissioning and ongoing support of equipment.

Authorised distributors can also help ensure inventory is available when needed; here, access to a global inven tory system saves time and money. They may hold an extensive inventory or — to take it one step further — offer storeroom management services, parts management agreements, or custom inventory programs. Better inventory management means better service with excellent relia bility, lower costs and the certainty of long term supply.

Business relationship
Most companies who value their strategic business relationships — what ever their purpose — wouldn’t dream of circumventing those relationships. In fact, such relationships are usually in place because they offer the most syner gistic and cost-effective solution.

This undoubtedly holds for modern distribution networks, with the autho rised distributor forming key business relationships both upstream, with the technology provider it represents, and downstream with its own clients. The result is a solutions-provider that offers considerably more than the sum of its parts.

Grey markets may give the appear ance of a bona fide distribution channel, and may even seem to cost less in the short term. However, viewed more holis tically, the total cost of ownership may be somewhat different — and the risks are substantially higher.

[Darryl Hom is Rockwell Automation Regional Market Access Manager, South Pacific Region.]