Disintermediation

Disintermediation is the removal of intermediaries in economics from a supply chain, or cutting out the middlemen in connection with a transaction or a series of transactions. Instead of going through traditional distribution channels, which had some type of intermediary (such as a distributor, wholesaler, broker, or agent), companies may now deal with customers directly, for example via the Internet. Hence, the use of factory direct and direct from the factory to mean the same thing. Disintermediation is the removal of intermediaries in economics from a supply chain, or cutting out the middlemen in connection with a transaction or a series of transactions. Instead of going through traditional distribution channels, which had some type of intermediary (such as a distributor, wholesaler, broker, or agent), companies may now deal with customers directly, for example via the Internet. Hence, the use of factory direct and direct from the factory to mean the same thing. Disintermediation may decrease the total cost of servicing customers and may allow the manufacturer to increase profit margins and/or reduce prices. Disintermediation initiated by consumers is often the result of high market transparency, in that buyers are aware of supply prices direct from the manufacturer. Buyers may choose to bypass the middlemen (wholesalers and retailers) to buy directly from the manufacturer, and pay less. Buyers can alternatively elect to purchase from wholesalers. Often, a business-to-consumer electronic commerce (B2C) company functions as the bridge between buyer and manufacturer. However manufacturers will still incur distribution costs, such as the physical transport of goods, packaging in small units, advertising, and customer helplines, some or all of which would previously have been borne by the intermediary. To illustrate, a typical B2C supply chain is composed of four or five entities. These are the supplier, manufacturer, wholesaler, retailer and buyer. The term was originally applied to the banking industry in 1967; disintermediation occurred when consumers avoided the intermediation of banks by investing directly in securities (government and private bonds, insurance companies, hedge funds, mutual funds and stocks) rather than leaving their money in savings accounts. The original cause was a U.S. government regulation (Regulation Q) which limited the interest rate paid on interest bearing accounts that were insured by the Federal Deposit Insurance Corporation. It was later applied more generally to 'cutting out the middleman' in commerce, though the financial meaning remained predominant. Only in the late 1990s did it become widely popularized. It has been argued that the Internet modifies the supply chain due to market transparency. Disintermediation has acquired a new meaning with the advent of the virtual marketplace. The virtual marketplace sellers like Amazon are edging out the middlemen. Direct sellers and buyers connect with each other because of the platform created by the virtual marketplace vendor. There is quid pro quo for the vendor for the use of the platform, else it would make no business sense to create such a platform. If the buyer, having connected with the seller, circumvents the platform and talks to the seller and does her deal directly with the seller, then the platform owner is unlikely to get her revenue share. This may be considered a new form of disintermediation. In the non-Internet world, disintermediation has been an important strategy for many big box retailers like Walmart, which attempt to reduce prices by reducing the number of intermediaries between the supplier and the buyer. Disintermediation is also closely associated with the idea of just in time manufacturing, as the removal of the need for inventory removes one function of an intermediary. The existence of laws which discourage disintermediation has been cited as a reason for the poor economic performance of Japan and Germany in the 1990s. However, Internet-related disintermediation occurred less frequently than many expected during the dot com boom. Retailers and wholesalers provide essential functions such as the extension of credit, aggregation of products from different suppliers, and processing of returns. In addition, shipping goods to and from the manufacturer can in many cases be far less efficient than shipping them to a store where the consumer can pick them up (if the consumer's trip to the store is ignored). In response to the threat of disintermediation, some retailers have attempted to integrate a virtual presence and a physical presence in a strategy known as bricks and clicks. Reintermediation can be defined as the reintroduction of an intermediary between end users (consumers) and a producer. This term applies especially to instances in which disintermediation has occurred first.