A Distributor or Re-seller as they are often known, buys goods in its own right from a Supplier. The Distributor then sells the goods to end customers where the end customers are customers of the Distributor. The key element here is that the supply contract is between the Distributor and the end customer – NOT the Supplier.
Distribution arrangements are typically used as a low risk means of expanding business into new markets or territories. A Distributor is essentially a Re-seller who assumes liability for products purchased. The Supplier of those products has less control over the Distributor’s activities but does pass on a degree of risk in respect of the products to the Distributor. There are a number of types of distribution arrangements as follows:
1. an exclusive distribution arrangement exists where a Supplier agrees to sell products only to the Distributor within a certain defined territory and agrees not to appoint other distributors to sell products directly to other customers within that territory;
2. a sole distribution arrangement is one where a Supplier appoints a Distributor as its only distributor in a territory BUT the Supplier reserves the right to supply products to end users in that territory;
3. a non-exclusive distribution arrangement gives the Supplier complete freedom to sell directly to end users and to appoint other distributors within a territory; and
4. a selective distribution arrangement exists where a Supplier agrees to appoint additional distributors in a territory if they meet certain criteria. This effectively limits the number of distributors appointed within a territory.
If a Supplier is considering appointing a Distributor in a particular territory to promote and sell their products, given the degree of autonomy granted to a Distributor, it is crucial for the Supplier to ensure that any Distributor it appoints is financially and commercially sound. It is advisable for the Supplier to research the territory, research the Distributor, and in particular to ascertain the Distributor’s financial standing and credit worthiness. The Supplier should also try to ascertain a potential Distributor’s other commitments to ensure that they don’t conflict in any way with the Supplier.
It should be noted that laws governing distributorship arrangements vary from country to country and Supplier’s should always seek legal advice.