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Disintermediation

From Academic Kids

In economics, disintermediation is the removal of intermediaries in a supply chain: "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate (such as a distributor, wholesaler, broker, or agent), companies may now deal with every customer directly, for example via the Internet. One important factor is a drop in the cost of servicing customers directly.

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 bypass the middlemen (wholesalers and retailers) in order to buy directly from the manufacturer and thereby pay less. Buyers can alternatively elect to purchase from wholesalers. Often, a B2C intermediary functions as the bridge between buyer and manufacturer.

To illustrate, a typical B2C supply chain is composed of four or five entities (in order):

  • Supplier
  • Manufacturer
  • Wholesaler
  • Retailer
  • Buyer

It has been argued that the Internet modifies the supply chain due to market transparency:

  • Supplier
  • Manufacturer
  • Buyer
Contents

Impact of Internet-related disintermediation upon various industries

Strong impact

Still in progress (due to legal or structural obstacles)

Failed and became niche ancillary services

Discussion

An example of disintermediation has been Dell Computers which sells many of its systems direct to the consumer bypassing traditional retail chains. In the non-Internet world, disintermediation has been an important part of many big box retailers such as 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, disintermediation has often occurred less frequently as a result of the Internet than many expected during the dot com boom. Retailers and wholesalers provide 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.

See also: Reintermediation

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