Supply Chain Disintermediation

Disintermediation could happen in any supplier/manufacturer and intermediaries (retailers or wholesale) relationships. The supply-demand imbalance creates an opportunity for the supplier to disintermediate and to reach out to other intermediaries or end users, to sell the products at a lower price that could create a price war between the intermediaries. This is an inherent risk for the downstream intermediaries that would result lower profit margin. Therefore, retailers seek means and instruments to minimize their exposure to suppliers’ disintermediation.

Supply chain disintermediation has reshaped the smart phone industry (Bicer & Hagspiel, 2016). Samsung entered to the industry as one of the Apple’s key suppliers and transitioned from a key supplier to the biggest competitor. Another example in the smart phone industry is Foxconn, Apple’s long-term contract manufacturer. Apple decided to diversify its manufacturing in 2013, therefore, reduced Foxconn’s ordered volume. Foxconn deployed its unused capacity to manufacture smart phones for Chinese entrant Xiaomi and helped them to sell the products to Western countries (Bicer & Hagspiel, 2016).

Bicer and Hagspiel proposed a contract model to minimize the risk of supply chain disintermediation. They elaborate that price, cost, and future demand are variables to both suppliers’ and retailers’ supply chain systems. Thus, a contract drafted the both sides terms would reduce the disintermediation risk. Such contract’s terms and conditions would be variable, which makes it difficult to draft a comprehensive contract. As an example, retailers prefer to add flexibility in the volume to the contract, which makes the suppliers’ cost higher, and increases retailers’ profitability.

Below are two examples of disintermediation in two different market segments; one is the real estate brokerage, the other is the banking system.

Real Estate Brokerage- there are companies that have tried to shift the brokerage services to the internet. These companies have learned to use the internet for marketing, information-resource and educational tool. They have been following a model to disintermediate the brokerages by providing the properties information on the web (Nwogugu, 2006).

Banking System- disintermediation could be interpreted into two meanings in the banking industry. First, it can be understood by decreasing importance of banks mainly traditional ones as loans operation institutes among financial intermediaries. Second, disintermediation may be perceived as withdrawal of funds from the banks in order to invest them directly. In this approach, the role of financial intermediaries is diminished (Marszalek, 2016). The bank industry has invested in online banking to reintermediate its position as a financial intermediary.

I conclude the intermediaries could rely on a comprehensive contract with favourable terms that limits the risk of disintermediation. Creating their own brand, such as Costco’s Kirkland, would make it harder for suppliers to disintermediate. Investing in technology to create online stores would make the intermediaries competitive in their space which would warrant enough volume and product backlog.

References:

Bicer, I., & Hagspiel, V. (2016). Valuing quantity flexibility under supply chain disintermediation risk. Elsevier.

Marszalek, P. (2016). Disintermediation of Banks-Causes and Consequences. Finanse Publiczne.

Nwogugu, M. (2006). Issues in disintermediation in the real estate brokerage sector. Elsevier.