Disintermediation: Definition and impact on your procurement department

June 20th, 2024
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Disintermediation involves reducing or even removing the various intermediaries that exist throughout the procurement process between two stakeholders. This means that consumers, both individuals and professionals, buy directly what they need from their suppliers, without going through a distribution channel, wholesaler, or any other intermediary. While disintermediation offers undeniable advantages, particularly in economic terms, it also raises many challenges for procurement departments in companies.

Disintermediation: Foundations and applications

Initially, digital progress facilitated disintermediation in many sectors such as travel, tourism, insurance, finance, and software. Thanks to the rise of e-commerce and information and communication technologies, suppliers were able to sell directly to consumers.

The reduction of intermediaries through disintermediation meant a direct relationship with customers, but also greater efficiency and transparency, as well as fair remuneration according to the law of supply and demand. Often, suppliers were able to increase their margins and/or lower their prices. This is how intermediaries such as tour operators or brokers gradually withdrew from the market, as they were associated with a loss of value by both ends of the supply chain.

However, the example of disintermediation has led to an almost infinite proliferation of product and service offerings, driven by globalisation. This is why, in this saturated competitive landscape, we now observe a trend towards reintermediation via online platforms. These aim to aggregate offers and guide consumers through their purchasing journey, positioning themselves as a key crossing point.

In the corporate world, the most appropriate approach depends on the procurement category. The benefits of disintermediation, such as cost reduction and increased efficiency, are offset by the complexity of managing supplier relationships. In other words, disintermediation may be of interest for head spend and mid-tail spend, which have a major financial impact within the company, but it’s different when it comes to long tail spend.

The Pareto principle, also known as the 80/20 rule, distinguishes three main procurement categories:
  • Head spend accounts for 80% of a company’s expenditure and covers 20% of the total number of procurement segments;
  • Mid-tail spend represents 15% of expenditure and 30% of procurement segments;
  • Long tail spend accounts for 5% of expenditure and 50% of procurement segments.

The necessary intermediation for long tail spend

Because it covers the majority of procurement segments, long tail spend concentrates most suppliers, orders, and product references. For procurement departments, this results in a certain complexity in managing all of these flows.

However, it is crucial to bring long tail spend under control, just like head spend and mid-tail spend. Otherwise, its processes can quickly become deficient and lead to hidden costs (maverick spend, managing multiple suppliers, errors, and returns…). Managing long tail spend better, therefore, improves companies’ operational and economic performance.

This is where intermediation makes complete sense, rather than disintermediation. To structure this procurement category, which represents hundreds or even thousands of suppliers, it is essential to rely on one or more intermediaries. This could be a retail chain and/or a marketplace that offers a wide range of products and services, or even a consulting firm to which you can outsource the management of this procurement category.

These intermediaries allow for rationalising the supplier panel, optimising the company’s resources, and managing supplier risks better. The challenge is then to opt for effective and virtuous intermediation.

The key role of virtuous intermediation

Virtuous intermediation emerges as a relevant solution to the limitations posed by disintermediation. This strategy involves turning to intermediaries who bring real added value throughout the procurement cycle but also have a positive impact on the environment and society. This is, for example, the case of broadline distributors who are committed to Corporate Social Responsibility (CSR).

Real added value

First, distributors master the entire operational chain, from supplier selection to customer service and product returns. Unlike marketplaces or retailers, they are therefore guarantors of the quality, origin, and performance of the goods sold. While disintermediation leads to savings, it is also important to emphasise that virtuous intermediation helps to reduce the Total Cost of Ownership (TCO) through contract negotiations, volume discounts, and administrative costs optimisation.

In addition, they provide services that bring real added value to end customers:

  • Furniture installation and assembly;
  • 3D planning for layout projects;
  • Expenditure optimisation;
  • Transaction digitalisation…

A globally positive impact

Simultaneously, virtuous intermediation is based on the idea of producing a positive global impact for stakeholders (mainly customers and suppliers) as well as for the environment and society.

In this sense, such an intermediary integrates and promotes sustainable practices:

  • Selecting responsible, local suppliers who have signed an ethical charter;
  • Offering sustainable products (made from recycled materials, energy-efficient, refurbished…) and circular services such as equipment rental or collection and recovery of old products;
  • Contracting with service providers that promote professional integration, etc.

As you can see, the processes of disintermediation and virtuous intermediation are complementary, each presenting its own benefits. Ultimately, it is important to adopt the right approach depending on the procurement category to get the most out of it.

For example, a furniture manufacturer needs to deal directly with their wood supplier through the disintermediation model but they cannot take the same approach for their long tail spend (office supplies, hygiene products, workshop furniture, personal protective equipment…). This would be extremely time-consuming for their procurement teams, but also for their internal customers. By making the right choice, each company is therefore able to gain in performance and competitiveness while working towards a fairer, more sustainable, and more prosperous world.

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