Which is more profitable: manufacturing or distribution?

. 7 min read
Which is more profitable: manufacturing or distribution?

India aims to become one of the largest manufacturing hubs in the world by 2025. With the pandemic hitting the entire world and turning the economy upside down, the country realised the importance of manufacturing and turned its focus on the Make in India campaign. This campaign also started incentivising business owners who are planning to set up manufacturing units and start production in the country. As the manufacturing industry grows, the need for distributors and other sales channels increases. Distributors come in all forms and sizes. Small distributors with local presence and regional knowledge gain a competitive advantage over others. The supply chain incorporates a multi-layered network of distributors, wholesalers and retailers.

The following sections talk about manufacturing and distribution businesses and the advantages and disadvantages of both.

What is a manufacturing business?

A manufacturing business is where industries manufacture original raw materials for a product of their own and basically “do business.” There are three types of manufacturing production strategies that are most commonly used to make more profit and benefit a manufacturing business.

1. Make to Order (MTO)

Make to Order (or Made to Order) is a strategy when manufacturing companies customize the product according to the customer's need and do not begin manufacturing until they receive confirmation of the order. One very familiar example is Dell Computers. In the MTO model, customers can order a customised computer, and the business delivers it in a few weeks. The great advantage of the MTO strategy is its ability to meet customers' demands in a more personalised and customised manner.

2. Make to Stock (MTS)

This is a production strategy where the business anticipates the customers’ demand and matches the inventory and production accordingly. The business/company would project and estimate the number of orders that their products can generate in a specific period and produce enough stock to meet that demand. This type of strategy needs a very accurate forecast of consumer demand to determine the production of stock. However, this strategy can sometimes cause overproduction and is a similar manufacturing strategy to MTA.

3. Make to Assemble (MTA)

Make to Assemble is when a manufacturing company produces and stocks only the essential parts/components of products and assembles them based on the orders placed by customers. This will allow customisation and also make manufacturing quicker. For example, in a standard DELL laptop, not all parts are manufactured by DELL itself. In fact, many components such as the chips and memory cards inside are supplied by Intel and other associated manufacturing companies.

Advantages and disadvantages of a manufacturing business

Although it can be capital intensive, starting up a manufacturing business is also highly rewarding. Before deciding whether you want to start a manufacturing or distribution business, it is essential to understand the advantages and disadvantages of both.

There are many benefits of starting a manufacturing business. The Make in India initiative and Atmanirbhar Bharat are actively promoting and prioritising the Indian manufacturing industry.  The government plans to invest significantly in this campaign to make manufacturing attractive and profitable to business owners. The government has announced Production Linked Incentive schemes (PLIs) of INR 1.45 lakh crores across ten sectors in its latest Union Budget.

One of the major advantages of setting up a manufacturing business in India is cheap labor. The average labor cost in India is five times cheaper than that of China. Along with labor costs, the number of unskilled labor and skilled engineers available for manufacturing processes is also high. India has started using high-quality equipment, which is leading to the production of high-quality products. We are adopting advanced manufacturing technologies like robotics, 3D printing, artificial intelligence, machine learning, augmented reality, virtual reality, and more that increase the efficiency, precision, quality, and profitability of the manufacturing business.

Some challenges that manufacturing businesses face in India are the availability of power, logistical inefficiencies, labor productivity, protection and enforcement of intellectual property.

The power fluctuations in India are very high, which directly affects the productivity, efficiency, and output rates of the manufacturing businesses. Moreover, the available power is becoming expensive. The production planning and the entire supply chain management are inefficient in India, which, along with the low labor productivity, makes it more inefficient. India is currently drafting reforms for its intellectual property laws to make them more risk-free and cost-effective.

What is a distribution business?

A distribution business or a distributor is an intermediary who assists in the movement of goods and services from a manufacturer to the end consumer. Distributors can be wholesalers, retailers, or suppliers on e-commerce platforms that help ship the product to the customer.

Distribution is an essential step in the business value chain before the product reaches the retailers or the end customers.  It is a highly profitable business in the value chain, and there are many benefits of being a distributor in the current Indian market.

Advantages of wholesale trade

One of the biggest advantages of wholesalers in the distribution channel is that you can predict your product margins. Also, wholesale distribution provides a lower cost to the end customers, which makes them return to the product and increases the recall value of your product.  Compared to retailers, wholesale distribution eases your operations significantly.

Wholesale businesses can give you access to a wide range of outlets and help you reach a larger audience. It is one way to grow your business faster as it leads to a network effect of retail stores, which can effectively boost your brand’s awareness. Also, it is easy and fast to expand globally when you sell wholesale products. While retail gives you a specific target audience for your brand, wholesale trade can take you to a much more widespread and broader audience. These are some advantages of using wholesalers to distribute products.

Conclusion

The profit margins in a business differ according to the type of industry, supply and demand model, supply chain optimisation, and its impact on both the distributor and the manufacturer. So, depending on the sector and the product, the distributor can make more margins than the manufacturer and vice versa. Usually, the manufacturers control the margins which the distributor gets. But the distributor has the advantage of reaching a wider audience and higher margins. However, distributors tend to generate higher profits because of lower fixed costs of investment in machinery, tools, and research and development.

Also Read:

1) How To Do Dealings In Business During The Pandemic?
2) How To Reward Your Employees For Their Efforts During Pandemic
3) How To Ensure Employee Safety During Pandemic In Your Business?
4) How to Ensure Sufficient Stock During this Pandemic in your Business?

Stay updated with new business ideas & business tips with OkCredit blogs in English, Hindi, Malayalam, Marathi & more!
Download OkCredit now & get rid of your bookkeeping hassles.
OkCredit is 100% Made in India.

FAQs

Q. How to calculate profit margins in any business?

Ans. There are two types of profits; gross profit and net profit. Gross profit is the profit earned by a business after deducting the cost of goods sold. Net profit is the profit left after addressing all your business expenses. These two are the key metrics that guide understanding the health of the business.

Q. What are the strategies for a manufacturer to optimize its profit margin?

Ans. Typically, a manufacturer's gross margin is around 25 to 35%. Some optimisation strategies like focusing on optimising customer margin, channel margins, improving the performance of various departments, supply chain optimisation with respect to processes, adopting advanced technologies for better efficiency and quality output can help the manufacturer achieve higher profits at reduced costs.

Q. What are the manufacturing hubs in India?

Ans. India is home to many major manufacturing hubs. Noida is one of the best automobile manufacturing hubs in the country. Yamaha, Honda, and other big players are established here. Hospet in the north of Bangalore is a major steel and iron hub. Apple Inc. has recently announced its plans to set up a plant in Bangalore. Major pharma and brewing manufacturers are established in Aurangabad (east of Mumbai). Nashik and Manesar are other auto and electrical engineering manufacturing hubs in India.

Q. What are some technologies that are shaping the manufacturing industry?

Ans. Advanced manufacturing technologies like robotics, 3D printing, artificial intelligence, big data, cloud computing, machine learning are changing the entire supply chain. These technologies provide solutions that help improve the efficacy, precision, productivity, and output of the company. These technologies act as catalysts that ultimately boost the economy.