What is Disintermediation?
Disintermediation is the removal of different elements within the middle of a supply chain. The intermediaries in product development – or “middlemen” – are removed from the supply chain to cut costs or shorten the time duration within a chain.
Disintermediation can influence the overall cost of the product, as well as increase the overall profit margins. It can allow companies to remain more cost-effective against their competitors, as well as give them a pricing advantage in the marketplace.
- Disintermediation is the removal of different elements within the middle of a supply chain. It can influence the overall cost of the product, as well as increase the overall profit margins.
- Online disintermediation often attempts to cut out the wholesaler and retailer and can sell products directly from the manufacturer.
- The origins of the term disintermediation can be found in the financial industry. When investors were able to invest directly into different types of products, the investment market went through disintermediation.
How It Works
Different examples of the disintermediation business model exist in different sectors, and it is often a staple of the online retailer industry. Disintermediation is not a one size fits all approach to supply chain management; however, we will also look at some of the risks and pitfalls involved with the concept. The diagram below shows several stages of a disintermediated supply chain:
Origins of the Term Disintermediation: Context Through History
Disintermediation’s usage as a term can be traced back to the finance industry. When investors were able to invest directly into different types of products rather than leaving interest to only accrue in a savings or checking account, the savings and investment market went through disintermediation. It was generally accepted as a term exclusively used in finance and insurance until it became more colloquially used in all other industries.
The Internet brought forth a new frontier of online retailing and sales that disrupt the traditional business model. Customers are given access to a wide variety of goods that can be purchased directly from suppliers and wholesalers that exist in the form of web-based stores online. Online disintermediation often attempts to cut out the wholesaler and retailer to sell products directly from the manufacturer.
Some types of online disintermediation attempt to only cut out the retailer and act as a type of B2C wholesaler to a wide online market. The B2C platform has proven to be highly profitable and, in many cases, has caused traditional brick and mortar retail stores to fight to hold on to market share, and even disappear into bankruptcy altogether.
Just in Time Manufacturing and Disintermediation
The concept of just-in-time manufacturing in supply chain management is one that is closely interlinked with disintermediation. When a cutting-edge supply chain management technique is integrated, it reduces the need for warehouse storage and the logistics around that function. An intermediary in the chain is removed, and disintermediation occurs.
Disintermediation: An Imperfect Technique
Disintermediation carries some caveats and pitfalls with it as well. When shipping goods to the end-user, it can sometimes end up being less cost-effective than shipping items to a centralized location – like a big-box retailer – and letting your customer come to you.
When a customer comes to the centralized location, it can end up reducing the overhead of shipping individual items to consumers; however, if you achieve economies of scale like Amazon, you can integrate individualized shipping and reduce costs.
Supply chain management is complex. There is generally no surefire approach to determining an effective way to develop a supply chain across different industries or even across different companies within the same industry.
Disintermediation can be a powerful tool to understand and test in different manufacturing scenarios to determine if such a type of business model can give a business a competitive advantage or serve as an unnecessary hindrance to profitability and operations.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: