AMWAY- DISTRIBUTION PROCESSES

Introduction:

Amway is one of the most successful American corporations today. According to the corporation's founders, Richard DeVos, and Jay Van Andel; "The company will experience a flourishing growth through the nineties."(Klebnikov, Paul:241) The company is presently the world's largest door-to-door sales coperation, and one of the most extensive service organization. Amway has presently about 10000 employees in sixtythree countries all over the world. In 1993 the corporation had sales equal to nearly $3.9 billion, and forecasted net profits (after tax) of 300 million for 1993 (forecasted by Forbes Magazine).(Amway Annual report 1992) Please refer to graph #1. The company has a "unique sales force", that is so unique because the size of the sales force. It is "close to 500,000 in the United States, 500,000 in Japan, and several hundred thousand more in places like Germany, Mexico, Korea, and Malaysia."(Amway Business review) Although, Amway can be seen as one of the most successful merchandise and manufacturing firms today, the corporation is facing one major corporate problem that could easily lead to a negative financial position.

Amway's basic concept is Network marketing. This type of marketing involves more than six thousand different products and services and is thus very extensive, and it requires a well functioning distribution system. I believe that Amway is facing a problem concerning it's distribution network of the company's goods. I would like to demonstrate this problem, and propose three possible solutions.

The Problem:

Amway's organization is highly decentralized, and it's management functions are delegated to first line supervisors. These first line managers are called main distributors in the organization. A major part of the sales revenue is based on the performance of these distributors. For a few years ago, products were sent to distributors all over the USA and in sixty other countries all over the world.(Phichntsiri: 12) This was a very expensive process, as it was more expensive to send small volumes rather than sending major bulks of products to wholesalers and retailers. I believe that this was a major problem which the corporation faced in a controllable manner, but a problem that could be more detrimental to the corporation in the future. The corporation could face severe problems in the process of being able to effectively compete with departmental stores, supermarkets, and discount stores.

Two years ago, top executive managers at the Amway corporation realized that they had to do something about the distribution process that the company faced. They realized that they lost major market shares, mainly because of unsatisfactory speed, and the cost of the delivery of products from only three main distribution centers serving the world.(Phichitsiri: 12) After studying the distribution processes from the manufacturer to the direct distributors, and finally to the customer, they realized that this process was too complicated, and there were at least two times as many steps in the distribution channel than needed. The old distribution system was divided into four main procedures, or distribution functions. These were for non-Amway produced items; (1)From manufacturer to agent/jobber, (2)from the agent to Amway's main distribution center near Grand Rapids in Michigan, (3)from the grand distribution center to the private, contract or common carrier (to 67% US mail), (4) and finally to the direct distributors, who distributed the goods to the customers. (Benar: 94) This pathway was very time consuming, and errors could easily be made.

Amway's top management discussed the problem within the organization, and found a solution to the distribution problems, which would decrease the costs by at least 30 percent, decrease delivery time to the customer, and finally increase the reliability (quality) of the distribution process. This basic concept of the solution was to cut out two, and in some cases three steps in the distribution process. The two primarily steps that were cut out were the agent (the jobber) and the grand distribution center. Also, in a few isolated cases, the manufacturers for only Amway products such as detergents, and other household products, shipped the goods directly to the direct distributors. This was a major advantage, as it saved the corporation even more more money and time. In addition to this change in the distribution system, Away's managers decided to try to localize the distribution centers all over the corporation's geographical market share. Instead of only having a few large, and centralized distribution centers, it was chosen to decentralize the distribution network, and concentrate on setting up smaller distribution centers. These local "warehouses" only stock bulky, and very popular products. By decentralizing, Amway has been able to "cut the delivery time of normal distributor goods from two weeks to an average of three working days." According to Rich DeVos, co-owner of the corporation; "Our customers are most important, and we have to satisfy their needs, otherwise, we will no be able to compete with other organizations dealing with similar concepts to those of the Amway corporation." (Kiebnikov 248) By decreasing the time of delivery, Amway has given a more competitive customer time utility for it's products. It has also been able to save large amounts of money by using less steps in the distribution channel.

Further Improvements Possible Solutions:

The main problem with any kind of distribution is that companies that relies upon physical distribution of products is that there is these organizations have no or very little control over the cost of transportation. There are too many external factors involved in this particular situation. Such external factors includes; strikes, increase in fuel costs, and temporarily increase in the demand of transportation during certain time periods. I believe that the Amway corporation has done a good job in trying to find a good solution to it's distribution problems. This can be demonstrated by the improvements in corporate performance. I still believe that there are further improvement that can be done to the system. It must always be taken into consideration that the customers end -up paying special shipping fees on goods, that usually equalizes the difference between Amway's retail prices and the prices quoted in normal shops. Amway does not want to be compared to normal retail stores, supported by the firm's slogan; "Shop without going shopping". (Keoamanek, Pongsutat: 48) This is a great concept as long as people have enough money to do shopping without going to their neighborhood departmental store, and are able to spend more money for a door-to-door service. I believe that there are basically three different solutions to the problem with distribution of products. These are; increasing the amount of small distribution centers throughout the geographical market share, second, start using Amway's whole sellers as direct distributors to the customer, and finally to ship products directly from manufacturing to the customer.

The first solution would be to further develop the distribution network. It is crucial for a corporation such as Amway to be the best in this field of doing business, and according to Richard DeVos "there is always room for improvements." (Benar: 48) Presently, most of the goods that the company sell go through three of Amway's main distribution centers, which also serve as being warehouses for some of the products. If Amway would set up even more local, distribution centers, and increase communications between all the steps in the distribution pathway from manufacturing of the good to the customer, it would be easier and less expensive to serve the customer. In the future, more local distribution centers be built, and these should not only have the most popular products in stock, such as toiletries, and home appliances, but also a wide variety of goods. By the use of such distribution centers, the company could also further improve the speed of delivery of the products to the direct distributors, so that they can distribute the goods to their customers.

A second possible solution would be to develop a distribution network in which manufacturers and wholesalers would actively work together with the Amway corporation in the distribution process. As this process would to rely more upon wholesalers, that would decrease the capital cost for the Amway corporation, and decrease the amount of funds spent on transportation from the appropriate port to the destination destination (the customer). This does not mean that all the distribution centers should be closed down, as these could deal only with directly produced Amway products. It would not be very profitable to make wholesalers buy products produced by the corporation, as Amway will act as a sole manufacturer in this second external step in the distribution process. Usually, a manufacturer does not make as much money out of the product, as what a jobber (agent), wholesaler, and retailer do. Also, the corporation has to keep up it's company profile, by being the sole distributor for it's own goods. Now, the reader may question how the wholesalers get in to the picture? Wholesalers would be responsible for the distribution process for less numerous merchandise goods (goods that do not sell in too large quantities). Such goods would be more effective to ship directly from the wholesaler where Amway acquire the products, instead of sending these to one of the distribution centers first. Amway would benefit in basically two different ways if this process is implanted. First, it would cut down on the transportation expense and the delivery service would be faster. Second, the corporation would be able to cut down on the cost of keeping expensive inventory in warehouses, and decrease the risk of running out of products if the demand is great, or on the opposite, having a surplus of products.

Finally, the third, and the most revolutionary solution would be to make the manufacturers act as distributors. As Amway can provide a large number of faithful customers, there are presently over two thousand companies that are interesting in joining the Amway family. Therefore, it should be possible for the corporation to demand for increased service from the manufacturers. Amway's producers that are located within the US could send goods ordered directly to the customer. This would in most cases skip two steps in the present distribution process; wholesalers or agents, and Amway's own distribution centers. I understand that this would be a too complicated process for very large amounts of goods, as this would require the manufacturer to set up a new distribution department, but for smaller amounts of bulky goods, this would be an excellent proposal. For instance, if a customer would like to buy a refrigerator from Amway's mail order catalogue, this refrigerator presently has to go from the manufacturer to the wholesaler, to one of Amway's grand distribution centers, and then to the customer. In my final proposal, this particular product would only go through one step, from the manufacturer to the customer.

Conclusion:

A couple of years ago, Amway faced decreasing in profits due to an ineffective distribution network. The executive management developed a new concept of distribution channel This was facilitated by decreasing the amount of steps needed in the distribution process of a good from the manufacturer to the customer. Instead of sending everything from three grand distribution centers, small distribution centers were built over a large geographical area. By doing that, Amway was able to increase the coverage of it's products, decrease the time needed for transportation, and decrease the cost of distribution. As time and possession utility are crucial to the customer, and that the corporation was able to partly satisfy these for a greater majority of the people, the amount of sales increased.

I believe that there are basically three different solutions to the problem concerning the distribution pathway of products from manufacturing to customer. These are; increasing the amount of small distribution centers throughout the geographical market share, second, start using Amway's whole sellers as direct distributors to the customer, and finally to ship products directly from manufacturing to the customer. As the current market is very competitive in Amway's field of operations, it is crucial to be able to maintain a powerful market share. This can only be done by satisfying customer needs. I believe that these needs can be satisfied by ensuring that time and possession utility are available for the products.

BIBLIOGRAPHY.

Klebnikov, Paul, "The Power of Positive Inspiration." Forbes 9 December 1991: 244-251

"Changes in Amway's Distribution Network." The New York times. 4 September 1993: (8)

Eggleston, Thomas, "Networking." Advertising age. 7 December 1992: (6)

Muller, Joann, "Amway Tailors Marketing Approach to Individual Foreign Cultures." Journal of Commerce and Commercial. 8 July 1991: (4)

Keoamaneek, Pongsutat, "Amway, A niche of its Own." Business Review 1 December 1992: (46-49)

Phochan, Phichitsisi, "Amway: Networking that Works." Business review 1 November 1991: (11-13)

Benar, Richard, "Cleaning up?" Forbes 25 March 1985: (94-97)

"Amway Corporation" The Wall Street Journal. 2 July 1993: (21)

Amway Corporation: Annual Report - Amway corporation, (93-01-10)

"The Amway Business Review" Amway corporation 1 September 1992: (pamphlet)

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