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Disintermediation Explained

Disintermediation Explained

Traditionally, producers distribute their goods to intermediaries (generally, distributors). These intermediaries supply those to the end customers. In a disintermediated system, the consumer directly deals with the producer, thus removing the intermediaries or middlemen from the supply chain. There may be more than one level of intermediaries in a supply chain.

A Little More About Disintermediation

Disintermediation often reduces the price of the products. Online shopping is one such system where the consumers buy directly from the company’s website. In the retail market, it is commonly known as “factory direct”, where the consumer receives the goods directly from the factory or company’s warehouse.

In finance, the investors may withdraw their funds from the intermediary financial institutions like banks or other savings and loan association and may invest the money directly to a company’s bond and equity shares. It is done in an attempt to receive a higher return.

Advantages of Disintermediation

This system is considered to have many advantages for both the producers and customers. As direct communication can be established with the customers formulating a better marketing strategy becomes easier. As the producer is directly interacting with the consumers it eases the process with a lesser number of transactions between them. It may also help in developing a better understanding of the demands of the customers. The customers can report issues regarding a product or service directly to the service provider or manufacturer and may register their dissatisfaction or appreciation. This process saves money, time and energy of both the parties.

Why Does the Disintermediated System Remain?

Even after all these advantages, many companies, as well as customers, still prefer the traditional system of distribution and investment. Removing the intermediaries puts an extra burden on the manufacturing companies. They may need to invest more money and manpower in-house to run the supply system without intermediaries. It also means much more responsibilities which are otherwise taken care of by the middlemen. Investors often find it more comfortable and safer to invest their money in banks and other financial houses. Investing money directly into the market needs skill and more research. One needs to plan their investment thoroughly in order to get a guaranteed and higher return.

This system also poses some challenges in the economy as removing the middlemen leads to job loss. It may also lead to lack of transparency in the market and arbitrary price hike by the producers.

References for Disintermediation


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