Feeling stuffed

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If a list of the issues that vendors are renowned for turning a blind eye to was ever compiled then it’s a sure-fire bet that stuffing the channel with inventory would be near the top. Miscalculating the market’s appetite and flooding the channel with stock — deliberately or not — is guaranteed to cause turmoil among distributors and resellers, but unfortunately it occurs all too frequently.

Accurately predicting the correct level of demand in the market without overburdening the channel is something all vendors will tell you they aspire to, even though it ultimately remains a difficult feat to consistently get right.

In an industry such as IT, where indirect sales channels play such a vital role in transferring products from factory to owner, there will always be surplus stock in the market.

It is important to distinguish between poor forecasting or sales management - which encourages over-zealous inventory tactics - and channel stuffing, which possesses more sinister connotations.

In this part of the world, industry players often refer to channel stuffing when vendors dump excess stock into the market to alleviate inventory build-up or apply pressure on the channel to meet their own short-term sales quotas.

In developed markets - such as the US where channel stuffing is illegal - the practice essentially involves vendors shipping more products to partners than they can sell in order to inflate sales and earnings figures.

This has led various accounting bodies to question the policy of companies booking revenue on a ‘sales-in' basis, rather than when it has been sold out by the partner.

Whichever way you define it, the custom of stuffing product into the channel largely creates more problems than benefits in the long run. "Overstuffing a product in the channel will turn it into a falling knife - whoever catches it will get injured unless they have the right tools," warned Yasir Alkaar, general manager at consumer accessories vendor Promate.

"We all saw how the portable hard drive business got destroyed and caused dealers to suffer huge losses when the market was suddenly overstuffed with inventory. The inventory was much bigger than the real market size, but the vendors just watched their dealers lose every day. The best reaction to it was that some credit notes were distributed here and there," added Alkaar.

The Middle East CPU channel certainly knows the score as well. Only two years ago dealers in the Dubai channel accused Intel and its authorised distributors of aggressive channel dumping tactics that contributed to the collapse of several components resellers.

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