Channel stuffers

Balancing ‘sell in’ against ‘sell out’ to ensure product availability while avoiding pushing channel inventory to dangerously high levels is a fine art. Vendors need to pay greater attention to local inventory levels to avoid being labeled as ‘channel stuffers’.

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By  Stuart Wilson Published  October 27, 2004

Balancing ‘sell in’ against ‘sell out’ to ensure product availability while avoiding pushing channel inventory to dangerously high levels is a fine art. Vendors need to pay greater attention to local inventory levels to avoid being labeled as ‘channel stuffers’.

Some vendors reckon they’ve got the balancing act spot on. They believe their channel managers are doing a great job of keeping channel inventory at a healthy level. What they don’t always realise is that grey product entering this region is already taking up room on resellers’ shelves.

Channel inventory levels and stock turns do not readily spring to mind as fascinating after-dinner discussion topics — most people would rather talk about sport, entertainment or even politics. But in the world of channel, inventory levels and stock turns are without a shadow of doubt hot topics for all concerned.

Hard drive vendor Seagate actually flagged up its success in controlling channel inventory when it announced its latest quarterly results. The vendor estimated that its distribution channel inventory for desktop products stood at 4.6 weeks of supply. Seagate claimed that for the industry as a whole, excluding itself, channel inventory was hovering around the 6.5 week mark.

In the Middle East, more than any other region in the world, channel inventory information is a precious commodity. The reason being that very few people know the precise situation, and those that do, tend to be concentrated at a second tier reseller level.

Yes, the vendors operating in the region know how much they’ve sold into their authorised distributors. They also receive sales out data from their distributors telling them how much of this kit has made its way down to the second-tier reseller level. Sophisticated vendors may even have rebate and incentive schemes in place with their second tier resellers that allow them to monitor how much sell out to end-users has actually occurred.

It all sounds great so far. Problem is, these vendors — especially in the components space — are only getting half the story. They are not able to see the full picture because the information they get does not take into account grey market product that has entered the region from Europe, Asia-Pacific or even the US.

This is particularly prevalent in the components space where the size of the products, their relatively high value and inherent price instability provide the perfect conditions for grey trade to breed. Channel inventory is where the real action is for many components vendors. Even for industry giants like Intel, channel inventory informs decisions about manufacturing capacity, pricing and even their product roadmap.

So, in some instances, components vendors can be partially excused for not getting a proper handle on their local channel inventories. However, for vendors of bulky finished goods — products that do not lend themselves so readily to the grey market — being guilty of channel stuffing is a cardinal sin. And yet there are still examples of vendors quite happy to stuff the channel to make their numbers.

If a product’s not selling as well as expected there are steps that vendors have to take. The many factors surrounding these decisions are in themselves highly complex. The action plan, which often goes along the lines of, ‘let’s stop making so many of them and let’s make them cheaper to clear out what we’ve already made,’ is not.

The secret for vendors and distributors is to really talk to the second tier channel and get an understanding of what they are seeing in the market. Some distributors do this already. They understand that no matter how hard a vendor pushes them to take product, sometimes it just makes sense to say no.

The problem is some vendors don’t like taking no for an answer and will stuff the channel wherever, however, and regardless of the consequences, just to make a target (and hence qualify for a personal bonus). Sometimes it is easier to run away from a problem than tackle it head on.

I’m talking about major vendors so desperate to make their numbers they are happy to do special one-off deals with distributors — with anyone in fact — knowing full well there is no way the stock they have sold will find its way to an end-user anytime soon. Stories in the market about warehouses in Saudi Arabia stuffed full of product that vendors sold into the channel even though there was nowhere for it to actually go are pretty common.

The Middle East market has been through a fairly tough few months. End-user demand has been ticking along in a satisfactory fashion, but it has not necessarily matched vendors’ ambitious expectations. This has created a situation where inventory levels rise and vendors’ sales teams flirt with becoming ‘channel stuffers’.

If vendors have engaged in their own brand of ‘monkey business’, they should make the most of the short-term rewards it brings them. Sooner or later, at some point down the line, this shadow inventory will come back to haunt them.

Channel stuffers have a limited lifespan. No one can stuff forever and distributors and resellers have a nasty habit of biting back when vendors go too far.

Stuff in haste, repent at leisure.

Which vendors are the worst ‘channel stuffers’ in the Middle East? E-mail us your choice of the Middle East’s top ‘channel stuffers’ and any other views on this topic.

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