The practice of ‘channel stuffing’ may have had its day, thanks to a US financial act that discourages vendors from making monthly or quarterly calls asking distributors to buy extra stock at the last-minute to artificially boost their sales.
The regulatory Sarbanes-Oxley Act was a direct result of the Enron, WorldCom and other financial scandals. As well as tightening accountancy standards, it has also helped stamp out channel stuffing.
Prompted by the US government, vendors have contributed $US400 million to fund market intelligence for retail investors. The legislation’s compliance is less than a year away.
Channel players said channel stuffing was a major problem in the late 1990s. However, vendors had since realised the practice was more trouble than it was worth. The impending US legislation should finally kill it off.
When security vendor SonicWall recently resigned its contracts with its Australian distributors — ACA Pacific, Lan 1 and Dovetail — new accounting procedures came into play.
SonicWall could no longer count shipments of its products to the warehouses of its three distributors as sales.
“We have changed,” SonicWall regional manager, Tim Dickinson, said. “It’s sell-through as opposed to sell-in. Sell-in is to a distributor. Sell-through is to a reseller who has bought something because they have a customer,” he said.
“We don’t record revenue until it’s on-sold to a reseller. It is to do with Sarbanes-Oxley. We definitely have conservative accounting methods and everyone is focused on sell-through. It is much better for both parties and we are all moving on the same road.”
ARN contacted a range of distributors, who largely said US-based vendors had been the worst offenders historically.
Sales to channel partners were not real sales because they simply moved stock from one warehouse to another, said eXeed managing Michael Bosnar. This could lead to being left with unwanted boxes.
Products were increasingly commodity-based and margins were shrinking, Bosnar said, which meant channel partners could not afford to keep stock for four weeks. Yet some vendors still channel stuffed.
“The end of the month, the end of a quarter, the end of a financial year; you can almost pick out when you are going to get the best deals,” Bosnar added.
Tecksel director, Mark Kofahl, said US vendors with quarterly reporting pressures were particularly troublesome.
“There’s an old saying that you can rely on getting four calls a year from your account manager asking you to buy stock,” Kofahl recalled.
Many of these US vendors had disappeared, Kofahl said, which showed the process did not work. Consequently, there was less pressure for account managers to artificially boost sales this way and such quarterly calls were now rare.
“That’s the way it should be,” Kofahl said. “When the product is sold by the vendor to the distributor, it is just a transfer. It is just moving it closer to the end user. It is not really sold; it is not really a reflection of demand.”
Express Data’s marketing director, Peter Masters, remembered channel stuffing as a major problem about six or seven years ago but said it was now mainly practiced by new vendors who might become excited about initial supplies.
“Most vendors realise it is short-term and counterproductive,” Masters said. “It sets up problems for the future. If there is too much stock in a distributors warehouse, it will stack up and it will be a long time before the distributor stocks up again, so nobody wins.”
Managing director of Ingram Micro, Steve Rust, said that manufacturers had been severely burnt.
“A big channel stuff meant no sales the next month and products stuffed in the channel lose market value,” Rust said. “The manufacturers have learnt that channel stuffing is a bad strategy for the business.”
IBM PC division channel manager, Phil Cameron, said fat margins had ended, stock soon became obsolete and inventory was kept in shorter cycles.
He said IBM worked to a weekly-cycle. Its programs focused on selling-through.
“Channel stuffing is dead from an IBM perspective,” he said.
Market analysts at IDC and Gartner both said channel stuffing did not work because of the follow-on impact on succeeding monthly sales.
Vendors might also have to discount to get those extra sales, so stuffing comes with an added cost.
But how does channel stuffing affect their figures?
IDC’s Mike Sager said his firm would track sales. Blips caused by stuffing would show up, but they would balance out over time.
Gartner Asia-Pacific principal analyst, Martin Gilliland, said IT vendors had become increasingly strict over channel stuffing.
Oil companies might boost profits artificially by claiming to hold millions of barrels of oil, but the increasingly short time frames in the IT supply chain prevented this.