- As published in Australian Reseller News August 8, 2001.
One of the oldest methods deployed by a vendor to give lagging numbers a rocket at critical points in the financial reporting calendar, is to try and shift the stock-holding burden to channel partners.
This is an activity known as channel stuffing. It is also an endeavour that does just that; it stuffs the channel.
With the industry's most recent slowdown now reaching its first birthday, crimes of channel stuffing seem to be making a comeback and people are going to get hurt - like Siltek, for example, and some of its vendor partners I suspect.
Vendors can stuff the channel in a number of ways, including appointing new distributors, offering rock-bottom prices to all and sundry, or setting unreasonably high rebate targets for distributors with very tempting rewards for hitting them.
A new distribution partner is always good for a nice, fat first order - a newly validated agent will want an array of stock to peddle. Never mind that the vendor's other distribution partners are now sure to find it even more difficult to move the stock they are holding.
Meanwhile, those "very exclusive", special large-order-at-discount-prices opportunities that come around in March, June, September and December each year can also be hard to resist for distributors. If they don't take them up, the vendor is sure to work its way through lists of known distributors and offer the same deal to the next guy.
Some of the larger distributors I spoke with last week said they are receiving calls every week from vendors that already have healthy distributors in this country. They are being offered large batches of aging stock at basement prices.
What benefit does that bring to anyone bar the sales manager and his quarterly numbers? None. Suddenly there is all this extra stock in the channel but no extra buyers.
Eventually, there is a whole raft of dead stock on wholesale shelves and often an outstanding debt to a vendor, a debt that will be hard work to collect on or the subject of a creditor's claim to an appointed liquidator when the distributor goes broke.
Then we have vendor rebates; those tasty morsels, highly attractive but worthless unless nominated targets are reached. These are guaranteed to get a wholesaler ordering if they are short of the goal line because often the rebate's existence is built into their pricing equation. Therefore, at the end of each quarter, many distributors will buy up big to make their rebate target and then sell through to resellers at zero margin.
Insiders say it was this mentality that got Siltek into trouble with HP sales. Its resellers were starting to hold their orders until these periodic discounting frenzies came around.
None of these tactics are unethical by nature, but they do often go against the spirit of channel loyalty, as they are motivated by a vendor's need to get the numbers for quarterly reporting rather than what is good for their partners and users.
Unfortunately, channel stuffing also occurs in the second tier of the channel. Distributors are the first to denounce this practice, yet they often serve to perpetuate it by doing the same thing to their reseller customers, albeit to a much lesser extent.
Channel stuffing is not healthy for the channel and we should be vigilant against the vendors and distributors that try it on. The above-mentioned methods of channel stuffing by vendors are widespread, but they are not isolated or particularly inventive.
I am sure there are far more subtle, and yet just as damaging, methods of stuffing the channel that have been observed. I would love you to e-mail me and expose those vendors that are the worst channel-stuffing offenders. Let me know who they are and how they, either covertly or overtly, go about it.
Gerard Norsa is editor of Australian Reseller News. Email him at email@example.com