Image: Flickr - Simon Cunningham These days, we often come across the derisory expression “channel stuffing” in merchandise business analyses. Many say it is the practice of booking revenue on occasions where product has been transferred to third party distributors. It is said, in many of these instances, that the liability in case of a non-sale to an end-user is retained by the maker or marketer that had earlier booked and reported the revenue.
The description of “channel stuffing” is often confused by accounting practices for the booking of revenue and whether or not an arms length sale has been completed. Sometimes instances so described turn out to be a straight out “revenue accrual” styled fraud, where revenue is booked without a transactional sale being completed or effectively guaranteed.
However, often the pretence of a contracted sales off-take agreement, one where buying unit volume quotas have been forced upon brand dependent distributors or reseller dealers are presented as if they are effective arms length transactions, which is highly dubious in many circumstances. The question always has to be asked, if the sales channel cannot move the product, upon whom does the ultimate liability for losses attributed to delayed, forsaken, or heavily discounted sales of inventory fall?
If a dealer has little collateral, then the re-seller agreement can practically found to be secured mainly by the value of the stock/inventory remaining in the channel. Then there is the matter of the consideration of the risk to the prospects for the manufacturer/marketer’s future sales. Or in other words, unless they can replace those resellers that they might choose to drive into liquidation for non-payment for inventory they could not shift with more effective ones, what happens to their future sales?
Often we have seen cases where a third party reseller is caught with stock they cannot shift, & many other resellers in the sales distribution channel are in the same situation. It is often not feasible for the manufacturer/marketer to do anything else other than offer the reseller a deep discount (or credit) on the unsold stock already booked in the past as sold at a certain higher price, in order that the reseller may then shift it, and remain a going concern.
Whatever happens, despite all the attempts at denial, if stock is not sold - often those claiming to have offloaded the risk are found to have borne the greater burden of resulting liability in the real world. We saw evidence of this with Australian miner’s supposed long-dated coal off-take export agreements with large Chinese importer customers, those same “firm legal contracts” that were effectively torn-up by some of the Chinese entities soon after the GFC. We equally note the oft-cited cases of dealer channel stuffing in the US auto industry.
On the other side of the coin, we also see evidence of the same false risk transfer scenario emerging for brand owners / marketers in respect of their outsourcing of consumer goods production to third party vendors (including those sometimes referred to as screw-driver operations). Those brand owners may believe they have effectively transferred to their third party vendors their minimum production volume & hence pre-shipment related budget risk. But in such cases where an unanticipated downturn in end-consumer sales for any given stock-keeping unit occurs, where will the weight of liability fall? They too may well find themselves forced, due to existential realities, to bale out their vendors. So in this respect too, perhaps the reality is that product still in the pre-shipment phase in contractual terms, may be of interest to us in respect of our logistical theatre-of-interest.
So again today, we are plainly still just back-grounding ahead of our long promised delivery of a raison d’être for pursuing smarter design & process method for multi channel logistics and transportation solutions.
Our position statement today is that, after material has been produced, it effectively enters a distribution & logistical theatre. The same theatre may see stock in play for a short or a very long period.
The controlling party in the distribution transactional chain may kid themselves that the de-risking of their organisation by contractual means is more important than the need for them to retain a singular vision of the logistical theatre’s efficiency & execution; but they are usually found to have done so at their own long-term expense.
Perhaps the Americans stumbled upon this concept accidentally, when they began classifying the critical party to an international shipment using the term "Principal-Party-of-Interest" (PPI)? And they proceeded to incorporate this terminology into their regulatory-security framework, instead of seeking to rely solely upon strict notions of the legal ownership of the goods being shipped.
The Americans adopted the said terminology for sound practical reasons - and we hope our reasoning proves equally solid as we develop our case.
The description of “channel stuffing” is often confused by accounting practices for the booking of revenue and whether or not an arms length sale has been completed. Sometimes instances so described turn out to be a straight out “revenue accrual” styled fraud, where revenue is booked without a transactional sale being completed or effectively guaranteed.
However, often the pretence of a contracted sales off-take agreement, one where buying unit volume quotas have been forced upon brand dependent distributors or reseller dealers are presented as if they are effective arms length transactions, which is highly dubious in many circumstances. The question always has to be asked, if the sales channel cannot move the product, upon whom does the ultimate liability for losses attributed to delayed, forsaken, or heavily discounted sales of inventory fall?
If a dealer has little collateral, then the re-seller agreement can practically found to be secured mainly by the value of the stock/inventory remaining in the channel. Then there is the matter of the consideration of the risk to the prospects for the manufacturer/marketer’s future sales. Or in other words, unless they can replace those resellers that they might choose to drive into liquidation for non-payment for inventory they could not shift with more effective ones, what happens to their future sales?
Often we have seen cases where a third party reseller is caught with stock they cannot shift, & many other resellers in the sales distribution channel are in the same situation. It is often not feasible for the manufacturer/marketer to do anything else other than offer the reseller a deep discount (or credit) on the unsold stock already booked in the past as sold at a certain higher price, in order that the reseller may then shift it, and remain a going concern.
Whatever happens, despite all the attempts at denial, if stock is not sold - often those claiming to have offloaded the risk are found to have borne the greater burden of resulting liability in the real world. We saw evidence of this with Australian miner’s supposed long-dated coal off-take export agreements with large Chinese importer customers, those same “firm legal contracts” that were effectively torn-up by some of the Chinese entities soon after the GFC. We equally note the oft-cited cases of dealer channel stuffing in the US auto industry.
On the other side of the coin, we also see evidence of the same false risk transfer scenario emerging for brand owners / marketers in respect of their outsourcing of consumer goods production to third party vendors (including those sometimes referred to as screw-driver operations). Those brand owners may believe they have effectively transferred to their third party vendors their minimum production volume & hence pre-shipment related budget risk. But in such cases where an unanticipated downturn in end-consumer sales for any given stock-keeping unit occurs, where will the weight of liability fall? They too may well find themselves forced, due to existential realities, to bale out their vendors. So in this respect too, perhaps the reality is that product still in the pre-shipment phase in contractual terms, may be of interest to us in respect of our logistical theatre-of-interest.
So again today, we are plainly still just back-grounding ahead of our long promised delivery of a raison d’être for pursuing smarter design & process method for multi channel logistics and transportation solutions.
Our position statement today is that, after material has been produced, it effectively enters a distribution & logistical theatre. The same theatre may see stock in play for a short or a very long period.
The controlling party in the distribution transactional chain may kid themselves that the de-risking of their organisation by contractual means is more important than the need for them to retain a singular vision of the logistical theatre’s efficiency & execution; but they are usually found to have done so at their own long-term expense.
Perhaps the Americans stumbled upon this concept accidentally, when they began classifying the critical party to an international shipment using the term "Principal-Party-of-Interest" (PPI)? And they proceeded to incorporate this terminology into their regulatory-security framework, instead of seeking to rely solely upon strict notions of the legal ownership of the goods being shipped.
The Americans adopted the said terminology for sound practical reasons - and we hope our reasoning proves equally solid as we develop our case.
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