What’s ‘channel stuffing’ and why is it problematic?

How much do you actually sell? How profitable are your sales? How accurately can you forecast your sales results? How many ‘returns’ do you receive? How often do you need to discount? How often are you left with old stock? What are your sales cycles? Are your sales people rewarded on volume only or on margin, account growth, account retention and customer satisfaction?

The answers to these and other key questions will tell you just how effective a sales force is functioning, how they measure their effectiveness, how they think about their business, their customers, their careers, and how likely they are to deliver profitable, sustainable sales results.

Through our observations quite a few companies still only measure their sales results by revenue, not what they get back by way of product returns, faulty product recalls, lost business, margins, length of sales cycle, etc. This singular measurement approach doesn’t take into account the real cost of sale or the true sales results that the business is experiencing. This is a common mistake often made by start ups and new businesses and if left unchecked can lead to unprofitable and unproductive behaviours and compromised relationships with business who take advantage of your situation.

When it really becomes problematic is when it becomes ‘channel stuffing’. The following excerpt I found on Wikipedia under Ethically Disputed Business Practices gives a very good explanation of this issue:

“Channel stuffing is the business practice where a company, or a sales within a company, inflates its sales figures by forcing more products through a distribution channel than the channel is capable of selling to the world at large. Also known as “trade loading”, this can be the result of a company attempting to inflate its sales figures. Alternatively, it can be a consequence of a poorly managed sales force attempting to meet short-term objectives and quotas in a way that is detrimental to the company in the long-term.

Channel stuffing has a number of long-term consequences for the company. Firstly, distributors will often return any unsold goods to the company, incurring a carrying cost and also developing a backlog of product inventory. Wildly fluctuating demand, combined with this excess inventory, leads to costly overtimes and factory shutdowns. Even mild channel stuffing can spiral out of control as sales works to make up for prior over-selling. Discounts used to drive trade loading can greatly affect profits, and even help establish gray market channels as salesmen no longer adequately qualify their prospects.

Occasionally, distribution channels such as large retailers have been known to identify the practice of channel stuffing in their suppliers, and use the phenomenon to their advantage. This is done by holding back on orders until the end of the suppliers’ quota period. The supplier’s sales force then panics, and sells a large amount of the product under more favourable terms than they would under ordinary circumstances. At the beginning of the next period, no new orders are placed, and, barring any action, the cycle is then repeated. This has an impact on customers, with gluts and shortages as buyers turn to competing products.

Corporations have been known to engage in channel stuffing and hide such activities from their investors. In the United States, the U.S. Securities and Exchange Commission has in some cases litigated against such corporations.”

Although not illegal, the challenges this business practice sets up can have catastrophic effects on business performance. How a business measures its sales results and how sales people are rewarded can have a dramatic impact on channel stuffing behaviours. For instance, if sales people are only rewarded on the volume of sales they send into the market, are tied to unrealistic sales quotas that do not match market expectations combined with no accountability for margins, returns, accurate forecasting, account maintenance and retention, then the ideal conditions for a channel stuffing are in play and we are in real trouble.

To avoid falling into this trap, you may like to analyse the following among other things:

• True cost of sale.
• Margins and volume discounting arrangements.
• Returns policy.
• Product recall conditions.
• Trading terms and conditions.
• Sales incentive schemes.
• Sales performance expectations.
• Customer service policy.
• Length of sales cycle.

With you and your sales people being very clear about what is expected and checking for any competing motivations which may create undesirable behaviors will help you from falling foul of the channel stuffing nightmare.

Remember, everybody lives by selling something.

Sue Barrett practices as a coach, advisor, speaker, facilitator, consultant and writer and works across all market segments with her skilful team at BARRETT. Sue and her team take the guess work out of selling and help people from many different careers become aware of their sales capabilities and enable them to take the steps to becoming effective and productive when it comes to selling, sales coaching or sales leadership.To hone your sales skills or learn how to sell go to www.barrett.com.au.