What is channel stuffing and how might it affect your business?

12 May 2016

How badly do you want your year-end performance bonus? This is a question I was pondering today as we are hearing more frequently about individuals in companies who are engaging in activities that artificially inflate sales or shipments for the sake of hitting their targets. Unfortunately, they don’t often think of this as fraud until it’s too late.

Some of these individuals ask themselves ‘what harm am I doing if I tweak the shipments in the last few weeks of the financial year so that we hit our targets?’

The related plans can be quite ingenious – we’ve seen ‘secret’ warehouses used to store goods that are meant to have been shipped and side deals being done to force higher sales through at the year end. However, the repercussions of putting too many products into a distribution channel than the channel is able to sell can be far reaching.

This sort of practice, called channel stuffing or trade loading, is often borne from the pressure of meeting sales targets. Sales are recorded on shipment, thus the sales target is met in the short term. In the longer term, goods often end up being returned or sales in subsequent months are lower due to having ‘over-sold’ previously. This may seem harmless but would it still feel so to a buyer of a company which had been valued based on trading in a period where channel stuffing had occurred?

Striking the right balance between setting ambitious revenue targets and incentivising people to do the right thing is always a challenge. Get it wrong, and someone will cross the line and ship those extra products or bring forward that big sale. Get it right, and you will have a motivated team built on solid ethical foundations.

We are seeing more of these issues coming to light as individuals, placed under huge pressure to bend the rules by those afraid to deliver bad news, blow the whistle. And it is always worth bearing in mind, as we see every week in the press, that these issues, when they come to light, can have a big impact on the reputation of a business and life changing consequences for employees.


 

If you would like to discuss the issues raised in this article please contact me:

Kelly McInnis | Manager
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