The news yesterday that two former executives of Bristol - Myers Squibb (a pharmaceutical giant) have had prosecution charges dropped against them, spurred this post. These two were top executives 5 years ago and apparently indulged in “channel stuffing” – the practice of dumping stocks into the wholesale or retail trade in order to show higher sales for a quarter or a period. As happens with such practices, if taken too far, one day they catch up with you. In the case of Bristol-Myers, it did and they had to publicly state this and their stock market value fell ; this was what led to the attempt at prosecuting these two executives.
Every consumer goods company in the world does this, to some degree or the other. Consumer goods companies do not sell directly to the end consumer, which is you or me. They sell to a complex distribution chain – wholesalers, retailers, etc etc. What they show as sales in their books is what they sell to their first link in this distribution chain . Its quite possible to give high discounts and sell large quantities to show higher sales in the books, although retail consumers are not buying any more or less. But then, come next quarter, this is sitting like an albatross around your neck – so you have to do even more just to keep the story going. It all swells up, until one day it becomes too much and the company goes public saying this has happened and take a “one time correction”. And promptly start the cycle all over again.
It had gone to such ridiculous extents in the past that factories needed to be set up to cater to this “peak demand”, only for them to sit idle after the dumping was over. Wholesalers were setting up warehouse capacity to hold these “dumped stocks” , which were entirely unnecessary. This practice has come down a bit after giant retailers such as WalMart and Carrefour who buy direct from the manufacturers, survive on lean supply chains and refuse to go along with such nonsense. But it can still be done in a lot of places with lots of people.
You would think that companies stuffed with bright people would see through the idiocy of this and not do it. You can win only in one quarter or perhaps a few – it will very obviously catch up with you. But then the irony is that the more the number of bright people in a company, the more this happens. It would be rare to find a company in the world that doesn’t do this in some form or the other.
That doesn’t make it a fit case to prosecute people as they have attempted to do in Bristol Myers. This is not a case for prosecution. Stupidity in business is not a crime. Trying to make a case by saying that they mislead investors by reporting higher sales is stretching it a bit too far. It’s the Board and senior management that has to watch over epidemics of imbecility that sweep companies from time to time. And if they don’t do their job, they will get sacked in due course.
Next time you buy a product and find its manufacturing date well into the past, you know what’s been happening ……
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15 comments:
Do you mean to say,the stuffing happens with the blessing of the company??
At least to the best of my knowledge w.r.t Indian pharma, the managers usually[quickly]can find the dumping by the sales people. They have two measures, primary sales and secondary.primary is the one they sold to the wholesales and secondary is the one which sold by the wholesale. so obviously when there is a difference between the primary and secondary dumping happens!
Such tactics seem to be common in most industries. Only that in service industries you have nothing to "dump". But yes, numbers manipulated left, right and center by the team to keep their luminaries (public or the top management) happy is not new. Only that, as you say Ramesh, this happens all too frequently to actually let it pass as a normal activity in the company! Sometimes it can be disconcerting like the ones mentioned in your post. But if it is cleverly done, no one even gets wind of such things and then life goes on normally. Just that sometimes, stupidity seems to be infectious!
@zeno - Of course trade loading happens with everybody's tacit approval. There is no reliable way to measure secondary sales - so it can be happily massaged. Primary sales is what the company is measured on - so right situation for loading. Happens all the time.
@Durga - Number massaging upto a point isn't all that bad. When markets want to look quarterly at stationery expenses; it is but inevitable that some form of smoothening will happen. But trade loading to the extent it happens is just plain daft.
Hi Ramesh
Very nice post!! Also very topical reading it as I am at a quarter end ..just a day after sending out a Corporate Controller's communication on the same subject.
True, it is not right to prosecute for stupidity of this nature.. but the visibility/bad press is not a bad thing at all. Aren't all Governance challenges in Corporates are about this itself.. bouts of stupidity to meet short term goals (and incentives?)
To my mind, this is a behavior issue.. of trying to beat the system.. Has been on for many years now in many forms. In an earlier (pre automation) era ,it took other forms- revenue recognition cut offs , inventory management (I know of organisations where the last day of the year or quarter.. was quite long ). Improved, realtime processes shut many doors .. but equally have opened a few others.. This ,I suppose will improve with more transparency and peer pressure.
But will behavior change.. I have my doubts !!(or maybe that's the cynic in me)
Sankar
we do something similar in our team...vela neria seiara mathiri project panni client kitenthu project vaanga vendiathu..once project vantha udanay oru velayum seiayama accumlate panna vendiathu..onsitelenthu offshoreku "backlog" apdinu dump aaagum...after few months in offshore..thirumba client kitta poitu..saaariba..ithu romba naala pending..shall we close this apdinu avan kitayae marana vaakumoolam vaangitu issueva close panida vendiathu. column columna ithaan nadakuthu :D
Q: previous commentukum intha postukum enna sambandham??
A: answer teriatha kostinsku terinja answer ezhuthitu varathillaya..antha mathiri thaan ;)
Almost all of the consumer goods companies work on the same model and surely channel stuffing happens in one or other form in every company. But it should not come to a point where executives are being prosecuted for this reason. Normally all products which past the expiry or best before dates are recalled by the Big Companies and if the sales return is too much (which may reveal it as fraudulent in nature), a strong corporate governance (internal auditors) or external auditors should have caught it before hand.
This practise is so common that a rookie can actually take it as SOP. It spirals out of hand only when business is going bunk. And you are right, its stupid to prosecute someone for business going bunk. But I agree with Sankar, it should definitely be brought out in the open. It will help in a reality check from time to time.
Deja Vu'
I rest my case
@gils - Very relevant comment from another industry with a similar theme. Examla 100% thalaivare.
@KC - Agree
@Deepa - Its slowly changing; at least now its disappearing from SOP !
@Kiwi - I know, I know.
@Sankar - Great to see you here. Totally right that most corporate governance issues relate to stupidity to meet short term goals, although a few are in the outright criminal class ! You are also absolutely right in that its all a behavioural issue and transparency will help to control behaviour.
During my management trainee stint, there was a new talc which my company launched and I was supposed to sell it shop to shop. Every shop I took the talk to, I had to hear stories of the previous 100 times when new products were launched and enthusiastic trainees like me used to come with a smile on their face and land stocks which finally don’t sell on their head.
Trade dumping is a phenomena of unorganized buying force. As you rightly said, the more the buyer gets stronger and organized the better he manages his seller and the more things fall in place
To conclude my earlier story – I managed a record sale of the talc in that territory – highest ever for the zone. But I was moved out before I could really get to know if what I sold into the shops actually got bought by consumers or not.
Stuff the trade, fluff the profits and bluff the stakeholders. Yes, it can still happen in many parts of the world. Dumping only means nuisance for business as such. No way it could carry on for a long time. I have seen people trying to flout the revenue recognition norms through any means and sometimes too intelligently. One needs a few strong controls in place to subdue such practices.
Definitely, stupidity of such nature does not call for prosecution.
@Sandhya - Aha; sales' loss is finance's gain. Also proves that finance girls, especially if they are as brilliant as Sandhya, make better salespersons than sales guys :)
@Vishal - Thats a wonderfully quotable quote - stuff the trade, fluff the profits and bluff the shareholders.
Comment from ambulisamma - My comments are disappearing here.
This is an interesting topic,though i dont hv traveled like you,i wish too write one in the same vein.
Ambulisamma
@ambulisamma - I got your comments four times on email, but it does seem to have disappeared from the site. Perhaps you are not bowing 8 times to Chairman Mao and Chairman Hu every day :)
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