February 14, 2011 — Having clear visibility into channel inventory is an important step to managing a successful supply chain. Once an OEM has visibility into channel inventory, they know what products are selling through their channel, what products remain and how promotions are performing at any given time. But that is not all. Many important decisions around revenue recognition, channel promotions, sales commissioning and manufacturing operations rely on having this clarity.
Historically, OEMs have focused on "selling in" their products to the channel without paying adequate attention to the actual "selling through" to the channel's consumer. Since typical contracts protect channels from the risk of carrying excess inventory through clauses such as price protection and end-of-life (EOL) markdown support, they don't mind the sell-in focus.
In fact, knowing they are protected from excess inventory losses, the channels can take advantage of OEMs' end-of-quarter sales sales-incentive programs that are focused on enticing channel to buy more. As a result, sales reps can game their sales commissions, weakening an OEM's ability to reward true sales performance.
Besides, such incentives misrepresent actual demand, which makes it difficult to make good procurement and production volume decisions. During the last "boom" cycle, many companies believed their own optimistic forecasts based on recent channel "sell-in" sales and engaged in over-ordering and stockpiling of key components. Such issues are further exaggerated in industries such as consumer electronics, where new products become "must haves" overnight, and existing products become obsolete just as quickly.
The Power of "Sell Through"
The "sell through" model addresses these issues by ensuring that the inventory in channel is replenished when existing inventory is sold to the end customer or when a marketing activity such as a promotion is planned where the channel forecasts selling a certain quantity to the end customer. However implementation of this model requires the OEM to have clear visibility into the channel sell through and mix.
Such information allows OEM to:
- Ensure accurate demand information is used for manufacturing planning and long-lead procurement.
- Support a conservative revenue recognition model that provides better transparency to investors in the era of SOX compliance.
- Reduce the risk of unplanned excess inventory mark-down and write-offs.
- Eliminate noise from quarter-end sales incentives, which allows the OEM to institute transparent and collaborative promotion/rebate programs with channel programs.
- Implement management by exception by creating management dashboards that alert on over- and under-balance conditions as compared to targets and sales trends.
- Improve understanding of demand patterns and customer buying behavior at the channel/product/mix level.
Without visibility into channel inventory and mix, implementation of a "sell through" channel program is not possible. Collaborative channel inventory management solutions, implemented through a software-as-a-service (SaaS) model such as the solution available from E2open, have allowed many OEMs to rapidly gain such visibility with minimal IT investment. With better channel inventory visibility they have been able to enjoy the benefits listed above.
About the Author: Rich Becks (LinkedIn) is senior vice president for strategic demand-supply solutions at E2open, a provider of software infrastructure service for business partner integration in the electronics industry. Prior to joining E2open, Becks was the vice president of supply chain at Seagate Technology, specializing in the areas of demand driven replenishment systems and inter-company collaboration. He has more than 20 years experience in materials and supply chain management working for large multinational data storage companies.