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Channel stuffing is the business practice where a company, or a sales force 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 favorable 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.
- Jerry W. Markham (2006). A Financial History of Modern U.S. Corporate Scandals: From Enron to Reform. M.E. Sharpe. pp. 218–. ISBN 978-0-7656-1583-1.
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