Tom -
Your analysis is interesting but the question is how does it apply to the current situation? The mechanics and history of channel operations have been extensively discussed on this thread as well as the DELL thread, and Chuz is as knowledgeable as anyone on the issues. Jim Kelley has done a fairly deep analysis of the financial and economic indications which implied that CPQ stuffed the channel in 4Q98. We don't need channel operations 101 here - this is a little more sophisticated crew.
The inventory which goes into the channel produces 2 immediate effects on the company's books. Booked revenue (and usually AR) goes up and inventory goes down. There are two key downstream effects - contra-reveune (the allowances for returned products and price protection) goes up as the "stuffed" product either gets cleared out via manufacturer's incentives, or gets taken back.
Throughout 1998 all indications showed that CPQ was attempting to reduce both channel inventory and exposure to future contra-reveune charges. Price protection was reduced from as much as 26 weeks to an average of 4 weeks, and the internal inventory was rising, not falling. But there were a number of anomalies in 4Q which made the trend harder to see. CPQ acquired the lease portfolio for the VAX installed base which DEC had sold to GE Capital, in an effort to provide consolidated lease plans to the high end DEC customer base. This had the effect of dramatically increasing AR with no actual product movement. CPQ shifted to a different distribution model with a number of key channel partners including co-location of manufacturing in which internal inventory was used in the assembly of products by the channel partner. The impact of these changes on the numbers is not straightforward to analyze.
My approach was to do as much digging as I could with the channel partners themselves, information which was bolstered by dataquest and IDC information on channel activity. That information showed that some key products were in very short supply in the channel, others were plentiful, but there was no dramatic shift in price protection which would have provided a big incentive for the channel to take a lot of product.
Jim Kelley looked at the AR and internal inventory position and concluded that CPQ had determined to bloat up channel inventories again in 1Q99 to make their earnings numbers. Chuz and I were on the fence on that one - if CPQ had made the consensus estimate we would have actually had more reason to look deeply into the channel position to see if this was achieved via stuffing.
But given the 1Q99 results, I think it is pretty obvious that CPQ did not stuff. Instead it looks like they have simply screwed up the distribution so that they get the worst of both worlds. The forecasts were obviously not right for what customers actually bought - the channels report shortages of key products, and excess of products which did not move as anticipated. With the new requirements for reduced channel inventory, there is no buffer for the production shortages. This is not a clever plan by CPQ to move product when the market is slow - it is, as Chuz suggests, just poor execution. |
