The channel is stuffed because CPQ has oversold to their vendors.
You might have read a related article in the Journal about CPQ a few weeks ago that discussed CPQ's accounting practices. In the article, the Journal pointed out that CPQ has made significant use of shifting sales between quarters.
In good quarters, they would move end-of-quarter sales into the next to help down-the-road sales figures. In bad quarters, they would retain this roll-over. (I'm sure that this is a practice of many, many companies, but apparently CPQ was practicing this on an extra-ordinary level) In any event, it seems that (I'm guessing) that CPQ's last quarter retained all of its sales to keep the numbers up, and didn't have any left over for this quarter to make up for the apparent shortfall.
WHAT THIS HAS TO DO WITH CHANNEL STUFFING IS: that the vendors have too much supply (boxes from CPQ) that they have paid for, and until they move the supply, they're not buying as much from CPQ. CPQ has stuffed the channel by more aggressive pricing to get the vendors to buy the supply that they really didn't need. This has kept CPQ's unit sales and revenues up, while (to this point) impacting margins slightly. Now the chickens have come home to roost. The vendors have had it. They've said no more until we sell what we have. Well CPQ can't shut down the assembly line, so they just slow it down (make pre-announcements) and price even more aggressively to keep their unit sales at least flat. The financial discussion in the first part of this post demonstrates why CPQ can't fix the shortfall internally by moving sales between quarters, because there aren't any to move. The handwriting is on the wall, and there is no way that CPQ would make their quarter.
Its all about forecasting demand. CPQ obviously did a poor job of it, or they were trying to cover over the real problems associated with the faltering indirect model, hoping that they would just be short term. Guess not...
To answer your question about sales arrangements with vendors, I have to say I'm not sure how that works. |
