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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: Jerome who wrote (95401)	2/23/2002 9:27:06 PM
From: Steven N	Read Replies (1) \| Respond to of 97611

What is your view on factoring.In Feb. of 98 Cpq was in dire straits with stuffing the channel and factoring. sn I also have doubts about it being illegal.

To: Jerome who wrote (95401)	2/24/2002 9:45:33 AM
From: rudedog	Read Replies (1) \| Respond to of 97611

There is certainly nothing illegal about channel stuffing. It is the basis of many of the wholesale-retail models out there today, including, as you point out, automotive. Channel stuffing in the computer industry was originally used to smooth out factory production versus orders. The factories worked most efficently when "building to forecast", i.e. to a known production rate, because the supply chain and manufacturing lines had cycle times which were long in comparison to retail demand cycles. So the big OEMs used the channel as a kind of buffer, providing incentives to offset the inventory carrying costs the channel would sustain. The economics worked out - production was sufficiently more efficient to pay for the incentives and also add to the OEM's bottom line. The reason channel stuffing fell out of favor has a lot to do with DELL, who developed a manufacturing and supply chain structure which put the "upstream" part of the inventory costs on the backs of their suppliers. That, combined with the fact that they sold direct, and so had several points of margin that the channel players had to give to the retailers, meant that they could be less efficient in actual manufacturing costs and still come out ahead. Also, the channel players figured out how the game was played, and so grouped their orders to those times when the incentives were available. So the channel incentives were no longer a mechanism to smooth out production, and instead became a permanent discount. The effect on the OEMs was the opposite of what was intended - production got decoupled from sales demand, and instead became a mechanism to make numbers at the end of a quarter. The channel economics really started to fall apart as DELL became a major player in 1997-98. When DELL was number 8 and had 5% of the market, they could be ignored. When they got into the top 3, they had a direct effect on channel economics.