Channel Fraud Still A Big Issue For Vendors

"This is a microcosm of what is happening [in the market].[Some [companies] are literally lying, cheating and stealing," said one distribution executive, who asked not to be named.

The executive believes some wholesale "distributors" are really brokers skirting the truth in their sales reports to make more money.

As an example, the executive said a wholesaler will tell a manufacturer that it needs a special price for one customer on a 10,000-unit deal. In reality, there is no large-volume deal. The distributor sells the units in small orders and keeps the extra money made through the volume purchase price.

In another scenario, a distributor may buy 10,000 units and tell the manufacturer that it sold 1,000 units and needs price protection on the other 9,000 units. In truth, the distributor may have sold 7,000 units and thus receives price protection on units already sold. It either pockets the financial gain or uses it to lower prices on its next shipment of product and further commoditize the vendor's products.

In either case, the model disrupts the natural flow of the channel, the executive said.

"As vendors get more sophisticated in their [sales] reporting, they realize these guys don't add value, they they're only getting to the lowest price by cheating," the executive said. "It will be a little bit of a wake-up call to the industry to [find] some of these alternative distributors that cheat so blatantly."

More and more vendors are taking steps to clean up channels by requiring more customer data, Elster said. He cited Pioneer Electronics, maker of displays and recordable-media drives, as one example.

"They've changed their special pricing approval process and asked us for more information to stop product from coming from overseas. We get copied on e-mails coming from the U.S., coming from Europe. They've done a better job tracking serial numbers, which is a new thing to find exactly where the product is coming from and who sold it to begin with," Elster said.

The most-volatile product category is hard drives, said distribution executives, but there are growing concerns with optical drives such as DVD- and CD-R/RW drives, too. Several executives and solution providers said finished goods also are at risk.

"A lot of vendors have changed their pricing models so that all regions have the same pricing. That will help the problem but for so many years, there were so many different rules," Elster said.

North America is a year or two ahead of other regions in terms of trying to clean up channel issues, but it will remain a challenge as long as there is even one weak link in the supply chain, said Kevin Murai, president and COO of Ingram Micro, Santa Ana, Calif.

"We're recognized around the world as distributors with the culture and the polices in place to drive ethical business with all our partners," Murai said.

One large distributor claimed to have walked way from hundreds of millions of dollars in business over the past few years because it was unprofitable to the point that customers were buying products for less than it could buy the products, said an executive who asked not to be named.

"It's not in anybody's best interests, in particular our customers, to have a channel that has those kinds of practices. There needs to be better transparency on pricing to allow distributors and solution providers to compete on value, not just on price," the executive said.