All Is Not Fair In Business

Every game has its own rule and it is the responsibility of players to
maintain a code of conduct and utmost discipline so that there is a room for
everyone to survive and prosper. But sadly it is becoming increasingly evident
that instead of working in cohesion, a lot of these players are working in
isolation, thereby leaving themselves open to a whole host of problems.

Just like every other industry, the IT vertical too is witnessing a lot of
unhealthy business practices, which leads to an imbalance in the entire channel
chain. And in most cases it is the smaller partners at the bottom of the channel
pyramid who are at the receiving end.

These unhealthy practices may be in the form of vendors and distributors
dumping stock with the partners by way of offering them lucrative discounts and
other schemes or partners overlooking their credit limits. Here are some of the
most common business traps that partners fall into in their quest of increasing
their topline. Needless to say, these should be avoided as they can have
long-term repercussions.

Malady: Absence of a uniform credit policy

Symptoms: In a value chain, the vendor in association with the distributor,
dumps goods on the partner who has to make the payment in cash. Later it is this
very sub-distributor who has to sell the product to another reseller on credit.
Often these resellers delay their payments either due to delay from the
customer's end or because they have other expenses to meet. In turn the sub-disti's
payment is stuck. This happens because a uniform credit policy is not
implemented in the spirit by the dealer.

Talking about this malady, Ambareesh Dixit, Head-Business Communication
Products Broadcast and Professional Products Division, Sony elaborated, “There
are certain reseller partners who handle various government, corporate and large
accounts and at times when these customers delay their payments (ie make
payments after a gap of four to six months) the partners fall
short of cash in hand and correspondingly delay payments from their end as
well.”

Side effects/results: Not sticking to the credit policy can lead to a number
of complications in the business. Some of the side effects are cheque bouncing
and bad debts. Besides, it leads to irregularity in the business churn. If this
happens regularly, the partner runs out of liquidity in his business.

Sharad Agarwal of Indore-based Pioneer Computers stated, “Every year it is
because of such unethical practices in the business that we face bad debt
problems. This loss is almost

25 percent of our revenues.”

Jodhpur-based Arvind Modi, CEO, Bits & Bytes mentioned, “Having a good credit
policy makes all the difference. All one needs to do is be disciplined otherwise
surviving becomes difficult. The policy has to be formed and implemented in the
same spirit. But often because of sales pressure people tend to forget the
rules.”

Remedies: Discipline is the key to addressing this issue. A credit policy has
to be streamlined and should be uniform. Ideally a 14-21 days credit period is
good enough for the industry and a fair one that should be adhered to. In
addition it is very important that every partner is registered with an
association or body so that their customers who may have defaulted or do not
hold good reputation in the market is spotted easily.

Modi sighted another remedy to the problem. “One can take a post dated cheque
from the concerned party well in advance at the time of billing and this will
put pressure on the reseller who in turn will ask their clients to make payments
on time. This is because the credit period differs from vendor to vendor and
product to product.”

Malady: Month-end dumping

At the end of every month, vendors and distributors offer discounts to
partners to clear inventory. For eg laptops are offered at Rs 1,000 lower than
their usual price. To grab better margins, earn handsome profits or at times to
achieve their target, the partner falls into a trap and ends up overstocking (ie
accumulating more goods than he can sell in the market).

Again this happens owing to two reasons, either the vendor or the distributor
resolve to reach a particular growth figure and further pressurize the partner
by dumping stock in his godown or because the partner in order to attain the
number one spot in the industry and for fame, ends up overstocking.

Side effects/results: Overstock-ing in the first place adds to pressure on a
part of the dealer and leaves before him unrealistic targets. He finds it
difficult to achieve the target in due time and thus gets carried forward.

Again stocking more than what he can actually sell in the first place takes
away liquidity from his business and he has to further ensure that every product
thus bought is sold. Given the pace at which technology changes and the speed at
which people want to grab the latest offerings, selling the old models then
becomes a Herculean task.

Once dumped, there are other headaches in the form of replacement, DoA and
warranty issues that has to be dealt by the partner and under no circumstances
is welcomed by the partner. To sum up, it leads to chaos both in the mind and
the business of the partner.

To this, Modi opined, “The problem with month-end dumping is that the level
of stock goes up due to too much pressure of schemes and other incentives that
are offered to the partners. This pressure gradually becomes a part and parcel
of the game.”

Agarwal of Pioneer Computers added that vendors often keep pushing dealers
and dealers have no option but to give in to their demands. Many a time, this
rejection from one dealer becomes a gain for the other. “Recently a vendor
offered my company products at Rs 1,000 lower than the usual rate. We did not
buy it but our competitor did and this affected our business negatively as this
competitor sold the stocks at prices much lower than what we were offering.”

R Mahesh, CEO, Ozone Computers, Coimbatore added that in case of dumping of
stocks, dealer has to realize the fact that how much a market can take so that
he does not get into over distribution. If a vendor or a distributor puts undue
pressure then the dealer should have the courage to say no to that particular
vendor or distributor. He has to learn to say no to orders. They need to
understand the tricks of the trade.

Puneet Datta, Senior Manager Marketing-Business Imaging Solutions, Canon
denied that vendors force certain targets on the partners and while buying they
all they need to keep in mind is the capital outflow and inflow besides
envisaging certain profits out of the stock they plan to buy. “Every partner is
aware that technology is changing. Besides the resellers today have
multi-branded outlets and they are very well aware of the stock pressure they
can take. A smart businessman knows when to take a call. Gone are the days when
the partners were not aware and took decisions hastily.”

Dixit of Sony added that dumping is never forced by the vendor and is always
a give and take relationship.

Remedy: One of the solutions to this problem is that once in every three
months, the partner should stop stocking. The partners should also tell his
distributor or vendor to either extend the credit limit because it would later
lead to payment defaults. “long term player will never get into undue pressure
and thus will survive and be able to do business as per his own terms and
conditions. One should take stock keeping in mind their capital limit, said
Datta.

Malady: Undercutting and selling

Yet another dangerous practice affecting the channel business health is
undercutting. Most of the partners claim that it is the distributor who indulges
in the same on most occasions. Undercutting takes place when a few dealers unite
and after mutual understanding lower the price of certain products and sell the
same to their customers. This practice affects the margins of other partners who
might be selling the same product at higher prices and leads to an unhealthy
business environment.

Side-effects/results: Under-cutting affects the margin operating price (MOP)
as it goes down. Thus the partner loses out on his margins. Further more it
leads to unhealthy competition in the market apart from being a violation of the
consumer rights.

Remedy: In the first place, dealers themselves have to be disciplined and
refrain from selling products at prices lower than what was originally decided
upon by the market. Besides an association or an effective body can look into
this matter and resolve the issue. The association can ensure that every dealer
sticks to a particular price and does not offer any products to their reseller
partners or customers at discounted rate.

Ajay Singla, President, Panipat Computer Dealers Association mentioned,
“Business does not merely run on paper and hence it is important that payment
issues be dealt with utmost discipline. An association can play a major role to
resolve the payment issue as they can keep a check on the market practices and
faulty partners.”

Malady: Unplanned inventory management

Unplanned inventory management happens because an over-ambitious partner
decides to purchase stock according to his whims and fancies without calculating
the costs involved in managing the inventory. Besides, many times a vendor
representative dumps stock with the partner because the former is under pressure
to meet targets assigned by his seniors and the partner succumbs under to this
extension of the pressure.

Side effect/results: Unplanned inventory management has its effects on the
MOP. For the bigger players, it is easy to stock more and take advantage of the
various schemes available but the smaller player is forced to strike a deal at
lower price so that he can do away with the excess goods he has bought.

Remedy: The only remedy applicable in this case is that a dealer keeps a
track of the average sales they have every month and the capital they can set
aside before they purchase any stock. Thus a dealer needs to keep in mind the
inventory cost and the time till when he can manage the inventory and function
accordingly.

Mahesh stated that it is clearly the distributors who initiate the unhealthy
practices within the industry as they over distribute. If there is a demand for
100 products in the market then they push close to 180-190 in the market. This
puts the dealer under pressure and creates an unhealthy atmosphere.

Malady: Cartel formation

Cartel formation is a practice where a certain price is decided for a
particular product and select partners are given the liberty to sell at this
slightly lower price whereas the same product is offered to other dealers at
higher prices.

Side effects/results: This practice leads to unhealthy environment in the
industry and creates animosity between partners.

Remedy: In case of cartel formation the entire distribution chain has to be
disciplined. However, vendors like Sony see cartel formation as an easy way to
achieve the revenue figures they desire to achieve. Dixit mentioned, “From an
ethics perspective it is incorrect to indulge in cartel formation but looked at
from the vendors/manufacturers perspective, the one who gives the company more
volumes will definitely be given more discounts and incentives when compared to
a partner who may not be giving the kind of output needed.”

Malady: Improper finance planning

Improper planning while buying stock and stretching the credit limits leads
to payment defaults. When a partner offers credit in excess or for a longer
period or he takes credit in excess of what he can return, it leads to delay in
payments.

Side effects/results: Improper finance planning affects the balance sheet of
the company. It has an implication on the both the topline and the bottomline.
It leads to payment default on the part of the partner. Besides, fraud cases are
a result of improper finance planning as well.

Remedy: Modi suggested that one needs to build a reputation in the market
that s/he is very strict when it comes to receiving payments and then allocate
expenses keeping in mind their budget and capital inflow.

Another initiative that can be taken up both by the national distributors and
the vendors is that they can tie-up with certain banks and share a list of
defaulters. The banks can thereby have an internal agreement with the partner
who maybe applying for a loan and these partners will have to register
themselves with the bank. Thus information as to how many loans a partner has
availed can be gathered from the bank. Since most of the banks are a party to
this idea tracing the faulty partner will thus becomes easy.

Malady: HR Issues

A large chunk of the SME and the SMB organization don't have a dedicated
partner who can perform the HR functions for their company. In most cases their
HR department handles every responsibility on their own. The bigger players in
the industry have a proper arrangement for the same but the smaller players
can't afford and in its absence retaining employees becomes difficult.

In most cases, vendors poache the partner's employee and there isn't much the
partners can do about it. Other than recruitment ensuring that the employees are
working in a healthy and competitive environment is also important.

Side effects/results: In the absence of an HR executive, employing the right
candidate who is both skilled and trained becomes a difficult task. Beside there
are times when an employee has to be trained on developing various soft skills
and made to attend workshops so that he can imbibe the requisite skill sets and
perform and work to the advantage of the company.

Having an effective HR policy and system in place will help improve both the
topline and the bottomline of the company. Agreeing to the statement Mahesh
said, “Often entrepreneurs and even their sales people are unaware of the
various business terminologies and practices. Thus the dealers in Tamil Nadu
have united to form a company wherein they can hold various workshops and
educate the dealer partners and thereby train them.”

Pooja Sharma

poojas@cybermedia.co.in