The only surprise about yesterday’s indictment of two former BMS executives for accounting fraud is that they weren’t also indicted for idiocy.
Channel stuffing –the practice of forcing extra inventory onto distributors to inflate current period sales– never ends well. What starts as a one time event to meet a single quarter’s target gets worse and worse. Distributors return some of the extra goods over the next few periods or sell them to their end customers at a discount, both of which depress net sales by the manufacturer. This leads to more and more stuffing as higher sales targets have to be met. Production planning is thrown off and extra costs are incurred. Eventually the channels can’t take any more –even with the inducements that they are given– and the whole thing comes crashing down. It doesn’t just happen in pharma; tobacco and high tech are but two other examples.
In the end, the manufacturer is forced into a large writeoff, its stock falls, it pays a large fine ($300M for BMS), executives lose their jobs and sometimes go to jail.
Don’t let this happen to you!June 17, 2005