All is not fair in business

BANGALORE, INDIA: 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

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.”

Remedy: 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.

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 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.”

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.

Malady: Undercutting and selling

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: 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.”