Shipped and Sold: A Brief Introduction

Horace Dediu helps weave through the accounting mess of shipped and sold units. There are many great points here, and you should read the whole thing, but I’m going to pull out one paragraph that allows for a good segue:

A big gap between sell-in and sell-through might imply large amounts of in-channel inventory. This is product that is sitting either in stores or in warehouses or on trucks in transit. If sales are steady, the inventory is measured in time as in “weeks of inventory”. This means that the excess is expected to be sold within a fixed time frame if shipments were to end. The smaller this amount, the better or “tighter” the operations are. Inventory, as Tim Cooks says, is fundamentally evil. It eats capital and erodes profitability.

And lo’, a segue: RIM’s inventory, for example, grew by 18% last quarter:

The value of RIM’s in-house supplies grew 18 percent last quarter alone, a faster rate than at any other company in the industry, according to data compiled by Bloomberg. And that doesn’t include the BlackBerrys gathering dust at RIM’s carriers and retail partners. Apple Inc., meanwhile, saw its inventory decline 11 percent in the period from the previous three months.

What happens when there’s lots of excess inventory that isn’t selling, Horace?

Sometimes miscalculation of sell-through could result in vast amounts of inventory that has to be returned by distributors. That inventory is either written off or sold at fire sale prices resulting in a “write-down”. This happened recently with both the HP TouchPad and with the RIM PlayBook. This special charge against income is a one-time (usually) incident but it can also affect a firm’s reputation with channel partners for a long time. This type of failure is very costly.

Indeed, this is what Bloomberg is reporting:

Research In Motion Ltd.’s stockpiles of BlackBerry smartphones and PlayBook tablets have swollen by two-thirds in the past year because of slumping sales, raising the chances of the company’s third writedown since December.

That RIM is having its third occurrence of what is supposed to be a one-time incident is disastrous and miserable for the employees. This industry moves fast, and RIM’s management has been unable to keep up.