Thursday, June 21, 2012

MLM Basic: What is Inventory Loading?

If you have been in MLM for a while, you may have ran into the term "inventory loading". So what is it?

In a product-based MLM, where you are supposed to sell products, and help your downline sell products. If you "encourage" your downline to stock up on products, beyond what s/he can normally sell, you may be guilty of "inventory loading".

DSA(Israel) Logo
DSA Logo (Photo credit: Wikipedia)
DSA, the direct selling association, defines inventory loading as follows:
The plan or operation requires or encourages its independent salespeople to purchase inventory in an amount, which exceeds that which the salesperson can expect to resell for ultimate consumption or to consume in a reasonable time period, or both.

While MLMWatch has a slightly different definition
Stocking up on products to meet sales goals, a practice that is promoted with claims that it will push the new distributor to higher bonus and/or leadership levels quickly. In reality, it increases the risk of significant financial loss if sales do not occur.

Why is this done, and what can you do about it?

Inventory loading is an often criticized process where the downlines are encouraged to "load up on inventory" of retail products, usually only to the benefit of his/her upline, so the upline can qualify for sales commission.

To analyze this, we have to see if from three different viewpoints; from the downline, from the upline, and from the company itself.

Downline POV

Inventory loading is potentially harmful to the downline as s/he buys so much inventory that cannot be sold in reasonable amount of time. It'd be like buying... 100 boxes of detergent when one box lasts you two months. It may serve as inspiration / pressure to sell more, but it's financially harmful.

Upline POV

Inventory loading is potentially beneficial to the upline as it helps s/he meet sales targets for bonuses and commission and whatnot.

Company POV

Inventory loading is potentially beneficial to the company as it every sale helps the the company's bottom line.


Amway (Photo credit: Wikipedia)
As a result of this analysis in 1970's by the FTC in its legal action against Amway, FTC and Amway reached a solution to discourage inventory loading through two main provisions

1) Limit order frequency. A member must sell 70% of existing inventory before s/he can order more

2) Refund policy: A member can request refund of any purchased items (usually within 90 days)
if they cannot be sold.

This prevents a member from ordering too many products, then got stuck with stuff that's impossible to sell, thus suffering financial loss.

With the advent of drop-shipping and reliable shipping services like Fedex and UPS and DHL and such, inventory loading has virtually disappeared. Modern MLM sales people don't really stock products in their garage or storage, but instead, just take orders and the items are drop-shipped straight from the company's fulfillment center.

However, some less scrupulous MLMs have moved onto "starter kits" to load down the initial purchase, as well as "autoship" to continually ship products to the members for consumption instead of resale. We will discuss those elsewhere.

Inventory loading is still worth studying, in that how you have to see a practice from all three POV to see why it is bad, and use it to analyze how to even the playing field.
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