Channel Check – Where Supply Chains meet Insider Trading?
Supply Chains are front and center as US Federal prosecutors turn their attention to the practice known as “Channel Check” among the financial analyst community. The Securities and Exchange Commission (SEC) has in recent days started to focus on insider trading cases, that according to published reports – revolve around “routinely published information about public-company supply chains”. While the investigation will in due time determine whether or not engaging in Channel Checks (also known as Supply Data analysis) will amount to insider trading, public recognition that supply chains serve as prime movers of a company’s stock price is noteworthy.
So what’s a Channel Check? It is the practice by which financial analysts and third party researchers collect information about a company’s business prospects by interviewing people within other organizations in this company’s extended supply chain and distribution channel. Such interviews typically occur without the target company’s permission or participation. For example, a Channel Check could include discussions with a grocery store manager to understand customer buying patterns for say a particular beverage brand at a certain price point. But it could also involve analysts contacting the company’s suppliers, vendors, sub contractors, contract manufacturers and distributors to obtain metrics on production plans, raw material availability, finished product inventory levels, promotion plans etc.
Data collected from these sources is seemingly innocuous when viewed separately. When pieced together however, these data points from a company’s supply chain can deliver startling insights into revenue and future earnings of a company – much in advance of such information becoming publicly available. This practice becomes more pronounced for companies such as Apple who are extremely guarded and secretive about information they make publicly available. Traders who focus on Apple stock for instance rely heavily on Channel Checks to advise them on iPhone and iPad production volumes, sales forecasts, shipments and new model introductions. Apple’s stock price has witnessed sharp spikes and declines in recent months resulting from information leaked from Channel Checks.
The focus on Channel Checks has yet again served to shine light on the criticality of a company’s supply chain; not just on its competitive position but on its stock price as well. The industry goes back to Stanford University professor Dr. Hau Lee’s research on Triple-A supply chains (Agile, Adaptable, Aligned) as the gold standard on supply chain strategies. Dr. Lee has said that “Instead of company-to-company competition, we are now in an era of supply chain to supply chain competition”. This sentiment is echoed and supported by the vast body of research from supply chain thought leader Dr. Martin Christopher, Emeritus Professor at Cranfield School of Management who says “supply chains compete, not companies”.
Channel Check shows that while supply chain excellence moves product, it moves stock prices as well!