Roundtripping stock ... What is it? and why is it done?

Expensive inventory

Luxury goods inventories are expensive ...i.e not just the finished goods but also the raw material inventories. For most sub contractors or suppliers to luxury goods companies, this poses a peculiar problem - obtaining and managing credit lines. Though this is a problem faced by most upstream supply chain partners, in SCMluxe the problem is compounded by several factors such as:

•  higher working capital due to high cost of inventory
• seasonality in sales leading to stock pile up
• cash inflow not matching the outflow
• much longer cash cycle times

Hence SCMluxe suppliers are constrained in obtaining higher credit lines or getting them during the off-season when sales are low but production needs to be kept running to prepare for the high season.....roundtripping is one solution (albeit not entirely legal) that they adopt to manage the cash flow. This simply involves "selling" inventory to in-house units and then bringing it back after a certain period to avail higher credit lines from banks or financial institutions

An example will make this much clearer. Diamond polishers tend to have high stock of goods during lean times - especially with the current crises in the US and European markets. The hope is for the coming Christmas/holiday season or the "coming"  economic recovery to boost sales. To manage credit lines till then, these suppliers will parcel out large tranches of high value stock (large carat diamonds) to willing downstream partners (wholesalers/distributors) or in-house units. Higher credit lines are then obtained from the bank based on these higher reported sales. The stock is then bought back to the company either through returns or other such means (rework, to add further value by setting in jewellery etc). The downstream partner may or may not be compensated by a small token amount for his complicity. This process of "roundtripping" was specially predominant in Indian polishers till the government clued onto it and introduced a nominal import duty of 2% to curb such practises.