Manufacturers have long used retailers to sell their goods to end customers. A manufacturer makes money by selling its products to retailers, and retailers make money when products are sold to the end customer. Here's a simplified supply chain diagram that will help explain what channel inventory is.
Graphic by the author.
The manufacturer sells its product wholesale (in large quantities) to the retailer. An example of this would be Apple selling large quantities of iPads to Target. Once the product is shipped to the retailer, the manufacturer "counts" or "recognizes" revenue for that sale (as represented by the star in the above picture). At this point, the manufacturer considers that product to be "channel inventory" because it hasn't been sold to the end customer yet. Once the product is received by the retailer, it is counted on the retailer's balance sheet as inventory.
Source: Fool.com