Retailers bid to reduce cost of unsaleable goods

The costs of returning or disposing of unsaleable goods is usually borne by both the retailer and the manufacturer. The payments depend on the agreements between the two, the type of product, and the reasons for not being able to sell the goods. Since the first industry benchmarks were published in 1995, the average reported rate of unsaleables has grown to 1.06 per cent in 2004 from 0.75 per cent of goods received, according to a report by the Food Marketing Institute (FMI) and the Grocery Manufacturers Association (GMA). "Despite the advances we have made in supply chain technologies and efficiencies, the costs of unsaleables continue to increase. To change this situation, manufacturers and retailers must work together to identify and correct the root causes of unsaleable products," stated Karin Croft, the GMA's senior director of industry affairs. In their report the FMI and GMA recognise that some retailers and manufacturers are at loggerheads over funding for unsaleable goods. Certain manufacturers and distributors have expressed the view that some of their trading partners do not behave fairly with regard to unsaleables. The report specifically deals with unsaleable foods and over-the-counter drugs, the main source of unsaleables. The report's key recommendations include calls: to process unsaleable products through specialised reclamation centers; to use product condition data to better understand where and how damage occurs in the supply chain; to expand current data synchronization and registration proceedures to help reduce unsaleable volume; and, the continued use of of voluntary guidelines previously published by the two organisations. "Even if all of these recommendations become adopted in the industry, one critical issue could remain unresolved," the report stated. "Cost recovery for reclamation centers generally remains an unresolved major issue. At this time, the task force observes that the industry faces risks associated with declining funding for reclamation centers." The report noted that some manufacturers continue to pay rates that have not been recommended in the industry's guidelines. They are typically called "adjustable rates" or "swell allowances," which are derived from a variety of methodologies and are often applied differently by manufacturers. Most companies have developed policies covering unsaleables business practices. Conflict between trading partners can result when a manufacturer's policy differs from a distributor's policy, the report stated. More manufacturers are now using service companies to process claims, a cost taht may be part of the deduction authorization process. Service companies pick up for some manufacturers at reclamation centers, where products are held for shorter time periods. The report also noted that reclamation centers are currently the most efficient way to remove unsaleable products from the supply chain. The reclamation center industry is in a consolidation phase, which will likely result in fewer processing facilities, the report noted. Some consolidation is driven by retailers and wholesalers. Other factors such as mergers and acquisitions of companies that operate reclamation centers are also bringing down the numbers. "The negative implications to the supply chain if all reclamation centers ceased operations outweigh the positive implications," the report stated. "Manufacturers and distributors would not be able to readily remove or recall damaged or otherwise compromised products from distribution in the supply chain and would lose centralized data for root cause corrections." The report and the recommendations are an outcome of consultations with 30 manufacturers and retailers. The group completed its work in November 2005 and presented its recommendations at the joint FMI and GMA board meeting on January 22.