GOOD NEWS ON UNSALEABLES? 2004-07-19 (1)

Christine Blank

Wal-Mart strikes again.

This time, the 800-pound, Bentonville, Ark.-based behemoth, noted for its directives to suppliers in areas like RFID, data synchronization and EDI, has made its presence felt in the vital, but often overlooked, area of unsaleables: products whose condition, age, or other defect precludes their sale to consumers.

What Wal-Mart Stores did in this area was to require all of its suppliers to put a "Best if used by" date on all food products; the deadline was early 2004. Industry sources said Wal-Mart made the move to ensure consumers receive the freshest products, but it could result in more unsaleable expired product.

Moreover, most of these manufacturers have responded by putting the dates on all of their products, including those sent to the supermarket channel.

According to one supplier, 75% of all food products already use "Best if used by," or open code, dating, including perishable and shelf-stable products. In addition, the other 25%, including some cookies, crackers and candies, are in the process of adopting the codes.

Suppliers and food retailers are concerned about the move to "Best if used by" dating on most products. In the past, manufacturers placed such dates on all perishables, but did not put them on all shelf-stable products, particularly those with long shelf lives that turn fairly quickly, such as bottled juices.

"It may be the right thing for the consumer, but it may not be the right thing for suppliers," said Ted Lechner, reverse distribution coordinator for H.E. Butt Grocery, San Antonio. Lechner is concerned that vendors, anticipating a higher rate of unsaleables, will put too much product into the supply chain.

That's a reasonable assumption by suppliers, he noted, since "if you're a consumer, you're not likely to reach in the back of the shelf and get the one that's about to go out of date." Food suppliers agreed. "Best-if-used-by dating will usually result in higher unsaleables, driven by an increase in expired product," said Gary Piwko, director of remarketing and unsaleables at Kellogg, Battle Creek, Mich.

"In the short term, you put yourself at some risk of taking on additional unsaleables," added Dee Biggs, director of demand fulfillment for Welch's, Concord, Mass. "It has brought one more layer of information relative to each SKU that has to be managed."

In fact, the new policy has already affected Welch's. While its unsaleables rate continues to decline, it is falling at a slower rate than before. "We are suspecting that open code dating has had some impact on that," Biggs said.

Evidence of Collaboration

Despite this development -- and the ongoing bickering over manufacturers' up-front compensation for unsaleables, or swell allowances (see story, this page) -- there is progress to report on unsaleables.

To be sure, unsaleables continue to be a difficult-to-manage problem that cost manufacturers (for warehouse delivered products) $2.6 billion in 2002, according to last year's Unsaleables Benchmark Report, sponsored by Grocery Manufacturers of America and Food Marketing Institute, both in Washington. GMA and FMI will release their 2004 report this week at the 2004 Joint Industry Unsaleables Management Conference, July 20 to 22 at Loews Miami Beach Hotel, Miami Beach, Fla. (This year's conference is sponsored by FMI, GMA, National Association of Chain Drug Stores and Consumer Healthcare Products Association.)

The bulk of the conference will be spent on ways retailers and manufacturers can reduce unsaleables in the supply chain. For the first time, awards will be presented to companies who demonstrate innovation in managing unsaleables. Winners will share their strategies at a session on Thursday morning. (See story, Page 49.)

One positive result of the industry's intense focus on the unsaleables problem is greater evidence of collaboration between trading partners in seeking solutions. Manufacturers and grocers told SN they are collaborating more on this issue, steadily working with each other one on one to reduce unsaleables.

"There was a point in time when unsaleables was a fairly contentious item between trading partners," Welch's Biggs said. "At this point, most folks are over that. They're looking to do what's right, which is to take costs out and develop products that work all the way through the supply chain."

Many supermarket chains now have executives focused on working with manufacturers to drive unsaleables numbers down. "There is no silver bullet," H-E-B's Lechner said. "What's needed is working with your trading partner to see what's working and what's not working,".

Robert Lounsbery, director of procurement for K-VA-T Food Stores, Abingdon, Va., noted that when the chain has problems with a particular vendor, its executives sit down with the vendor to express their concerns. Manufacturers, for the most part, have worked with the 88-store chain to reduce unsaleables and "address the issues that are causing unsaleables," he added.

Kellogg's Piwko noted the company conducts ongoing studies and has cross-functional teams that work with retailers to determine drivers of unsaleables and to create solutions.

Preventing Damage

What have retailers and manufacturers been doing to address unsaleables, together and separately? Both groups have pursued in-depth supply chain analysis, better data to track products, and better packaging and transportation practices, among other strategies. Identifying the underlying causes of unsaleables is usually the first step taken by companies. Damaged packaging is the primary cause, accounting for 58% of unsaleables, according to GMA and FMI. Expired product creates 22%; discontinued items, 13%; and seasonal goods, 6%.

Many vendors are getting better at configuring product loads on pallets to prevent underhang and overhang, as well as wrapping loads correctly to prevent damage, said Mike Ghasali, president of Damage Research, Saddle Brook, N.J.

Vendors and retailers are also trying to reduce the number of touch points in the supply chain. In the supermarket channel, products go through 10 to 16 touch points from the manufacturer to the store, Ghasali stated. "They [manufacturers and retailers] are trying to identify which touch points they can take out," he said.

Meanwhile, some supermarket executives are preventing damage in their stores so product does not have to be sent to reclamation centers. "We're trying to put more emphasis on responsibility at the store level," K-VA-T's Lounsbery revealed.

Since late April, K-VA-T's store managers have been required to get permission from district managers before any unsaleable can be sent to the reclamation center. In the first month, the chain saw a 38% reduction in unsaleables -- a "lot of money" in savings, Lounsbery said.

Yet how do vendors and retailers handle items that are unsaleable because there is simply not enough room on the shelf for new product lines?

"One of the big issues has been shelf resets," Biggs acknowledged. "There may be nothing wrong with a product, but it is pulled off the shelf and taken to reclamation centers." To address that, Welch's has worked with customers to identify shelf resets in advance, and create a sell-through program for products targeted for removal. "We can at least create some revenue for them, and not have them sent to reclamation centers," Biggs said.

Lounsbery also observed the impact of new items, particularly in the health and beauty care areas. "Everybody wants speed to shelf," he asserted. While K-VA-T is trying to promote those products better (including offering discounts), manufacturers can also do a better job of "policing their own products," Lounsbery contended. "They can recognize that, if they're going to introduce new items, product is going to have to come off the shelf somewhere."

Wanted: Data

While no magic bullet, technology can play an important role in managing unsaleables, especially in collecting data about them, observers agreed. "The biggest issue facing unsaleables managers is lack of data," said Dan Raftery, president of Raftery Resource Network, Antioch, Ill. "Where you see companies investing in data, you see success."

"It's essential to collect data and turn it into actionable information," Piwko said. "Without the information, it's impossible to identify opportunities and measure performance."

The best way to evaluate where unsaleables are being created in the supply chain is to simply collect data at several points about the conditions of products, Raftery said. Retailers evaluating unsaleables should take a large enough sample that can be extrapolated chainwide.

For example, Welch's, with the help of a consulting firm, was able to determine where unsaleables problems were happening when it started a complete supply chain analysis about two years ago. All of Welch's warehouses were evaluated, along with a number of customer warehouses and stores.

"We wanted to know how much of the problem belonged to Welch's and how much potentially to the retailer community," Biggs said. "With that information, we were able to focus on making changes internally, and shared that information with a bunch of customers."

Using Cognos' business information system, Welch's expanded its data warehouse to include unsaleables, and started tracking sales by customer and stockkeeping unit. "We made goals and objectives for the field sales team," Biggs stated. "They are incented to pay attention to unsaleables."

Although Welch's supply chain analysis does not reveal why the products were sent to reclamation centers, that is the next objective. Working with Carolina Logistics and other technology partners, Welch's will try to track why specific SKUs were not sellable.

At the same time, H-E-B's Lechner cautioned against relying too much on data to control the problem. "You can get to the point where you have data overload," he cautioned. "You've got to be able to decipher it, and use the data you really need to help you reduce unsaleables."

Although RFID could help vendors and retailers track products at the pallet and SKU level in the future, they agreed now is not the time to focus on that. "There are a number of good possibilities down the road, but they are still pretty far down the road. We shouldn't wait until then. We should move before then," Lounsbery averred.

"Unsaleables require a lot of persistence in details. People are not waiting for a silver bullet like RFID," Raftery added.

For Retailers, Not So Swell

One of the most contentious issues in the unsaleables arena continues to be the way manufacturers compensate retailers for unsaleable products.

Retailers object to the emergence of up-front allowances created by manufacturers to cover expected unsaleables, so-called swell allowances -- or their more flexible variant, adjustable rate reimbursements. These replace after-the-fact determinations of loss.

"The movement to swell allowances is a major mistake," said Richard Kochersperger, director of the Food Marketing Group, Wallingford, Pa. "It is strictly a bean counter's point of view, but doesn't fix anything."

"I believe that some manufacturers see this as an opportunity to establish a fixed number they can budget, and others could take advantage of that situation at the expense of the retailer," stated Robert Lounsbery, director of procurement for K-VA-T Food Stores, Abingdon, Va.

Lounsbery said swell allowances give manufacturers less incentive to reduce product damage that is attributed to packaging. "If a manufacturer wants to go to a cheaper package, it results in higher unsaleables that have no impact on the manufacturer. It comes back on the retailer," he said.

About half of manufacturers use swells, according to last year's Unsaleables Benchmarking study, sponsored by Grocery Manufacturers of America and Food Marketing Institute. It said adjustable rate reimbursements are used by 29% of manufacturers.

"We have stayed away from swell allowances," said Dee Biggs, director of demand fulfillment for Welch's, Concord, Mass. Welch's does use swells for a handful of customers where the percent of unsaleables is "dramatically high," but prefers to work with retailers one on one to solve problems, according to Biggs. "Over the long term, a personal approach works for us and is consistent with other things we're doing relative to customer relationship management, especially with our most critical customers," he said.

However, Ted Lechner, reverse distribution coordinator for H.E. Butt Grocery, San Antonio, shrugged off the impact of swell allowances. "It is just something we have to learn to manage," he said. "It may be right for some suppliers, and it might not be right for others."

Giant Food Takes Unsaleables Award

Giant Food, Landover, Md., along with Universal Solutions and Visagent, are the recipients of the first Unsaleables Innovation Awards.

The winners are being honored this week at the Joint Industry Unsaleables Management Conference, sponsored in part by Grocery Manufacturers of America and Food Marketing Institute. The winners will make presentations about their unsaleables programs Thursday morning. The conference is being held July 20 to 22 at the Loews Miami Beach Hotel, Miami Beach, Fla.

The awards were given for projects that produced quantifiable improvements in unsaleables management within the retail or manufacturing environment.

Giant Food was selected as the retailer winner for its Waste Reduction initiative, conducted in partnership with Advanced Environmental Recycling Technologies (AERT). "Through collection and conversion of polyethylene HD grocery bag and shrink film, and corrugated packaging materials into home building products manufactured by AERT for Lowe's and Weyerhauser, Giant Food has realized such significant benefits as generating a positive buy-back revenue stream, a landfill diversion tax credit, and diversion of 100 million pounds of corrugated cardboard from landfills in Virginia, Maryland and Delaware," according to GMA.

Universal Solutions International, a reverse logistics firm in Winston Salem, N.C., was chosen as the winning manufacturer for its work with Procter & Gamble on a "Load Stabilization/Stretch Wrap University" project.

"In addition to damage prevention, implementation of this solution has allowed P&G to realize a 50% reduction in internal quality incidents; a 10% to 15% increase in load retention; and a 20% reduction in stretch film usage," GMA said.

Visagent, a trade management services firm in Jacksonville, Fla., was recognized for its Surplus Goods Exchange (SGE) program, designed to maximize user companies' return on investment from the disposition of excess and unsaleable inventory.

Developed by the WorldWide Retail Exchange (WWRE) and Visagent, the SGE program is a neutral, online exchange between retailers and suppliers for the trading of legitimate surplus, close-out and short-dated goods.