THE GROWING DIVIDE

MICHAEL GARRY

Despite years of reports, meetings and industrywide efforts, unsaleables -- products removed from distribution -- continue to represent a significant problem in the food-distribution industry.

That reality was reflected in the record attendance of 237 retailers, manufacturers and vendors who came last month to Newport, R.I., for the 2002 Joint Unsaleables Management Conference, sponsored by the Food Marketing Institute, the Grocery Manufacturers of America, both Washington-based, and Food Distributors International, Falls Church, Va.

It's not just the cost of unsaleables, which for manufacturers across all retail channels has increased steadily for years. Last year, it reached a record-high 1.14% of sales, which translated into $2.5 billion, according to the latest Unsaleables Benchmarking Study released last month by the Joint Industry Unsaleables Committee. Manufacturer unsaleables for the supermarket channel alone did stay essentially flat at 1.27%.

The bigger problem, observers said, is the widening gap between manufacturers and retailers about how to deal with the issue. Driving that gap is the growth in what are called swell allowances and adjustable rates -- funds that manufacturers pay retailers to cover unsaleables.

More manufacturers are opting for these fixed caps on unsaleable reimbursements, observers said, rather than refunding retailers for their unsaleables costs according to the Joint Industry Report (JIR) Guidelines issued in 1990. The reason? To limit their liability by controlling the growing scale of reimbursements.

In reaction, retailers, who feel the capped payments don't cover their costs in all causes, are shifting their unsaleables away from manufacturer reimbursements to outside salvage operations. This is ramping up tensions on both sides and keeping retailers and manufacturers further from collaborating on root cases, said observers.

"Swells encourage the retailer to just dispose of the unsaleable item," said Denis Reilly, president and CEO, USF Processors, a third-party reclamation firm based in Dallas. "If the manufacturer never gets the item back, the manufacturer never gets the feedback necessary to address the root cause making the item unsaleable."

"[Manufacturers] can't have adjustable-rate policies and just walk away from root causes," said Gary Spinazze, senior director of procurement, Nash Finch, Edina, Minn.

The numbers in the 2002 Benchmarking Study are revealing. According to the study, sponsored by FMI, GMA and FDI, 30% of responding distributors used salvage as a way to dispose of reclamation volume, a considerable jump from 20% in last year's survey. "The economics of swell allowances and adjustable-rate policies," said the study, "are prompting distributors to salvage product whenever possible."

More than half of manufacturers responding to the survey (52%) now use swell allowances, which Ann Lightburn, president of foodBiz, Berkely Heights, N.J., and author of the Benchmark Report, calls an increase from last year. A little more than one in five (21%) of all manufacturer respondents employ adjustable rates, also an increase, she said.

In addition to reducing their outlays, manufacturers view swell allowances and adjustable rates as a way to increase dialogue with retailers about actions to reduce unsaleables, noted Dan Raftery, president, Prime Consulting, Bannockburn, Ill. But the jury is still out on whether that will in fact occur, he said. "If it does, it's a good move. Otherwise, it's just shifting the costs to salvage operations, which doesn't eliminate unsaleables."

Dialogue is still far from widespread. In the Benchmark Report, 71% of distributors and 46% of manufacturers report between one and 10 collaborative relationships on unsaleables. More than one-quarter (27%) of manufacturers reported no collaborations at all. "How can we possibly look at reducing unsaleables if we're not communicating with each other?" noted Mike Gadbois, manager of product recovery/unsaleables/corporate-inventory control, Hannaford Bros., Scarborough, Maine.

Sharing data on unsaleables is widely recognized as an essential part of any solution. But according to Gadbois, that's not happening. He said he finds it "hard to believe" that retailers aren't sharing data with manufacturers. "If that is the case, we really need to ask, 'What is it we have to hide?"' he said.

Most retailers, observers said, rather than collaborating on solutions, simply accept the inevitability of unsaleables and make sure that their costs for handling these products are covered -- or even exceeded, making unsaleables a profit center.

"There's not enough senior management involvement at distributors to deal with the root causes," said an executive with a Midwestern wholesaler. "And some manufacturers think it costs more to make changes, so they leave it as it is."

Seeking Answers

Still, attendees of the conference were there because they view unsaleables not as a revenue stream but as a problem to be eradicated. They were not disappointed, as many executives presented their experiences and successes in dealing with these unwanted products.

Collaboration was a recurring theme. "Even though we look at [unsaleables] in a different light, we still have the same issues," said Gary Regina, supply chain manager, Winn-Dixie Stores, Jacksonville, Fla. "So we need to come together with some sort of program that would allow us to find out what the issues are and what to do about them." Regina made his comments during a session called "Partnering to Identify Root Causes of Unsaleables." He shared his presentation with Jim Leuck, manager of unsaleables, strategic supply chain, Nestle USA, Glendale, Calif.

Sharing information is among the keys to solving the unsaleables riddle, agreed Leuck and Regina. For example, Nestle shares unsaleables information obtained from third-party auditors with retailers, Leuck said. Indeed, he called this information "the backbone of what we use to correct issues."

These audits often do "hidden damage assessments" that look into the root cause of unsaleables. For example, noted Regina, it might examine the pallet used by manufacturers in deliveries, comparing Chep pallets with white wood pallets.

Regina said Winn-Dixie gleans important nuggets of information from the chain's reclamation centers, where they can determine the type of unsaleables going through. Often, such data delivers "low-hanging fruit" that can be easily acted on. For example, for one product it was determined that a jar was cracking because it was being packed upside down. "They flipped the case over and that reduced the damage tremendously," he said.

Regina noted that Winn-Dixie gains useful information from manufacturers on slow-moving items and promotions for different geographical areas. "Not every item is going to sell in every area," he said. "Kraft mayonnaise is a top seller in most of Florida but not in the Carolinas. Not every promotion is going to work in every market."

Another example of collaboration was given at the conference by Gary Piwko, senior manager, unsaleables, Kellogg, Battle Creek, Mich. Working with a third-party auditor, Kellogg, he said, did a study of shipping platforms at 30 distributors over a 1.5 year period. The company found that product shipped on slip sheets experienced 161% more damage than product shipped on pallets. "It's not that way for all products, but it shows we have to know how we're shipping product and how the platform reacts with our products."

Expiration dates were another hot topic at the conference. One retailer spoke of seeing "a dramatic increase in out-of-code products" at the store level. "We point fingers at our stores for not rotating product and we see a problem at our DC in receiving."

Gadbois noted that, industry-wide, grocery products often only get rotated during resets when new planograms are made. "With the exception of dairy, there's not a lot of stock rotation going on," he said.

Kellogg and Hannaford Bros. also addressed ways of limiting unsaleables that result from discontinuations. According to Jason Derrig, region sales manager, Kellogg, the company tries to provide retailers with 90 days' notice of a discontinued product, and the minimum notice is 60 days.

In one example, when Kellogg discontinued two Eggo items and brought in two replacement items, only 51 discontinued units were returned while 8,760 new units were stocked.

In working with Kellogg, Hannaford will provide the manufacturer a minimum of 30 days' notice before discontinuing an item, said Scott Craig, director of logistics, Hannaford Bros. At its warehouse, Hannaford will focus on sending product back to Kellogg; while at stores, discontinued product will remain on the shelf until space is needed, Craig said. Hannaford also utilizes markdown funds that are made available by Kellogg.

Another way that retailers have been trying to get a handle on unsaleables in recent years has been to reduce the credit on unsaleables paid to stores.

Food Lion, for example, has taken a harder line on reimbursements to its stores, said Pete Bonneau, manager of reverse logistics, Food Lion, Salisbury, N.C. In the past, he said, "we thought stores were using the unsaleables-returns process as a way to clean up inventory. Seasonal items were coming back that should have been marked down."

So Food Lion created a "budgeted reclaim-transaction fee" that is assessed on all returned items. The fee, said Bonneau, "creates a discussion and healthy friction" with stores.