Breaking Point

MICHAEL GARRY

There will always be unsaleables — products that are taken out of distribution because of damage, expiration or discontinuation. But will there always be a conflict between retailers and manufacturers over retailers' compensation for these products?

As food retailers and manufacturers convene this week for their annual Joint Industry Unsaleables Management Conference in Lake Las Vegas, Nev., the payments issue continues to raise hackles among retailers, who argue that they are not receiving enough payment for unsaleables from manufacturers that have adopted so-called adjustable-rate policies or swell allowances.

The adjustable-rate approach, adopted by a growing number of manufacturers in recent years, employs advance payments aimed at covering unsaleables costs. This contrasts with the alternative approach, first described in the 1990 Joint Industry Report (JIR), that pays retailers based on an examination of unsaleables collected after the fact at retail reclamation centers.

The discord continues, despite the creation of a new industry report intended to address the payment issue. Released in November 2005, the report, “Improving Unsaleables Management Business Practices — Joint Industry Recommendations,” laid out steps manufacturers need to take to establish more equitable adjustable rates that more retailers will deem acceptable.

For example, it suggests that manufacturers collect “statistically sound data” throughout the supply chain and share with retailers non-confidential details regarding the development of the adjustable rates. The report also asks retailers to give manufacturers unfettered access to stores, warehouses and reclamation centers.

So far, the new report has apparently not had its intended impact. At least, that's the sentiment expressed in a letter sent out in January to members of the Food Marketing Institute and the Grocery Manufacturers Association by Ed Crenshaw, president of Publix Super Markets, and Richard Wolford, chief executive of Del Monte Foods. Crenshaw and Wolford are chairmen, respectively, of the FMI Industry Relations Committee and the GMA Industry Affairs Council.

“It is clear,” said the letter, “that the [Joint Industry Recommendations] document is not being used and the [unsaleables] problem is being ignored. This is a situation that cannot stand.”

While declining to suggest a specific course of action, Crenshaw and Wolford urged “the leadership of every company to review the report and to include a discussion of the ideas in your meetings with trading partners.”

At the Unsaleables Conference this week, one session will be devoted to a discussion of the Joint Industry Recommendations. Participating companies include Food Lion, Winn-Dixie Stores, Kellogg's, Nestlé USA and Nestlé Purina PetCare.

Winn-Dixie's representative at the session, Gary Regina, the Jacksonville, Fla.-based chain's supply chain manager, also expressed disappointment in the industry's progress in implementing the Joint Industry Recommendations. “We had hoped to see many of the current adjustable [rate] policies amended to reflect the guidelines presented in the report, which has not happen as of yet,” he told SN in an email communication.

STARTING POINT

For Stephen Sibert, senior vice president, industry affairs for Washington-based GMA, just having the industry recommendations in place is a good starting point. “Even if there are complaints that it is not being used, the reality is that it gives us something to discuss,” he said. Some companies, he added, “are trying to figure out how to use it.”

Sibert observed that in the past manufacturers would assign just a few people to handle unsaleables. These days, however, CPG manufacturers are starting to look at this area in a more “holistic way,” he said. “They are getting package designers and logistics involved,” he said. “It's important that this is managed across multiple disciplines.”

Chris Mead, manager of reverse logistics for Food Lion, Salisbury, N.C., is on the Joint Industry Unsaleables Steering Committee's Unsaleables Leadership Task Force, which created the Joint Industry Recommendations. “Some manufacturers and retailers are using the guidelines to lead change within their companies, while others have clearly made no steps to follow the suggested guidelines,” said Mead. “This issue is causing the relationships between the retailers and manufacturers to become increasingly strained.”

Over the long term, Mead expects retailers to “grow sales and profitability at a higher rate” with manufacturers that are following the industry guidelines.

In response to retailers' concerns about lack of manufacturer adherence to the Joint Industry Recommendations, Carolina Supply Chain Services, Winston-Salem, N.C., has established a Gold Seal Certification program. Manufacturers that follow the guidelines receive the certification. “Retailers can then know that those steps have taken place,” said Sharon Joyner-Payne, vice president of marketing for CSCS.

Dan Raftery, president, Raftery Resource Network, Antioch, Ill., observed that “it takes time to go from current practices to what the new guidelines recommend. Even if a manufacturer budgets for changes to its unsaleables practices, the impact won't be seen for another year. I think it's pretty much a normal evolution.”

DISCORD AS INCENTIVE

Raftery, who has analyzed the unsaleables issue for years on behalf of the GMA and FMI and helped author the Joint Industry Recommendations, noted that retailers' current dissatisfaction with manufacturer payments is nothing new. Even under the original JIR policy, which is still being used by some manufacturers, retailers do not always get paid for the entire amount that they invoice manufacturers. “There has always been disagreement about what retailers should get paid,” he said.

But discord over payments is not necessarily a bad thing, Raftery said. “If manufacturers paid retailers whatever they want, nobody would look at the root causes and try to minimize unsaleables, and there would be more.” That is the justification used by manufacturers for establishing adjustable rates. “Manufacturers say they want retailers to have some skin in the game,” noted Raftery.

“Under the original JIR policy, there's no incentive for retailers to become more efficient, and many run reclamation centers as a profit center,” said Bruce Stevenson, director, sales and marketing, Strategic Solutions, Walnut Creek, Calif., who worked previously for Roundy's and Fleming. “Now retailers are being held more accountable.”

But Raftery said “it's too early to tell” whether retailers are indeed taking more action to address unsaleables, or simply leaving unsaleables in the hands of their stores. He is of the opinion that the original JIR policy, under which products are required to be channeled through reclamation centers, is the most “closed system” that provides for “controlled disposition” and generates the data that can be used in “continuous improvement.”

Winn-Dixie handles a large number of suppliers still using the original JIR policy through its company-owned and operated reclamation centers. Regina, a member of the Joint Industry Unsaleables Steering Committee, pointed out that reclamation centers were promoted in the Joint Industry Recommendations as still “the most efficient way to remove unsaleables products from the supply chain.”

Regina noted that not every vendor on an adjustable rate program is handled through the reclamation centers “because of the lack of funding to cover our costs.” Nonetheless, Winn-Dixie is willing to bear those costs for some adjustable rate vendors and track their unsaleables through the centers. “If a supplier wants to partner with us to reduce unsaleables, regardless of the policy they are on, we are very open to collaborate with them in any way we can,” he said.

Regina also stressed the importance of the data gleaned from reclamation center analysis of unsaleables. “We feel the data is very important for root cause analysis, but many suppliers using adjustable rates do not feel the need for this data and do not audit that data for unsaleables reduction.”

SHIFTING COSTS?

Steve Kindler, vice president, inventory management for Rite Aid, Harrisburg, Pa., and a member of the Joint Industry Unsaleables Steering Committee, takes strong exception to manufacturers' use of adjustable rates. “They put retailers at a significant disadvantage,” he said. “We view them as an attempt to shift cost from the manufacturers to retailers.”

Kindler said it's a “myth” that the adjustable rates represent the only way for retailers to collaborate and reduce unsaleables. Rite Aid, he said, has had success in reducing unsaleables via collaboration with manufacturers that use the original JIR rate policy. “That's really a win-win,” he said. “It's not a zero-sum game, which is what adjustable-rate policies are, where one party wins at someone else's expense.”

H.E. Butt Grocery Co., San Antonio, in a report describing the activities that earned it a GMA Unsaleables Innovation Award for unsaleables management last year, said that “the growing number of adjustable-rate programs had prompted [the company] to consider additional programs, since not all adjustable-rate programs reimbursed them for their unsaleables cost.”

Food Lion's Mead noted that several manufacturers that have adopted an adjustable-rate program have “walked away from unsaleables.” By contrast, the manufacturers that have successful adjustable-rate programs hold every part of their organization accountable for keeping unsaleables to a minimum. “I attribute the success that we've had with several of our key manufacturers to their increased visibility and accountability throughout their organizations,” he said.

Food Lion has held a series of “vendor summits” with key manufacturers to discuss ways to work more collaboratively on reducing unsaleables. The summits have helped the chain to “minimize our adjustable-rate losses,” Mead said.

Strategic Solutions' Stevenson acknowledged that some manufacturers set adjustable rates to control costs, but fail to do maintenance work and ongoing audits to substantiate the rates. Or some conduct only “snapshot audits” that look at retailers' stores and distribution centers, but not internally at their own processes. “That gives adjustable rates a black eye and makes it hard for retailers to accept them,” he said.

Strategic Solutions' policy is to work with manufacturers on continuing the audits that support adjustable rates, in accordance with the Joint Industry Recommendations, Stevenson noted. “The rates could go up or down” based on the new information collected.

Rite Aid has found, said Kindler, that despite the advent of the Joint Industry Recommendations, manufacturers remain averse to collaborating with his company on how they establish their adjustable rates. Stevenson said his company encourages manufacturers to show retailers how their rates were developed, though “a lot of manufacturers don't like to give up that information — or don't know how to answer questions about them.”

On the other hand, Stevenson added, some retailers, even those that participated in creating the industry guidelines, still refuse to let manufacturers or their agents conduct audits in their stores and distribution centers.

Winn-Dixie has allowed manufacturers to audit its distribution centers and, until recently, its stores, said Regina. “We have taken the position that if a supplier wants to audit our facilities, they must share the findings,” he said, observing that most suppliers on an adjustable rate policy have not shared their data. “We have also asked suppliers and third-party providers to redefine the store audit process in order to get the true damage rate.”

UNSALEABLES PROGRESS

Whether motivated by adjustable rates or other factors, many retailers have taken substantive steps to reduce unsaleables in their supply chain.

For example, Food Lion recently launched a “Product Condition Analysis” program, through which it is auditing 10%-15% of the products at its reclamation centers to understand what is causing them to be unsaleable. Products are identified using 12 damage codes.

“This information has been extremely valuable to drive change internally and with our manufacturers,” said Mead. “We're sharing the information with several of our vendor partners to identify opportunities to work together.”

At its vendor summits, Food Lion and some of its key vendors have identified a number of root causes of unsaleables, including poor pallet configuration and overly tight shrink wrap on pallets. Insufficient cardboard strength and glue/tape issues contribute to half of its warehouse product damage. Food Lion also discovered ways to minimize damage to products, such as HBC items, that go through its break pack facility.

Winn-Dixie has developed reporting to identify unproductive items in its assortments and provide data for the category management process, said Regina. It has also republished its discontinued item policy.

In addition, Winn-Dixie has made enhancements to its signage to improve sell-through of deleted items and “heighten the awareness in our retail stores of the need for rotation of products,” Regina said. “These efforts have proven to be very successful in unsaleable reduction.”

Rite Aid has placed “tremendous focus” on trying to reduce unsaleables, said Kindler. The drug chain's strategy is centered on “better management of inventory levels, while keeping adequate stock,” he said. Targeted areas include promotions, off-shelf displays, discontinued inventory and new items. “We have a much more stringent new-item selection criteria,” Kindler noted. “We're closely monitoring new-item distribution and weeks of supply down to the item and store level.”

Since 2004, Publix Super Markets, Lakeland, Fla., has refused to accept damaged freight delivered by manufacturers at its receiving docks. According to an entry form submitted to the GMA's Unsaleables Innovation Awards competition, this policy was implemented by “culling out obvious damage and inspecting any cases where damaged merchandise is suspect.” If one unit of product is damaged, the report added, “the entire case is refused.”

This policy has led manufacturers to identify a slew of root causes driving their unsaleables, such as product overhang, use of slip sheets and bad wood pallets. Suppliers have taken steps such as reducing touch points, reconfiguring pallets, reevaluating packaging and inspecting shipments. The improvements are tracked on vendor scorecards.

As a result of its warehouse receiving process, in conjunction with other supply chain efforts, Publix has reduced its unsaleables return (to reclamation center) percentage over 16% during the past two years, Maria Brous, Publix's director of media and community relations, told SN.

And despite increased labor costs at warehouse receiving points, Publix has cut overall unsaleables costs by nearly 14% year-to-date compared to last year, Brous said.

No Benchmark Report This Year

WASHINGTON — The Grocery Manufacturers Association here has decided to issue the industry benchmark report for unsaleables every other year rather than annually, according to Stephen Sibert, the GMA's senior vice president, industry affairs.

The unsaleables benchmark report, produced in concert with the Food Marketing Institute, Arlington, Va., is typically released in July at the annual GMA/FMI Unsaleables conference, but will be held until the 2008 conference, said Sibert.

The annual schedule “wasn't giving the industry an opportunity to respond to the numbers,” Sibert said. The new schedule “will give companies an opportunity to build a policy [in response to the report].” In last year's report, the total industry cost of unsaleables was projected to have been $2.05 billion.

He said the every-other-year schedule will also apply to the GMA's logistics and IS reports, which have also skipped 2007. GMA's financial performance report will keep to an annual schedule, however.

“It's sad, in a way; good information comes from that report,” said Bruce Stevenson, commenting on the move from an annual schedule for the unsaleables benchmark report. Stevenson is director, sales and marketing, Strategic Solutions, Walnut Creek, Calif., which conducts unsaleables audits for manufacturers. “They should do it every year.”
— M.G.

An Unfair Break?

When it comes to unsaleables, some food and drug retailers believe that club outlets and mass marketers are getting an unfair break.

That's because manufacturers' adjustable-rate policies — which many retailers also believe don't adequately cover their unsaleables costs — are calculated the same way for all classes of retail trade. However, not all classes of trade suffer the same rate of unsaleables, so that the classes with fewer unsaleables, such as mass and club retailers, end up with a better deal.

“Supermarkets carry the full line of items manufacturers produce, while club and mass only carry a limited assortment,” said Gary Regina, supply chain manager, Winn-Dixie Stores, Jacksonville, Fla. “By carrying the full line, supermarkets have more touch points, more expired product issues and more opportunity to encounter additional unsaleable losses.”

As a result, added Regina, “club and mass show a profit from most of these adjustable-rate programs, vs. the supermarkets and drug channels, which experience losses.”

Steve Kindler, vice president, inventory management for Rite Aid, Harrisburg, Pa., expressed a similar view. “Each channel is different; it's not fair to come up with a single average,” he said. “The nuances of different channels need to be considered.”
— M.G.