THE UNSALEABLES PARADOX

If it's July, then it must be time to re-examine unsaleables.Each year at this time, food retailers and manufacturers convene for the Joint Industry Unsaleables Management Conference to look at ways to collaborate on reducing the number of products that can't be sold at retail because they are damaged, expired, recalled and discontinued. But for those products that do end up as unsaleables, the debate

If it's July, then it must be time to re-examine unsaleables.

Each year at this time, food retailers and manufacturers convene for the Joint Industry Unsaleables Management Conference to look at ways to collaborate on reducing the number of products that can't be sold at retail because they are damaged, expired, recalled and discontinued. But for those products that do end up as unsaleables, the debate continues to boil about who's responsible for them and how to compensate retailers for them.

This year's conference, sponsored by Grocery Manufacturers Association, Food Marketing Institute, the National Association of Chain Drug Stores and the Consumer Healthcare Products Association, will run from July 19 to 21 at the Fairmont Waterfront Hotel in Vancouver, British Columbia.

While progress has been made, unsaleables remains a problem endemic to the food supply chain that can be treated and managed but never really cured. But the industry keeps trying because of the stakes involved.

A measure of what's at stake is provided by the annual Unsaleables Benchmark Report, sponsored by FMI and GMA, which will be released this week at the conference. Last year's report pegged unsaleable losses for CPG manufacturers across all retail channels at $2.57 billion, which represented a decline of $140 million from the previous year. This marked just the second annual decline since the industry began tracking unsaleables a decade ago.

"There's so much room for improvement," said Karin Croft, senior director of industry affairs, Grocery Manufacturers Association, Washington. "Corporations can really impact their bottom line if they pay attention to improving the level of unsaleables by reducing damage and improving their ability to manage new product introductions, current product obsolescence and promotional and seasonal goods."

COLLABORATION IS KEY

While retailers and manufacturers are often at odds over unsaleables, the irony is that they get the best results through collaboration rather than working individually, observers said.

"Collaboration is really the key, because one type of company can't see the entire supply chain," said Dan Raftery, president of Raftery Resource Network, Antioch, Ill. "There are many examples of manufacturers and distributors working together as a team of investigators to identify root causes of unsaleables."

In order to collaborate with its vendors, Food Lion, Salisbury, N.C., began holding damage summits in October in conjunction with Universal Solutions International, Winston-Salem, N.C. Food Lion's third summit was in May, and the company plans to hold three or four each year.

The summits have three goals, said Chris Mead, Food Lion's reverse logistics manager. They are to educate, to "enroll the vendors as partners in reducing unsaleables" and to execute. "In our last summit, we asked each vendor to research their top 10 unsaleable items, to identify the root causes, and then to report back on the steps they plan to take to help us lower unsaleables."

As a result of the summits, Food Lion has made "significant changes" throughout the organization, Mead said. In addition, several vendors have implemented companywide changes to their packaging, closeout processes, new-item introductions, merchandising plans, reporting and accountability. "Vendors have been very quick to implement changes when they see how their changes can impact the bottom line," he said.

Kellogg, Battle Creek, Mich., has also been working with retailers to address the root causes of unsaleables, conducting more than 100 weeklong unsaleables studies within the past five years, during which it evaluated the packaging of more than 25,000 products. Transportation, handling and other supply-chain practices were also evaluated, and the findings were then shared with retailers.

"By demonstrating a sincere effort to improve our processes and helping the [retail] customer to improve their processes, a stronger trading-partner relationship is developed," said Russ Hockin, vice president of cross channel operations and business development for Kellogg. Some of the improvements from these efforts meant shipping products to the retailer on high-quality pallets instead of slip sheets and implementing plastic corner posts on modular displays to improve load integrity and reduce damage. "For every improvement that Kellogg has implemented to reduce unsaleables, the [retail] customers benefit as well," he said.

Manufacturers and retailers want to know how they're doing in the unsaleables area, something that takes extensive information gathering to figure out. Rick Milligan, director of packaging, engineering and client development for Universal Solutions International, said his company collects information on hundreds of data points, including rate of damage, rate of expiration, pallet quality, and case and unit load configurations. Universal Solutions was one of three companies that received Unsaleable Innovation Awards from FMI and GMA at last year's Unsaleables conference.

"One of the trends that we're seeing is that our clients are asking us to benchmark them and their performance relative to their competitors or like companies within the industry," Milligan said. Universal Solutions International used to keep manufacturer and retailer data separate but now integrates it because of clients' demands for industry benchmark studies that require integration.

Though more partnerships are being formed, and more data is being shared across the supply chain than in previous years, there is still room for improvement. "The industry consultants like to talk about transparency in the supply chain, and, well, that just doesn't exist," Raftery said.

K-VA-T'S NEW PROGRAM

Retailers are also looking at their internal processes to curb unsaleables. K-VA-T Food Stores, Abingdon, Va., is developing a new program that will scan all of its unsaleables at the store level before sending it back to the reclamation center, determining if it is to be returned to vendors or sent to a food bank. Only a portion of unsaleables are currently scanned.

"This is going to add additional cost on our side, but it should give us a lot more credibility because we're going to scan everything," said Robert Lounsbery, K-VA-T's director of procurement. "This is going to be kind of discouraging, like looking in the mirror and realizing that you've got some blemishes."

The new products to be scanned include direct-store delivery and private label. "That's a sizable chunk of our business, and we really don't have a handle on how much of that merchandise is being damaged," he said.

K-VA-T has already instituted steps at store level to monitor unsaleables, including a rule preventing stores from returning merchandise unless they have authorization from their district manager. "The district manager first has to review the damages, and this has helped to greatly reduce the amount of unsaleables we've had at store level," Lounsbery said.

Gene Bodenheimer, executive vice president of Universal Solutions International, said he's seen other retailers come up with creative incentive plans for store management teams, including a component for reduction of unsaleables.

COMPENSATION CONUNDRUM

While the industry is seeing increasing collaboration to minimize unsaleables, it's also witnessing increasing disagreement over how manufacturers should compensate retailers for them. "Both of those things are going up at the same time," Raftery said. "They are not contradictory; they don't cancel each other out. They exist side by side."

A project is under way at GMA to create voluntary guidelines for fair and equitable cost sharing of unsaleables between manufacturers and retailers. "It's a friction point right now -- and not surprisingly," Croft said. "Unsaleables are costing our industry an annual estimated $2.6 billion a year. That's a lot of money, and I think in this era of belt-tightening for corporations and retailers, senior management is now starting to pay more attention to unsaleables."

Compensation increasingly takes the form of adjustable rate policies and swell allowances -- both are upfront payments to retailers for anticipated unsaleables cost. "More manufacturers have begun using adjustable-rate policies, said Mike Ghassali, president of Damage Research, Hackensack, N.J. "Retailers don't like it, but that's what more manufacturers are going toward."

The reason this change can upset retailers, Ghassali said, is that in the past some retailers were overcompensated for their unsaleables. "Now [manufacturers] are paying based on the actual damages. From the retailer perspective, they're losing money."

Whether embraced by retailers, adjustable-rate policies do have advantages. Swell allowance is a fixed-rate figure that may not even be based on historical figures, Bodenheimer said. Conversely, properly figured adjustable-rate allowances are based on a comprehensive, statistically significant sampling plan.

A good adjustable-rate program will create a greater awareness of the costs and drivers of unsaleables, and can result in improvement plans and performance enhancements, Bodenheimer said. "The best programs are treated as an ongoing program with the objective to continuously improve the performance of the products and packages as well as the performance of inventory management, promotional activity and other 'behavioral' factors affecting unsaleables."

For their part, to be fair, manufacturers must demonstrate an ongoing effort to manage and to continue to reduce unsaleables, Kellogg's Hockin said. Kellogg's Morning Foods and Kellogg's Frozen Foods both use adjustable-rate allowances. "It takes a lot of effort and auditing work to execute a fair policy," he said.

Raftery agreed there is a renewed drive to understand what the compensation formula should look like, adding that there is "no clear solution."

Raftery also mentioned new products as an area of concern. A large number of new products came out in the last year, causing more discontinued, and therefore unsaleable, products. Among the most problematic items were those created in a frenzy to appeal to consumers on the Atkins and South Beach diets, Raftery said. "I believe right now they're somewhat languishing in the reverse distribution pipeline."

It's an ongoing battle, Raftery noted. "Companies that continue to invest in the resources to 'tame the tiger' will keep the tiger under control," he said. "If they let go of the leash, it runs wherever it wants."

Do Dates Create Unsaleables?

Industry observers are divided over whether the industry's voluntary adoption of "Best If Used By," or "open code," dating is driving up unsaleables.

Some believe easy-to-read dates have a positive impact on unsaleables figures while others believe the opposite. The first group holds that the dates make product rotation easier, thereby improving speed to shelf and ensuring older products are sold first.

The other possibility, however, is that the dates increase unsaleables by giving customers the ability to read a product's date. "Customers like the freshest," said Karin Croft, senior director of industry affairs, Grocery Manufacturers Association, Washington. "They like to go to the shelf and they like to dig through, and they'll always be taking the newest and leaving the oldest."

As for the empirical evidence, open code dating appears to have had little effect so far on the unsaleable rates of several large companies that recently began using it, said Dan Raftery, president of Raftery Resource Network, Antioch, Ill. "There was no noticeable impact to most of those manufacturers, I believe. At the industry level, you couldn't see it in the numbers."

Russ Hockin, vice president of cross channel operations and business development for Kellogg, Battle Creek, Mich., echoed this belief, adding that all Kellogg's Morning Foods and Frozen Foods products employ open code dating. "This dating has not had a significant effect on our unsaleables because most of our products have at least one year of shelf life," he said. "But open code dating has made us more sensitive to providing enough time for the retailer to sell the product through."

-- JESSICA ROTHSCHUH