Relative cost of unsaleable goods falls in 2005

By Ahmed ElAmin

- Last updated on GMT

Related tags Retailing

Manufacturers managed to reduce the relative cost of reimbursing
retailers for unsaleable goods in 2005, indicating they may have
turned a corner in combatting a $2bn problem.

Average manufacturer payments for unsaleables declined slightly to 1.05 per cent of sales in 2005 from 1.13 per cent the year before according to an annual survey by the Food Marketing Institute (FMI) and the Grocery Manufacturers Association (GMA). That amounts to a projected $2.05bn cost to manufacturers.

Respondents to the survey cited packaging improvements and other changes to reduce damage, along with increased management focus on data, as the major reasons for decreasing rates.

Manufacturers have been under increasing pressure from retailers and distributors to reduce the amount of unsaleables they have to handle and return through their supply chains.

"This year's survey shows that the industry is actively engaged in working to manage the dynamics of unsaleables,"​ said Karin Croft, GMA's senior director of industry affairs. "The report describes the latest stages in the evolving approach to the benchmark measurement of this cost to the entire CPG supply chain."

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. The report specifically deals with foods and over-the-counter drugs, the main source of costs of unsaleable goods.

"Improving shipping practices and packaging materials are the unsaleables management practices cited by the largest number of manufacturers,"​ the report stated. "Including markdown funds in new product launches is the practice used by the fewest manufacturers."

Nearly three-fourths of the surveyed manufacturers, or 33 out of the 46 providing data, reported lower unsaleables rates in 2005 versus 2004.

The costs of returning or disposing of unsaleable goods is usually borne by retailers, distributors, and manufacturers. The payments depend on the agreements between the manufacturer and the retailer, the type of product, and the reasons for not being able to sell the goods.

Nearly half of surveyed manufacturers reported data about full case returns from distributors. These manufacturers reported that 43 per cent of the unsaleables were returned to active inventory. Closeout liquidators received 17 per cent of this volume in 2005.

These manufacturers also reported an average of $9.3m in payments for full case returns in 2005, down from $12.1m in 2004.

While manufacturers and retailers managed to lower the costs associated with unsaleables, distributors fared badly. Distributor unsaleables costs increased to 1.17 per cent of sales in 2005.

As a group, distributors reported receiving payments from manufacturers that were less than their unsaleables costs.

Distributors on a joint industry unsaleables committee say that one reason for cost and receipts declines may be a decrease in the per cent of total unsaleables volume covered by agreed upon policies and sent to reclamation centers for processing and data collection.

"This report emphasizes the need for continued trading partner collaboration on some very challenging issues, specifically, reducing overall unsaleables and proactively addressing the reimbursement gap issue between manufacturers and distributors,"​ stated Patrick Walsh, FMI's senior director of industry relations.

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.

In related news the GMA and the FMI cited Heinz US Consumer Products and GENCO Damage Research for innovation in reducing unsaleables.

Heinz worked with GENCO to identify root causes of unsaleables, instituting an aggressive goal to reduce them by 40 per cent.

In the first year, Heinz trimmed unsaleables by 23 per cent and projected an additional 25 per cent reduction to meet their goal in just two years, the organisations said.

Heinz calls the programme "Project MUDA", which means "waste" in Japanese.

The GMA represents the leading branded food, beverage and consumer products companies.

The manufacturers surveyed reported about $152bn in gross US sales in 2005. Surveyed distributors reported about $147bn in gross US sales in 2005.

Related topics Processing & packaging

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