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Demystifying discontinued products.

Better communication and increased lead times may take costs out of the discontinued products process and stem the flow of items to reclamation centers.

Picture this: A category manager in a retailer's merchandising department conducts a category review and decides to delist some slow-moving items, but fails to relay that decision to other departments, causing warehouse replenishment specialists to continue reordering these items.

Or, how about this: The marketing manager at a manufacturer learns about a decision to discontinue a certain flavor of a product, but neglects to tell others, causing the purchasing department to continue ordering packaging materials for production.

If either one, or both, of these scenarios sounds familiar, it's no wonder. This lack of communication is widespread in the industry and is largely responsible for the vast amount of discontinued yet undamaged product that ends up in reclamation centers. That finding was among the results of a recently released white paper, titled "Improving Efficiencies in Product Discontinuation," developed for the Grocery Manufacturers of America (GMA), Food Distributors International (FDI) and Food Marketing Institute (FMI) by Prime Consulting Group Inc. In fact, the study found between 10% and 40% of the total volume of unsaleables for an individual company can be discontinued products.

The recognition of the size and scope of the discontinued products issue led the Joint Industry Unsaleables Steering Committee (JIUSC) to examine ways in which the industry could improve efficiencies in this part of the supply chain. "Some of the figures coming back from companies were showing an awful lot of perfectly good merchandise that was discontinued but was showing up in reclamation centers," says Robert Lounsbery, a member of the discontinued products working group and director of procurement at Mid-Mountain Foods, Abingdon, Va.-based division of K-VA-T Food Stores. "This was happening even though the industry has been making good efforts to reduce the amount of unsaleables. When you turn around and send perfectly good merchandise to reclamation centers, then we're not achieving our goal."

The JIUSC determined that costs associated with discontinued products are additive, with the highest level occurring when these items are removed at the end of the supply chain (i.e., at the reclamation center). "There's a real opportunity here to cut a cost that we can all do without," says Aileen Dullaghan, senior manager, industry relations, FMI.

While the committee did not attempt to quantify the actual costs of discontinued products, "several of the retailers did a 'gut check' and realized that it was a fairly significant cost," says Dullaghan. The white paper does, however, identify general categories of costs, such as interdepartment communications, sales rep communications, partner communications, database maintenance, special promotion administration, special promotion allowance, unused raw materials and packaging, shelf reset costs, special handling costs, pick-up transportation costs, disposal costs and inventory carrying costs.

"The reclamation business is a $4 billion industry," says Lounsbery. "If 15% of that is discontinued product, that represents $600 million. That's a sizable sum that the industry can capture. What's more, if at some point our consumers realize that this is taking place after we've been telling them that we're trying to save them money, they'll be disappointed in us because ultimately who's paying for that cost? The consumer."

The study found that inadequate and delayed communication about discontinued products, both inside an organization as well as between trading partners, is one of the core issues driving inefficiencies and adding costs to the total supply chain. "The bugaboo has always been that a manufacturer didn't want to tell a retailer that they were discontinuing a product because they were afraid that product would be pulled and they'd lose the shelf space," says Lounsbery. "But they would lose that shelf space anyway, so it's really preferable to communicate early and figure out how best to sell through merchandise rather than sending it to the reclamation center."

Another core issue, noted the report, relates to the value of discontinued products. "These 'perfectly good' products may quickly drop in value after a trading partner learns of their discontinuation," according to the study. "The big issue is protectionism," says Dan Raftery, president, Prime Consulting Group Inc., Bannockburn, Ill. "There are cloaks of secrecy that exist in the discontinued product process. There's a determination on both the manufacturer side and the retailer side to protect their investment. If they have an investment that can be affected, they tend to delay communicating the information about what's being discontinued."

The white paper offered a number of suggestions regarding better communication and increased lead times for the various decision points that exist within the discontinuation process. These recommendations were largely based on lead times that committee members said they'd like to see, notes Erin Harcourt, senior manager, industry affairs, GMA. For example, when the decision to discontinue a product is made by a manufacturer, lead time for ordering packaging materials should be 120 to 180 days, noted the white paper. It was also determined that a 90-day lead time for notification is ideal before manufacturers stop shipping the discontinued products to retailers and wholesalers. For their part, retailers and wholesalers should notify manufacturers about 30 to 60 days before they stop buying the discontinued products when the decision to discontinue originates at the manufacturer. If the retailer originates the decision, the lead time should be 60 to 90 days, as this is the first communication about the discont inuation decision.

Increased lead times would allow retailers to sell through to consumers as much product as possible, points out Michael McCarthy, director of education and distribution services, FDI. "If a retailer or wholesaler decides to discontinue an item, they need to communicate that information up the supply chain so the manufacturer can make the appropriate product adjustments, he says. "On the other side, if a manufacturer decides to discontinue a product they need to let the wholesalers and retailers know so the product can be pulled off the shelf and put on an endcap at a special price."

The study noted that any product markdowns should be determined by the trading partners and a time limit should he set. "For example, if you know that a new item is coming in two months, you have the time to make the decision about what to discontinue and to use movement data to determine how much of that product can be sold at the regular price, how much at 40% off and how much will likely be left for the manufacturer to pick up," says Raftery.

With the white paper as the groundwork, the committee hopes to move the initiative forward. "We'll be looking for companies interested in piloting some of the learnings from the white paper and then documenting their results," says Harcourt. Those results are expected next year, according to Dullaghan.

Among the next steps may be an effort to get a better handle on the actual costs of discontinued products. Harcourt points out that quantifying these costs isn't easy. "Reclamation centers have codes for dented product and codes for good product, but they wouldn't have the knowledge that something was a discontinued product," she says. "We should consider establishing a reporting structure that would get lists of discontinued products to reclamation centers so those could he coded." In fact, says Dullaghan, several retailers have begun to rework the way they track unsaleables in an effort to get at the cost of discontinued products.

Lounsbery agrees that going through the reclamation center may be the best way to quantify these costs. "There may be some added expense to do this, but it's well worthwhile in order to get at the costs of discontinued products," he says. "If you consider category management, you want to know the exact cost of the items out there. That's true with discontinued products too. You need to know all the monies that are put against an item to get at the true profitability of that product."


The slight decline in industry unsaleables recorded by the "2001 Unsaleables Benchmark Report" may seem like nothing to write home about, but in a business that chalks up more than $2 billion a year in unsaleables, every little bit counts.

The report, conducted by foodBiz and published by the Joint Industry Unsaleables Steering Committee, found that unsaleables last year cost the industry an estimated $2.4 billion, down from $2.5 billion the previous year. It was the first decline since the benchmarking studies began more than seven years ago. "The cost to the industry for overall unsaleables had increased each year, but we saw it dip this year," says Erin Harcourt, senior manager, industry affairs, GMA. "This indicates that we're finally getting our arms around this issue."

The study attributed the decline to improvements in areas such as packaging and shipping container materials, pallets and shipping practices, reduction in store reimbursement rates, and changes in policy terms and allowances. However, the report noted, the industry still has long way to go to reduce the cost to more acceptable levels. Among the areas identified as needing more attention were inadequate retail shelf-stock rotation, high levels of out-of-code product at reclamation, frequent store resets and product disposition to reclamation, and high levels of product discontinuation/introduction and reclamation.
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Publication:Grocery Headquarters
Date:Sep 1, 2001
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