Why Defective Deductions Deserve a Second Look

Previously, returns happened quietly behind the scenes.

Today, returns directly reduce supplier profits.

Many CPG suppliers view “excessive defectives” as a straightforward quality problem: maybe the packaging failed or the product leaked, so it gets returned, and the issue seems settled.

But it is not always that simple.

The National Retail Federation projected 2025 retail returns at $849.9 billion. Of these, 19.3% are from online sales and 9% may be fraudulent. This volume raises retailer pressure and supplier costs.

This is where the situation becomes complicated.

Not every defective deduction actually means the product was faulty.

Sometimes the product was mishandled, or merchandising failed. Sometimes inventory lingered, return codes were misleading, or records were insufficient.

All of this confusion can be costly.

The Product May Not Be the Problem

Let’s look at a made-up example.

A supplier sends out generators before storm season. In 30% of stores where everything goes smoothly, the generators sell fast.

In other stores, poor placement and lack of attention mean missed sales and more returns. Some of these are labeled as defective and come with extra charges.

The supplier looks at the deduction report and wonders, “How did our product suddenly become defective in the stores where it did not sell? " This is exactly the kind of question suppliers should ask.

The real problem might be poor execution, lack of visibility, wrong coding, or costs outside the supplier’s control.

Sometimes the product is fine.

But the paperwork often is not.

Why Excessive Defectives Hurt More Than the Deduction

The deduction is just the most visible problem.

The hidden costs are often even greater.

High defect rates can hurt how retailers see your brand and make buyers more cautious.

This can affect restocking, growth, promotions, and reviews.

Finance teams notice shrinking margins.

Sales teams feel more tension with buyers.

Supply chain sees unexplained freight and return expense.

Executives see a once-profitable item suddenly causing problems.

If no one looks deeper, the supplier might just accept the deduction as a normal business expense.

That is where the real risk lies.

Once a deduction is written off, people rarely check if the claim was valid, supported, a duplicate, coded correctly, or could have been recovered.

What CPG Suppliers Should Review

Do not just look at excessive defective fees as a whole—review each deduction individually. For each fee, analyze the supporting data to identify the reason, assess its validity, and uncover insights to help prevent future deductions.

Suppliers should review defectives by:

• Item number

• Store or club location

• Region

• Shipment date

• Return date

• Selling window

• Return reason code

• Freight expense

• Seasonal timing

• Supporting documentation

• Duplicate claim risk

• Post-audit exposure

Even a small pattern in the data can reveal important information.

If one region shows more defects, the issue may be handling or execution. Spikes after resets may signal transition problems. If defects rise post-promotion, compare them to plans and sales.

Avoid disputing every deduction immediately. First, use the data analysis above to specifically identify which deductions warrant further review. Clearly document the criteria and evidence used to select the deductions you decide to challenge.

The goal is to make decisions based on facts, not guesses.

Why Executives Should Care

Excessive defectives affect revenue, operations, and relationships with retailers.

This makes them an important issue for executives.

For chief financial officers, the question is simple: “Are we giving up recoverable dollars because the deduction looks too complicated to challenge?”

For sales leaders, the question is different: “Are invalid defectives making our brand look worse than it is?”

For operations leaders, the question becomes: “Are we paying for execution failures outside our control?”

All three questions matter.

Create a recovery strategy: identify causes, study problem areas, and fix issues. Don’t just focus on old claims—act proactively.

This is where HRG’s experience is valuable. HRG created the concept of retail deduction recovery, and their work bridges the gap between data, documentation, retailer policies, and real-world supplier operations.

Software can identify a code.

Experienced people can ask, “Does this claim make sense?”

Asking that question can change the result.

The Takeaway

Establish a routine process to thoroughly review every excessive defective fee. For each deduction: verify its accuracy, identify the root cause, implement corrective actions, and seek cost recovery wherever justified by data.

If the product really did fail, fix it. That part is clear.

If deductions arise from issues like poor execution, handling mistakes, unsupported returns, duplicates, inadequate documentation, or retailer errors, review each case in detail. Challenge these deductions with evidence and document your actions rather than automatically accepting the expense.

It is too difficult to earn a good margin to let it slip away.

Take the time to look into deduction codes so you can prevent margin loss, instead of ignoring them because you are busy.

Take Action

If excessive defectives, returns, freight costs, or post-audit deductions are affecting your profit and loss statement, HRG can help you identify which are valid, which are not supported, and which might be recoverable.

Before you write off the next round of defective deductions, let HRG take a closer look.