top of page
  • Facebook
  • Youtube
  • LinkedIn
  • X

Excessive Defectives Reset: Stop the Rate Hike

  • The HRG Team
  • 18 hours ago
  • 3 min read
Two pallets of boxes.

If you’ve ever seen an “excessive defectives” fee and thought, Wait… since when are we paying a subscription for returns? — You’re not alone.


The second half of February is when many retailers stop “surviving peak” and start grading what happened. Returns mature. Scorecards refresh. Allowance rates get reconsidered. And if your defective bucket is inflated (even for reasons that aren’t truly product defects), that rate can get “reset” in a way that sticks.


Here’s why the timing is brutal: the National Retail Federation (NRF) projects $849.9B in total returns for 2025—about 15.8% of annual retail sales—and estimates 19.3% of online sales will be returned. That much product moving backward through the system creates chaos. And chaos loves mislabeled root causes.


The uncomfortable truth: “defective” often means “unsellable”

On paper, “defective” sounds like manufacturing failure.


In practice, the bucket can include:

  • cracked packaging from rough handling

  • leaking seals from pallet pressure

  • crushed cartons at receiving

  • temperature abuse in transit

  • “customer remorse” returns that still get coded as defective

  • even fraud/policy abuse that ends up downstream as damage or quality complaints


NRF found 9% of returns are fraudulent. Appriss Retail (with Deloitte) reported $103B in fraudulent returns and claims in 2024, with 15.14% of returns deemed fraudulent in that research. Different sources, different methods, same takeaway: return streams are noisy—and suppliers can get billed as if all noise is their fault.


A fictional scenario (clearly fictional)

Fictional example (not a real company): A sauce brand finishes Q4 strong. In late February, they get flagged for “excessive defectives,” and a higher allowance rate is proposed going forward. Their first instinct is to panic—until they segment the data.


Turns out 70% of the “defectives” are clustered in one distribution center (DC) and one carrier lane where pallets were double-stacked. Product quality wasn’t the issue. Handling was.


That’s the move: stop arguing about the number and start proving what the number contains.


The February “Excessive Defectives Reset” playbook

Step 1: Split the bucket into 4 categories

Before you dispute anything, classify every unit into one of these:

  1. True defect (manufacturing failure)

  2. In-transit damage (carrier/lane)

  3. Warehouse/DC handling damage (receiving, put-away, pick)

  4. Policy returns/customer behavior (not a defect)


If your internal data can’t support this split yet, that’s your first fix. Because you can’t win a dispute with a bucket that’s already blended.


Step 2: Audit the retailer’s math, not just the narrative

“Excessive defectives” fees often hinge on rate math. Validate:

  • Timeframe: Are they using the right weeks?

  • Denominator: Units shipped vs. units sold vs. units returned (these produce very different rates)

  • Sampling: One region vs. network-wide

  • Item identity: Universal Product Code (UPC) and pack size mix-ups

  • Double counting: The same unit showing up as both a return and a fee


Step 3: Build a “Defectives Evidence Pack”

Make it easy for a reviewer to say yes:

  • return reason codes + location detail

  • photos (damage type and packaging condition) if available

  • lot/date codes to show whether it’s isolated or systemic

  • proof of delivery (POD) + appointment logs (when handling is in question)

  • carrier lane and DC mapping

  • packaging change history (did anything change before the spike?)

  • one-page corrective action plan


This is where suppliers quietly win. Not with emotion—with structure.


Step 4: Create a heat map (the truth teller)

Run a simple pivot:

  • by retailer

  • by item/stock keeping unit (SKU)

  • by DC

  • by carrier lane

  • by week


True defects spread across lanes. Handling problems cluster.


Step 5: Negotiate the future while disputing the past

If a new allowance rate is being proposed, treat it like a contract change:

  • Ask what inputs drove the change

  • Propose a temporary rate pending segmentation review

  • Request a re-rate once corrective actions are implemented


Because the biggest loss isn’t last month’s fee. It’s a higher rate that follows you all year.


Where HRG fits (lightly)

This is exactly the kind of situation where “we’ll look at it later” gets expensive. HRG’s approach (people + process + tools) is built for these messy categories—where attribution matters and proof wins.


Not hype. Just discipline.




bottom of page