Excessive Defectives: The Returns Tax on Margin
- The HRG Team
- 7 hours ago
- 3 min read
You know the feeling: sales look healthy, shelves are full, and yet the cash line keeps getting nibbled to death by deductions.
Excessive defectives are one of the sneakiest nibblers.
Because it sounds like an operational issue—damaged goods, returns, reclamation, the messy stuff that happens after the sale. And yes, some of it is real. But a surprising amount of it is mis-coded, duplicated, out-of-window, or simply not yours to pay.
Meanwhile, the returns machine in U.S. retail is enormous—$890B in returns projected for 2024, representing 16.9% of annual sales. That pressure to recapture costs flows downstream. Eventually, it lands on suppliers as defectives, unsaleables, and chargebacks.
And when you broaden beyond consumer returns into total “unsaleables” (damaged, expired, discontinued, etc.), some industry estimates put the annual impact across manufacturers, distributors, and retailers in the tens of billions.
That’s the backdrop.
Now let’s talk about why your team gets hit even when you did your job.
What “excessive defectives” usually means in practice
In plain terms: product was deemed unsellable, and someone is assigning the cost to you. That can include:
Damage (case crush, punctures, broken seals, torn packaging)
Temperature abuse or spoilage
Expiration/rotation failures
Handling issues in DCs or stores
Returns/reclamations that get mapped back to a vendor
The important thing isn’t the label. It’s the trail:
Which locations?
Which SKUs?
Which dates?
Which policy/rate?
Which proof?
Because when those elements don’t line up, defectives stop being “cost of doing business” and start being recoverable leakage.
A fictional (but painfully realistic) scenario
Let’s say you’re a mid-sized brand shipping consistently.
Then your AP team notices defectives deductions spiking in one region. Ops assumes: “Must be packaging.” Sales assumes: “Retailer is tightening up.” Finance assumes: “Not worth the fight.”
Three months later, you discover the spike started when a DC changed how it coded damage—and a chunk of deductions were duplicates tied to the same reclamation batch.
Nothing about your product changed. Your cash flow did.
That’s why defectives can’t be treated like background noise.
The 5 ways defectives get inflated (and why they’re easy to miss)
Double-dips The same event gets charged twice—often via different codes or cycles.
Out-of-window claims Retail policies typically have timeframes. Claims outside those windows may be disputable (or at least require better support).
Wrong rate / wrong agreement Defectives often run on rate tables, program terms, or category-specific policies. If the wrong program is applied, the math is wrong.
Bad mapping (SKU, pack, or vendor setup) A pack change, item transition, or system mapping issue can route charges to the wrong vendor or wrong SKU.
No documentation, yet still deducted Retailer deductions and chargebacks aren’t always richly explained at the moment they hit—so teams spend hours hunting context after the money is already gone.
Why this matters more than people think
Even “small” defectives deductions are usually high-frequency.
And if you’re in a program where chargebacks or compliance penalties can run as a percentage of invoice (often cited in the 1%–5% range depending on the issue), a few bad weeks can quietly erase a month’s profit on a fast-moving SKU.
The danger isn’t one deduction.
It’s the habit of letting them stack.
The Defectives Recovery Playbook (simple, not sexy, works)
Here’s what a disciplined defectives system looks like:
Build a defectives ledger (not just a pile of PDFs) Track every defectives-related deduction with: retailer, code, invoice, PO, ship date, location, SKU, units, dollars, reason.
Create a “hot map” Sort by where it happens (DC/store/region) and when it started. Spikes are clues.
Match to your shipment truth Confirm what you shipped, when, and under what terms. If the deduction can’t tie to a clean shipment record, that’s a red flag.
Validate policy, window, and rate Before debating “fault,” verify the retailer’s own rules were applied correctly.
Demand the proof standard If the claim is valid, fine—pay it. If it’s not supported, it doesn’t get a free pass just because it’s labeled “defectives.”
Recover cash and fix the root cause When defectives are real, recovery isn’t the end. Feed findings to packaging, DC routing, pallet patterns, temperature controls, and store-level execution.
Measure it like trade spend Defectives isn’t just ops. It’s a recurring drain on margin—so it deserves a KPI and a monthly review.
Where HRG fits (without the “hard sell”)
Most teams don’t lose this money because they’re careless.
They lose it because defectives are cross-functional, messy, and time-consuming to validate—especially when the data trails are fragmented across portals, emails, and settlement systems.
HRG’s lane is helping suppliers separate valid from invalid, build airtight support, and recover what’s truly recoverable—while also spotlighting the operational patterns that keep defectives from coming back in the next quarter.
Because the goal isn’t to argue more.
It’s to stop paying for things you don’t owe.