In the latest episode of The Savvy Supplier podcast, Al Frank and Boyd Evert, CEO and co-founder of HRG, delve into the escalating issue of excessive defective deductions impacting retail suppliers. As we approach 2025, this challenge is poised to intensify, making it crucial for suppliers to comprehend its root causes and implement effective mitigation strategies.
Common Causes of Excessive Defective Deductions
While product flaws and packaging issues are apparent contributors to defective deductions, operational factors within retail environments often play a more significant, yet less visible, role.
A primary concern is the miscoding of defectives, where products removed from inventory for reasons other than defects—such as inventory shrinkage or in-store usage—are erroneously classified as defective. This misclassification inflates defective rates, leading to unwarranted deductions for suppliers.
The Impact of Retailer Operations
Retail operations can inadvertently escalate defective deductions through:
Inventory Shrinkage: Discrepancies between recorded inventory and actual stock, often due to theft or administrative errors, can result in products being misclassified as defective.
In-Store Usage: Products used within the store (e.g., cleaning supplies for spills) should be coded appropriately. Misclassification as defectives unjustly transfers the cost to suppliers.
Customer Handling: Items damaged by customers—such as opened packaging or tried-on products—may be deemed unsellable. If these are coded incorrectly as defectives, suppliers bear the financial burden.
Identifying Root Causes
To discern whether excessive defective deductions stem from product issues or retailer operations, suppliers should:
Analyze Data Patterns: Examine defective rates across different regions, periods, and product categories to identify anomalies that may indicate operational issues.
Collaborate with Retailers: Discuss with retail partners to understand their inventory management practices and address potential miscoding issues.
The Role of Inventory Shrink
Inventory shrinkage, defined as the loss of products between manufacture and point of sale, significantly contributes to erroneous defective deductions. Factors leading to shrinkage include:
Theft: Both external (shoplifting) and internal (employee theft) activities reduce actual stock levels without corresponding adjustments in inventory records.
Administrative Errors: Record-keeping or data entry mistakes can create discrepancies between recorded and actual inventory.
Damage: Products damaged during handling or by customers may be removed from saleable stock but not accurately accounted for.
Addressing inventory shrink requires robust loss prevention strategies and accurate inventory tracking to prevent unjust defective deductions.
Mitigation Strategies for Suppliers
Suppliers can adopt several approaches to reduce the impact of excessive defective deductions:
Data-Driven Analysis: Utilize granular data to monitor defective rates and identify patterns indicative of operational issues.
Training and Education: Work with retailers to ensure staff are adequately trained in proper coding practices for unsellable products.
Regular Audits: Conduct periodic reviews of defective deductions to verify validity and promptly address discrepancies.
By proactively addressing the underlying causes of excessive defective deductions, suppliers can safeguard their bottom line and foster stronger partnerships with retailers.
For more insights and assistance in managing deductions, visit HRG's website . There, you can access valuable resources and connect with experts dedicated to optimizing supplier-retailer relationships.
Listen to the full episode of The Savvy Supplier podcast for an in-depth discussion on this critical issue.