How to Reduce Product Damage Across Distribution Channels

By Dan Hafen
Director of Product Management, ShockWatch

Original Publication 2008

Introduction
Manufacturing quality controls and best practices lose all value if the products become damaged before reaching their final destination. Poor handling and distribution processes are primarily to blame for this damage, according to Universal Solutions International, a supply chain analysis and reverse logistics solutions provider. Product damage is probably easiest to understand in the context of the food and beverage and consumer packaged goods (CPG) industries everyone has seen dented boxes on store shelves and stories of food-borne illness on the news but product damage affects all major industries. Pharmaceuticals, chemicals, electronics, works of art, medical devices, and paper products are just some of the many perishable or sensitive goods that incur damage when dropped, tilted, or exposed to unacceptable temperatures and humidity levels. Every link in the supply chain is at risk; damage can compromise incoming raw ingredients and materials as well as finished product on the way to the end user. Every segment in the supply chain suffers from the blow. Although product damage in the food and beverage and CPG industries has dropped slightly since its peak in 2002, it is too soon to celebrate. The problem still costs billions of dollars annually. (See chart below.) Plus, according to the 2004 and 2005 Unsaleables Benchmark Reports, only about half of the manufacturers in these industries are experiencing a year-to-year decline in the number of unsaleables. The 2004 report indicates that although products become unsaleable for any number of reasons including expiration, discontinuation, and seasonal applicability damage is the leading cause, accounting for 58 percent of unsaleables.

Total Cost of Unsaleables in Food and Beverage / CPG Industries $2.71 billion $2.57 billion

$2.52 billion

$2.05 billion

2002

2003

2004

2005

Source: Grocery Manufacturers of America

Impact across the Supply Chain

Industry benchmarks, such as those recorded and published in the United States and Canada, can help companies evaluate the level of their unsaleables costs from year to year. However, the 2006 Unsaleables Benchmark Report states that its benchmarks exclude certain cost components including, but not limited to: administration costs, costs associated with root cause determination initiatives, some service provider costs and some reclamation center costs. Therefore, the complete cost of unsaleables extends far beyond the numbers in the report that are explained here. cost declines may be a decrease in the percent of total unsaleables volume covered by JIR policies and sent to reclamation centers for processing and data collection. The JIR policies, or Joint Industry Recommendations, were originally published in 1990 but were revised throughout 2005 and released in January 2006 by the Unsaleables Leadership Task Force. The new JIR policies suggest that retailers and manufacturers work together to reduce the number of unsaleables. It also includes detailed instructions on adjustable rate policies (ARPs), which allow manufacturers to pay a fixed percentage of unsaleable costs for damage that may be related to type of packaging or other manufacturer decisions. The 2006 Unsaleables Benchmark Report shows that Manufacturers with ARP or swell allowances report lower average unsaleables payment rates.

Impact on Manufacturers
The 2006 Unsaleables Benchmark Report shows that in 2005, unsaleables cost food and beverage and CPG manufacturers 1.05 percent of their sales. This was actually a decrease from 1.13 percent in 2004, but the report states that one reason for

Unsaleables Cost Rate for Food and Beverage / CPG Manufacturers

1.25 1.2 1.15 1.1 1.05 1 .95 .9 .85 .80

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
(Average of total unsaleables costs divided by total sales)

Industry wieghted Average

Company Average

(Mean of all company rates)

Note: 2002 Industry-weighted Average restated to 1.02 versus .99 as previously reported

Source: The 2004 and 2006 Unsaleables Benchmark Reports of the Grocery Manufacturers of America and the Food Marketing Institute
The basic cost of unsaleables is clearly significant for manufacturers, but the risk of liability for bringing damaged goods to market may have even greater impact on a business. Aon, a provider of risk management services, found in its 2007 Global Risk Management Survey that damage to reputation is the number one risk concern among multinational corporations and that most companies are not prepared to mitigate this potential risk. Any number of factors and events may affect a companys reputation, but it is easy to imagine how the frequent sale of damaged product would quickly impact consumers opinion and loyalty to a brand.

Impact on Distributors
The analysis of distributor responses in the 2006 Unsaleables Benchmark Report proves that unsaleables are still a serious problem in spite of the recent decline in manufacturers costs. From 2004 to 2005, distributors in the food and beverage and CPG industries saw their unsaleables costs increase from 1.13 percent to 1.17 percent of sales. A total of 56 percent of distributors saw an increase in their unsaleables costs in that time period. Plus, like manufacturers, distributors with a reputation for product damage may also suffer from loss of business.

Food and Beverage / CPG Distributors Unsaleables Costs by Major Department

11% 22% Reclaim Payments ARP & Small Allowances Share-level Deductions

that opportunity because products are shipped directly to the consumers home. External failures, or product damage that the consumer sees, present a significant challenge for e-tailers. According to a 2001 Supply Chain Management Review article on e-fulfillment, These failures are the most expensive both in terms of correcting the defect and regaining the lost goodwill. For large, costly items like furniture, a third party may perform the repair or the consumer may simply return the damaged product. A high number of returns, the article continues, could bankrupt a company in short order because of the high handling and shipping costs involved. Some reports estimate that online furniture companies like Furniture. com and Living.com experienced up to a 30 or 40 percent return rate before finally going out of business. This high risk of product damage and returns is significant for any company that does business online and ships product across long distances.

The Blame Game

As supply chains become more complex, the risk of product damage increases. Canadas Efficient Consumer Response (ECR) Steering Committee publishes a National Users Guide and Toolbox for managing unsaleables, which explains that It would be excruciatingly easy for trading partners to revert to a finger pointing mentality. It is clearly impossible to determine with 100% accuracy how the damage occurred to any given damaged product. However, companies can try to identify the likely causes of product damage in their specific supply chain. Pinpointing the problems and rectifying them leads to a more positive outcome than simply blaming other workers for the damage.

84%

3%

Sample Size: 10 Distributors

Source: 2006 Unsaleables Benchmark Report of the Grocery Manufacturers of America and the Food Marketing Institute

Impact on E-business
When traditional retailers receive product from a manufacturer, in-store repair specialists are often able to fix damage that occurred during shipping. This type of damage is referred to as an internal failure because, potentially, no one outside the company knows about it. While some e-tailers can make basic repairs in the warehouse, many lack

Root Causes of Product Damage

Common causes of product damage include inferior packaging, transportation, improper pallet loading, and mishandling. Exposure to unacceptable temperatures and humidity levels due to shipping delays, neglect, and unseasonable weather can also cause damage. dunnage can reduce the possibility of a package or unit load being damaged during transit. For example, dunnage prevents horizontal crushing of frozen foods. He goes on to explain that the ability to see the individual product units through the tertiary packaging helps reduce the number of unsaleables. Effective pallet wrapping can also ensure the integrity of products during distribution. A 2006 study conducted by Carolina Supply Chain Services and sponsored by The Dow Chemical Company shows that poor unit load wrapping could potentially cost manufacturers approximately $388 million in product damage. A companys investment in packaging, from primary to tertiary, can greatly impact its level of unsaleables.

Packaging
Packaging is a products core defense against damage. Wikipedia offers a clear explanation of the three packaging levels: Primary packaging is the main package that holds the food that is being processed. Secondary packaging combines the primary packages into one box being made. Tertiary packaging combines all of the secondary packages into one pallet. For example, a recent study by third-party supply chain authority GENCO revealed that using coated natural kraft cardboard from MeadWestvaco can help frozen food manufacturers reduce their unsaleables by 44 percent. Corrugated cardboard is commonly used in packaging, but its protective characteristics begin to break down after six months. It is also very susceptible to handling damage when its moved from supplier to customer to warehouse to lineside inventory, according to an article in the Manufacturing Extension Partnership newsletter. Companies should recognize these potential problems and how their products may be affected as a result. Greg Bunker, senior development engineer at The Dow Chemical Company, states in a recent Logistics Today article that proper use of

Pallet Loading
Even the best packaging only goes so far in protecting products if the pallets are loaded improperly or broken down before reaching their final destination. Some types of packages are more susceptible to damage on the pallet. For example, in 2002, the Carton User Group, the Pira International independent packaging consultant, and the Lean Enterprise Research Centre of Cardiff Business School in Wales, U.K., studied supply chain damage to aseptic cartons, the sterilized packages often used for containing beverages and liquid foods. The study found that aseptic cartons suffer far more damage when pallets are broken down into roll cages, as opposed to when they remain intact throughout the supply chain.

Damage Rates for Aseptic Cartons

Common Damage Rate Damage Rate for Pallets Broken into Roll Cages

Damage Rate

up to 28%

about 50%

up to 5%

about 28%

up to 2%

about 8%

Minor Damage

Significant Damage

Critical Damage

Source: Reducing Damage in the Fast Moving Consumer Goods Supply Chain by Greg Wood, Pira International

Transportation
Transportation is another major factor in protecting products from damage. However, according to a recent article in Purchasing magazine, Many purchasing managers admit today that their companies have a tendency to treat transportation as an afterthought. Yet it is critical for companies to make their delivery schedules clear to their carriers. Slowdowns and delays can affect tracking ability, customer satisfaction, and exposure of product to unacceptable conditions that could lead to spoilage or contamination. Transportation is an especially critical consideration for online retailers, or e-tailers, simply because their products often travel great distances and at less-than-truckload volumes, potentially allowing products to slide and incur damage. The distance of travel, the potential for load shifting in partially full trucks, and the multiple handoffs in the supply chain all contribute to the likelihood of product damage along the way.

levelers. Product can be crushed on the way out as it knocks against these obstructions. Even after the first pallets are removed, loads can still be damaged as the forklift impacts the interfering pit wall as its backing out of the trailer. The article goes on to state that dock openings are not big enough for modern trucks, which causes gaps around the dock that may allow outside weather conditions, such as heat or rain, to affect the product being unloaded. This situation can be particularly hazardous for items that are sensitive to temperature and humidity.

Temperature and Humidity

While physical damage is the most common type of product damage, contamination due to unacceptable temperatures and humidity levels is also a significant risk factor especially for the pharmaceutical and food and beverage industries. Each type of fresh, refrigerated, or frozen food requires a unique and narrow range of conditions to maintain optimal quality, shelf life, and nutritional value. In 2005 the U.S. Food and Drug Administration updated its Food Code with guidelines for time/ temperature control for food safety, requiring handlers to follow strict rules regarding duration of food exposure to specific temperatures. Several foods are considered potentially hazardous foods (PHFs) because of their capability for containing microorganisms if temperatures fall outside the acceptable range. For example, in its October 2007 Food Code Supplement, the FDA added cut tomatoes to the PHF list because of their susceptibility to supporting Salmonella at temperatures above 41F. Therefore, all fresh cut, sliced, and diced tomatoes must be stored, distributed, and displayed at or below this temperature. The North American Tomato Trade Work Group has developed a lengthy document detailing proper handling of different types of tomatoes in order to prevent bruising and contamination that would render them unsaleable.

Handling and the Material Transfer Zone

Product handling can ultimately determine whether product will arrive at its final destination intact. Improper handling is sometimes due to lack of training, but businesses focus on efficiency is also to blame. Workers who feel rushed to move more product may sacrifice the quality of their care. Plus, truck trailers have changed size over time to accommodate more product per load. When a modern truck backs up to a standard 48-inch dock, the trailer is most likely lower than the dock and is packed full of product, making it difficult to unload without causing damage. As Walt Swietlik of Rite-Hite Corporation explains in a recent Food Manufacturing article, The first few pallets of a fully cubed, below-dock trailer are difficult for workers or forklifts to reach, due to interference from bumpers or pit walls surrounding standard six or seven-foot-wide

Solutions for Minimizing Product Damage

In order to minimize product damage, a company must first study its supply chain. A root cause analysis can help management identify the specific factors causing product damage. The 2006 Unsaleables Benchmark Report states that industry benchmarks are not measured consistently among manufacturers and distributors and therefore should be recorded at the company level in order to more accurately gauge an individual organizations performance. There are many consultants in todays market who can perform a root cause analysis and help establish individual company benchmarks. A variety of other providers specialize in dock redesign, improved product packaging, state-ofthe-art dunnage, and training of product handlers all to reduce the amount of unsaleables and improve overall business practices. It is important to note that product damage cannot be completely eliminated. Workers may still accidentally drop a fragile package on occasion. However, even if companies cannot eliminate all damage, companies can eliminate the unknowns associated with damage. A successful supply chain is not necessarily one with absolutely no incidences of damage success comes in being able to tell whether or not damage has occurred. Damage must be discovered before the consumer opens a box containing a broken product and before she eats contaminated food that makes her sick. This knowledge can only come through data collection. According to a white paper published by VeriSign, a network infrastructure services provider, standardizing the management of pharmaceutical product data related to a companys internal events is important, but the potential for revolutionary value comes from the ability to link item-level data to events and observations outside the enterprise. The paper goes on to explain that with the help of an industry information framework, Product recalls and product being classified as unsaleable due to condition excursions can be more focused thereby reducing costs. Among other benefits, such a framework will help rid the supply chain of drugs that have expired or been exposed to unacceptable conditions. Radio-frequency identification (RFID) is one technology that can help companies collect and analyze data regarding the location and condition of products during shipping. Typically, one RFID device follows each truckload of product throughout its journey and transmits information along the way. However, RFID technology is not an affordable or even a necessary option for all industries. A recent article in Food & Drug Packaging states, While RFID and nanotechnology may be cost-prohibitive for the food industry, cutting-edge technologies are available that address the same issues at a fraction of the cost. Examples include traceand-track systems, microtags, and temperaturesensitive or edible inks that trace products and indicate freshness. These options follow each individual product through the supply chain, unlike RFID, which only records temperature and other readings taken from one point within the truck trailer. Many data technology companies are working to develop other affordable solutions, including inventions such as labels that detect bacteria, that will gain consumers trust as well as approval from the Food and Drug Administration. However, the article continues, innovations working in a perfect lab setting are one thing; incorporating them into mainstream packaging is another.

Data Collection
Studying the supply chain should not end with the initial root cause analysis; data collection is most effective as an integral part of a longterm program. It is only through ongoing data collection that a company can develop its own benchmark for improvement, measure its success, and identify which solutions are effective in reducing product damage.

Chemical indicators may be the most affordable and valuable solution for monitoring many products that are sensitive to temperature, impact, and tilting. The indicators adhere to individual products or pallets to monitor conditions throughout a truckload or storeroom, rather than just from one point within the unit. The indicators can even stay with the product once it reaches the retail display case in order to continue monitoring conditions until the moment the consumer purchases the product. The tamper-proof devices provide indisputable evidence of mishandling, clearly indicating to the recipient whether or not damage may have occurred. The devices can detect impacts, tilting, exposure to unacceptable temperatures, and length of such exposure. Plus, the prominence of the indicators encourages workers to use care during handling, thereby eliminating careless behavior.

Conclusion
The risks in the supply chain vary by company, and certain products obviously require more care than others. Each company must perform its own analysis to determine whether product damage is occurring as a result of packaging, pallet loading, transportation, or handling. Even after making improvements in the applicable areas, companies should employ some method of data collection so that they will know whether or not damage has occurred, and so they can develop an internal benchmarking system for measuring improvement. With modern technology and a system of collecting supply chain data, companies can greatly reduce their unsaleables costs, improve customer satisfaction, and ensure a positive reputation for preserving inherent product quality.

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