Case Studies – Tree Top

Introduction:

Tree Top, Inc. was established as a grower-owned apple processor in 1960 and has 1,322 grower-owners in the states of Washington, Oregon, and Idaho. Its corporate headquarters and two processing facilities are located in Selah, WA. There are three additional Tree Top processing facilities in Washington State and a bottling facility in Rialto, CA.

Tree Top pure apple juice and cider remain the backbone of Tree Top’s retail sales. The Cooperative also markets other consumer packaged goods, such as Flat Fruit®, Apple Slices®, blended fruit juices and applesauce. Tree Top also produces and sells in bulk an extensive array of dried and frozen fruit products, as well as juice concentrates used as ingredients in the food industry.

Overview and Initiative

Prior to 1997, Tree Top did not have a reclamation policy. Once reviewed internally, spoils claims/deductions were automatically cleared to general ledger. Costs/fees were seldom questioned and the lack of a policy left the brokers and Regional Sales Managers to apply varying standards.

In the preceding three-year period, Tree Top, Inc. watched spoils/reclamation costs increase annually at double digit rates, ultimately exceeding 1% of sales. These increases started to have a significant impact on the overall profitability of the cooperative, and management decided to put some measures, controls and analyses in place to better understand these costs.

In late 1997, the company underwent a major reorganization. One outcome was the formation of a Sales Services Department with a manager to oversee all sales support functions, including Credit, Accounts Receivable, Freight and Distribution, Order Entry, Customer Service, Sales Administration Support and Customer Claims. One of the first projects assigned to the new manager of Sales Services was to implement a spoils/reclamation policy and determine what needed to be done to control these costs.

Once a draft of the reclamation policy was developed, it was forwarded to Dan Raftery at Prime Consulting Group to assist in its completion. When finalized, in October of 1998, the question became: ‘how to implement and monitor compliance’. Tree Top, Inc. decided to enlist the services of a third party audit firm that specialized in reclamation. This decision was based on several factors:

  • Tree Top did not have the expertise or staff required for a successful implementation.
  • Tree Top’s systems could not record and measure unsaleables on an item (SKU) basis, only on the product line level.
  • Minimal, if any, useful measurements (reports) were available from our systems.
  • Contacts with reclamation center managers and customer reclamation management were non-existent.

With these factors in mind and after the evaluation of third party providers in the Unsaleables arena, the decision was made to partner with Wesley Associates Business Consultants, Inc., to manage unsaleables auditing for the Consumer Packaged Goods Division. An Unsaleables Cost Reduction Plan was implemented and the first step was to distribute the newly adopted corporate policy for unsaleables. The first part of 1999 was spent working with our customers to gain acceptance of our new policy. Also, reclamation invoice submission and approval processes needed to be changed and the auditing of invoices against the new policy needed to be fine-tuned. Initial acceptance and results were good but not to the level we had hoped. In January 2003, Tree Top management revised their unsaleables policy based on input from customers, as well as from lessons learned from the initial policy and using GMA industry average fees. The new policy, used as the cornerstone for the Unsaleables Cost Reduction Plan, proved to be an effective tool for managing unsaleables. While the GMA national unsaleables rate has steadily increased and/or flattened during the past four years, Tree Top’s unsaleables rate has steadily declined.

Results and Benefits

  • The measurable results of the Unsaleables Cost Reduction Plan were based on total spoils costs for Tree Top unsaleable from 1999 to 2004.
  • Tree Top expected a 10% reduction in unsaleables; instead, the plan’s six-step process awarded a 50% reduction!
  • Year-end 2004, Tree Top’s unsaleables rate was 0.54% (0.45% without new package design) or half of the 2003 GMA published National rate of 1.11% and 40% of the 2003 Supermarket Channel.
  • Sales vs. Spoils Comparisons – Once Wesley Associates began tracking Tree Top’s unsaleable claims, W/A was able to provide Tree Top data showing which products had the highest rate of unsaleables as well as customers and regions with the greatest percentage of spoils. Tree Top and Wesley Associates also monitor customers who are on policy to ensure they are invoicing according to the policy agreement.
  • The Unsaleables Cost Reduction Plan
  • The results and benefits realized came from implementing an ongoing “Six-Step Unsaleable Reduction Process” that measures both claims and policy adherence. As a result, Tree Top is in a position to better manage its unsaleables.

The Six Step Unsaleable Reduction Process:

1. Policy/Agreement Compliance
2. Correct Dispositions
3. Maintain Current Product Files
4. Perform Weekly Audits
5. Implement Corrective Actions
6. Customized Management Reporting

 

I. Policy/Agreement Compliance – Tree Top worked with Wesley Associates to write a revised unsaleables policy following 1990 JIR average guidelines in 2003.

  • Policy was mailed to Tree Top’s customers.

  • Calls were made to customers for policy acceptance and/or to negotiate an agreement. An agreement to use Tree Top’s DPC’s, instead of the standard default 6% DPC fees, also proved to be a substantial impact on the bottom line.

  • This approach resulted in about 81% of Tree Top’s customers either accepting the policy, billing to an agreement or billing at an acceptable rate by year-end 2004.

  • 19% of Tree Top’s customer-base is uncooperative and/or non-compliant. On-going efforts are made to improve this non-compliancy percentage by negotiating with these customers via Tree Top’s regional sales managers / brokers to negotiate lower fees or policy acceptance.

II. Disposition – Tree Top selected donation to a food bank as the preferred chute. Customers holding the product for pick up or using a center option chute are contacted and requested to donate the products. Donating provides a charitable contribution and a tax advantage. It also eliminates any “out the back door” practices and potential chance of products going through reclaim a second time.

III. Maintain Current Product Files: Assures policy customers are billing correct pricing/fees.

  • Product files are updated and sent to 3rd party reclamation processors whenever new products are added or price changes occur.
  • Product files are kept current with new products, price changes and discontinued SKUs.
  • Product files are formatted using Tree Top’s discounted prices (97% of list) along with fees (Post, RCH and DPCs) and calculated with a 130% price maximum.
  • These product files are also compared to customer unsaleables invoices vs. Tree Top’s pricing/policy, which flushes out any policy issues, pricing errors or misassigned SKUs.

IV. Perform Weekly Audits - Working in conjunction with Tree Top, Wesley Associates audits Tree Top’s invoices on a weekly basis.

  • Invoices are scanned into Wesley Associates database to determine overbillings on policy, pricing and/or misassigned issues.
  • Weekly audits also show trends of continual overbilling and deductions by specific customers as well as trends in excessive quantities, product lines and/or diversion.
  • Any issues and abuses are directed to Tree Top management for review.

V. Implement Corrective Actions – If the audits uncover policy, pricing or misassigned issues, corrective actions are immediately taken. Wesley Associates maintains the most up-to-date retailer and reclamation contact information, which allowed their Account Managers to open a line of dialogue with Tree Top’s customers. All communications and results are logged into their database.

  • Retailer and/or reclamation centers are contacted to correct dispositions and confirm they are using the most recent product file for pricing.
  • The Rec center is also contacted if audits show SKUs that are invalid.
  • Repayment is requested when warranted. i. Multi-pack packaging issues: Many of Tree Top’s products are packaged in 6 or 9-pack quantities and are sometimes returned because the packaging is damaged. Occasionally, the incorrect SKU for the multi-pack price is scanned as singles. When this happens, the reclamation center is contacted so they scan the correct SKU in the future. A repay is then sent to the customer for any multi-pack overbillings.
  • Between 2000-2004, significant dollars were recovered in repays for incorrect multi-pack pricing, price blows, out of max pricing and invalid SKUs.

VI. Customized Management Reporting – is an important part of the “Unsaleables Cost Reduction Plan”.

  • Tree Top is provided with weekly audit reports summarizing total number of claims, total fees, total avg unit fee along with the dollar amount and percent of the overbillings.
  • Weekly reports show the net audit difference between the total amounts invoiced and the customer overbillings.
  • UPC analysis indicates products and quantities most often returned through reclamation.
  • Wesley summarizes the audit information for Tree Top’s management team in streamlined emails so they are up-to-date on the claims and deductions issues from their customers.
  • Monthly conference calls are scheduled with key team members to address current issues.
  • “Policy Compliance Report” is compiled annually for Tree Top management. Report indicates the status of customers adhering to policy.
    • Highlights changes from prior report regarding customer billing practices.
    • Analysis identifies issues with specific vendor codes as in some cases, multiple invoices are produced within the same billing cycle and disposition/fees can vary by invoice.
  • Sales-vs.-Spoils Annual Report: analyzes spoils as a percent of sales on a customer, regional, national and UPC/product line level. Additionally, product specific quarterly reports and ad hoc special request queries are provided as needed.This reporting also benefits Tree Top by enabling them to spot trends and concurrently helps manage and control unsaleables on a timely basis. Tree Top also has access to its unsaleables data through the Wesley Associates Website. This web-based software enables Tree Top to access customer specific claims or run reports at any time.

An Unexpected Problem

Though the Tree Top/Wesley Unsaleable Reduction Plan was working well, a problem occurred. Suddenly, claims began to increase instead of decrease. Analysis pointed to a product that we thought had “a very innovative new type of packaging concept”. Unfortunately, this new product’s packaging proved to be unsuccessful and, as a result, between 2002-2003 significant quantities were sent through reclamation. Tree Top’s unsaleables rate increased from 0.57% to 0.79% in 2002. Similarly, in 2003, unsaleables were at 0.58% without the new packaging concept vs. 0.74% with it. In August 2004, the new packaging was discontinued and Tree Top’s overall unsaleable rate rapidly declined to 0.45% or less than half the industry average!

Package Improvement Activities

Being able to now monitor reclamation on an SKU basis, Tree Top determined the majority of its reclamation costs were in four specific packaging items. Tree Top contacted various reclamation centers and asked them to hold spoils from some of Tree Top’s major customers.

Physical inspection at the rec. centers of these lots by Tree Top’s packaging design personnel confirmed the four items indicated as problems, were the majority of the spoils. Tree Top was then able to assess the root cause and applied initiatives that should further reduce the spoilage rates on these items.

  • 6-packs of 4 oz applesauce cups. Spoilage on the 4 oz containers appeared to be at least 75%, due to one or more cups falling out of the 6-pack carrier.
  • 64oz bottles: Missing labels was the biggest defect.
  • 5.5 oz containers had missing hi-cones.
  • During inspection, it was also observed that various pallets of Tree Top products had no apparent damage at all. This was determined to be retailer product rotation issues.
  • After inspection, an analysis of sales-to-spoils data for these items verified the dollar amount of claims for 4 oz Apple Sauce containers justified packaging improvements and gave a payback of less than one (1) year. Additionally, the missing labels on the 64 oz containers resulted in claims sufficient to warrant improved scanning equipment on the packaging lines.
  • Periodic physical inspection of products “Held for Review” at the reclamation centers has also proven to be very beneficial in determining packaging problems and their effect on the bottom line.
  • Moving forward into 2006, Wesley Associates will track/chart the above-mentioned containers each month to monitor the change in claims before and after packaging changes.

Lessons To Be Learned

The key-lesson of Tree Top’s “Unsaleables Cost Reduction Plan” is:  “You Can’t Manage What You Can’t Measure”.  If a company does not have sufficient data to support the reasons why its unsaleables costs are out of control, they will not be able to manage or correct the situation.

Tree Top’s innovative approach to unsaleables can be applied in any other aspect of business, whereby, the first steps are to identify the problem; have sufficient data to back up the observation; have a means of analyzing and interpreting the data; have a plan for corrective action and, finally, implement the plan.

A manufacturer needs to maintain, audit and understand its reverse logistics invoice data so they are able to detect any over-billing errors. An unsaleables policy must be in place, updated to FMI/GMA guidelines, and they must be capable of measuring compliance so reclamation centers cannot charge their default policy rates. Lack of involvement permits reclamation centers to apply their highest, most advantageous fees. Manufacturers also need to indicate the means for final disposition of their products, or utilize third-party representatives to retrieve and/or audit product to determine real damages. Otherwise, these products will likely be sold to salvage dealers for random disbursement. Lastly, a manufacturer needs to be proactive with its unsaleables issues; otherwise, they lose control of the reverse logistics process and their competitive edge.

 

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