This way you can boost the outcome of the weapon the grinder produces.
You can however boost the odds in your favor and pay a bit of Moonstones, a rare currency on Elpis. Put in 3 common green rifles and get a unique blue assault rifle, but like all things in borderlands they are random. This can just be something different or maybe it will produce a better gun. This is how it works, the grinder is something like a slot machine, you can put in 3 weapons and the Grinder will make a whole new weapon with it. Now there is a new thing in town, the Grinder, and as the name states it grinds up your old loot.
Normally if you had crappy loot you would throw it away or you would sell it, maybe you could make your co-op buddy happy with your previous gear.