Tesco's primary distribution director John Boulter told delegates it was making great progress with the initiative. Tesco now has 30% of all its inbound freight under factory gate agreements, which amounts to 10,000 deliveries a week from 500 suppliers using 120 carriers.
Boulter said Tesco had driven significant improvements in the key performance indicators of picking up from the factories and delivering to the RDCs on time. Since the back end of 2002, performance in picking up had improved by 15% and delivery was up by 20% in both cases performance is now about 90%.
"This is the way we operate now, so please continue to come on board," said Boulter. And his message to those suppliers who had not signed up was clear: "Don't use delaying tactics, we want progress so don't waste time." He called on those suppliers not to prevaricate and to be transparent with costs. Otherwise, he warned, "friction and frustration" would be caused because it would become immediately obvious if suppliers were not honest with the figures because he had a database of 500 suppliers' costs as a benchmark.
However, suppliers heard that Tesco's guiding principles to factory gate pricing included "the spirit of partnership" and flexibility. Boulter said he was willing to work through problems because one size would not fit all and the cost of servicing Tesco would not increase.
For Tesco, factory gate pricing is about creating visibility in the supply chain so that further wastage and costs can be driven out. Boulter said he could see slack in the supply chain and wanted to pull it right up through the chain and he hinted there were more initiatives to come. He described factory gate pricing as a catalyst for change and said "one change opens up opportunities for further change".
It was a view shared by other speakers at the conference. Safeway's supply chain operations director and ECR's co-chair Mark Aylwin said it was one of a range of transport optimisation options, such as consolidation centres and RFID tagging, while IGD senior analyst Emma Aujla said factory gate pricing was "part of a wider evolution of the supply chain".
This has certainly been the case with Birds Eye Wall's experience with Tesco. BEW signed a factory gate pricing agreement with Tesco 18 months ago and BEW's head of logistics David Ingram said the agreement had already opened the gate for broader supply chain discussions on lead time reduction, in store processes and packaging development.
However, Cap Gemini Ernst & Young's head of supply chain operations Joel Segal believed factory gate pricing would evolve beyond the supply chain. "For a retailer, distribution cost visibility is the first piece of total acquisition cost analysis," said Segal.
He believed retailers would look at other costs in the purchase price of products, such as insurance, and ask suppliers "who is best placed to manage each cost efficiently and effectively?"
This was supported by the latest IGD survey on factory gate pricing. It found nearly 80% of those questioned believed retailers would undertake more upstream activities, such as looking into the costs of packaging or raw materials. But more telling was the fact that 100% of retailers questioned said they would undertake more upstream activity using Segal's description, distribution is just the first low hanging fruit.
Benefits of an open book approach
Clearly open book costing is the next step and Sainsbury's transport development manager Paul Green attempted to convince the audience of the benefits of an open book approach. Once again collaboration and visibility were the key words as Green explained how an open book approach had enabled some smaller and regional suppliers to bring their products to the shelves. But the real key word in an open book approach is trust. Tesco's Boulter said with factory gate pricing it had taken far too long to make a breakthrough on trust, so it is likely that open book costing will be a tougher nut to crack.
However some suppliers may have warmed to the idea after hearing foodservice companies 3663 and Compass's experience of open book costing. The understanding between 3663 logistics md Andrew Selley and Compass logistics director Allan Eaton was obvious as they explained how 3663 provides Compass with a budget of all its costs of distribution, from wages and vehicles costs to shrink wrap and pest control.
Compass benefits from understanding the true supply chain cost, 3663 gains from a longer term relationship without the uncertainty of an annual tendering process, while both companies profit from sharing risks and opportunities and entering into joint purchasing agreements on items such as fuel, mobile phones and other areas for mutual benefit.
But some suppliers to supermarkets such as Tesco and Sainsbury may have moved uneasily in their seats to Eaton's comment that Compass would no longer deal with suppliers who would not enter an open book agreement a sign of things to come in food retailing perhaps?