Factory gate pricing, a retailer-led supply chain initiative, has dominated industry discussion over the past year. The debate was furthered when nearly 500 senior industry personnel attended an IGD conference to examine retailer plans and assess their impact on the wider industry.
Retailers possess the technology, infrastructure and desire for a competitive edge, so it looks certain that factory gate pricing will soon affect all sectors.
So what changes are being made? Factory gate pricing is based on cost visibility of the chain, with retailers and suppliers in discussions to determine how much of the product cost is down to transport. The retailer supply chains move more than five billion cases of goods each year and, as more goods are moved further, economies can be found. So retailers are seeking control of the transportation of goods from suppliers' factories to their regional distribution centres.
By moving more goods, the retailers believe they can reduce the cost of this leg of the supply chain. But a number of other benefits are also sought as factory gate pricing links in with the long-term strategies of the retailers.
The growth of new retailer formats, the need to minimise stock held in the supply chain and the desire to provide the customer with the best possible availability are also benefits of factory gate pricing. And, if cost can be reduced on transportation, this can be passed on to the customer to achieve a competitive edge in the industry.
Retailers compare these changes with the shift towards centralised distribution which began in the UK in the 1970s. Previously suppliers had delivered goods directly to the retailers' outlets, putting pressure on the stores and adding cost in the supply chain through poor vehicle fill. When retailers began to develop their own deport infrastructures, suppliers believed that their businesses would be hit drastically by the changes.
Yet, in 2001, central distribution accounted for 93.9% of all goods moved to the multiples and has become the accepted way of operating in the industry. And the retailers believe that in co-ordinating the transport they can alleviate the pressure on their RDCs a point of congestion in the supply chain as well as allowing more collections to be made from suppliers without increasing costs, which could improve in-store availability.
So what is the controversy over factory gate pricing? Many suppliers have spent time optimising transport networks to all the retailers as well as to their raw material suppliers. If they lose large amounts of volume to retailers, then costs could increase elsewhere.
One key supplier fear is that it would become much more expensive to deliver goods to those retailers not implementing factory gate pricing, a concern which is not shared by retailers seeking to gain a competitive edge.
Suppliers are also concerned that retailer co-ordinated collections may impact on their warehouse operations. Many suppliers' warehouses will be unable to manage collections from retailers throughout the day. Operational issues such as the manning of loading bays and dealing with stockholding on-site are being examined. Suppliers are also suspicious that retailers will use the visible product and transport cost information to negotiate further price decreases in the future.
These changes will also impact upon the logistics service providers (LSPs) who move the goods. Many of the larger LSPs work with retailers and suppliers and are seeking alternatives to these changes, such as shared warehousing.
The future for smaller LSPs is less clear if the retailers, rather than the suppliers, decide who moves the goods. But, having seen similar initiatives implemented in other industries, the LSPs can also provide lessons for retailers and suppliers on how to fully optimise supply chains.
Tesco, Sainsbury and Safeway are leading these initiatives and all major retailers are overhauling their supply chains through consolidation networks and new depot infrastructures, so many changes are on the way in how suppliers and LSPs will operate with retailers. n
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