Manufacturers who thought they could stick their heads in the sand until the current debate about factory gate pricing died down received a rude wake up call last week when the two main proponents of "we collect" supply chains made it abundantly clear engagement was not optional. Their new distribution strategies are being rolled out at pace ­ and suppliers are expected to come on board. That was the key message to come out of last week's IGD conference on factory gate pricing which became a hot topic at the end of last year when Tesco and Sainsbury started pushing for its introduction as part of efforts to re-engineer their respective supply chains. They were keen to take more control of the distribution of product from suppliers into their depots ­ believing this would lower transport costs and boost efficiency. The two multiples are not the first to get excited about the cost savings and efficiencies that can be generated by the process ­ others have examined the idea in the past and some have even partially implemented it. But the fact Britain's top two grocery chains have now put factory gate pricing right at the heart of their distribution strategies means the grocery supply chain is about to undergo change of a scale similar to that created by the introduction of central distribution in the early 1980s. Twenty years ago manufacturers were just as worried about central distribution. But most could see consolidation would ultimately benefit them, their customers and consumers. Suppliers are equally worried about today's factory gate pricing concept. The big difference is many struggle to see a similar win:win situation emerging from retailers' efforts to move one step beyond consolidation. Nevertheless, research carried out by IGD found many suppliers accept change is needed, are willing to adapt and believe they can modify existing systems. But given Tesco and Sainsbury have hardly been shouting about their plans, suppliers feel ill informed about what's going on ­ and 40% accept that's probably fuelling their mistrust of the whole concept. IGD found suppliers have many questions about the operational and financial impact of factory gate pricing on their overall businesses. Tesco's group supply chain director David Wild insisted all of these issues ­ and more ­ were tackled during negotiations with suppliers. But he was particularly scathing about those who questioned whether retailers were moving too quickly and would not be able to cope with the complexity of the systems they created. "Can we handle the complexity? We are handling 1.2 billion cases through 26 distribution centres, some of which are handling 100 million cases. It's a multi-temperature operation serving 700 stores of vastly different sizes across 50,000 products. So we would argue that our secondary activity is even more complex than this," he said. Those attending the conference heard him spell out Tesco's vision for creating an inbound supply chain which was transparent, low cost, efficient and effective. And suppliers were left in no doubt they were going to have to come on board: "We are serious and we intend to make a success of it. Those who have worked with Tesco over the years know that when we set about something we do the right thing, and that's what we intend to do with this." The fact the multiple has created a 30-strong team to manage the primary distribution initiative, and has invested millions in G-Log software to manage the complexities of the inbound supply chain, shows just how serious it is. But, as Wild explained, there is a lot at stake for Tesco. "We are managing to spend £2.5bn on our supply chain. So it's no surprise that we are under continual pressure to get that figure down because that is how we can create value for our customers. Of that £2.5bn, £500m is spent each year moving products from factories to our distribution centres. That's the amount of money we are targeting with our primary distribution initiative. By managing it better we will save a significant percentage of that." He said it was right Tesco took a closer look at its inbound costs after spending years transforming the way it distributed products from depots to store shelves. "Our overriding concern is to get economy and efficiency into the supply chain. We are not simply saying open up your factory and let our lorries in'. We want a process that's driven by factory gate pricing to allow efficient management of the inbound supply chain." The process is detailed. It starts with a supplier briefing. Then an analysis of the current supply chain is conducted using a standard form to identify issues such as costings and an optimal supply chain is subsequently designed and agreed. Around that are discussions relating to costs, key performance indicators and targets. Frozen food suppliers are the first to have gone through the process. Negotiations started last June and more than 120 suppliers are now on board, accounting for 65% of Tesco's frozen food business. Wild promised a "pretty aggressive" roll out of factory gate pricing over the next six to nine months ­ although he said the exact timescale would be determined by discussions with suppliers. In particular, it will be at the heart of changes being made in Tesco's ambient and fresh networks. Solutions will vary for individual suppliers ­ there is, said Wild, no one size fits all solution. But underpinning the work are some guiding principles for Tesco, he added, such as its commitment to work in partnership with suppliers to find those different solutions and its pledge that the cost of servicing Tesco will not increase as a result. "What suppliers fear is a situation where their cost of servicing Tesco is going up and that's perfectly understandable. They fear we are transferring cost from us to them. What has surprised us is how, in many cases, that was based on a lack of understanding of their own internal costs," said Wild. And he is less than impressed by the argument that changing the way Tesco is supplied will have an adverse impact on the costs of servicing other retailers. "We are trying to create an efficient supply chain for Tesco and we cannot be responsible for looking after the interests of our competitors," said Wild. Ouch. But he insisted Tesco was willing to take the time to work through any specific issues that suppliers had ­ such as the implications for any long term distribution contracts, and for proof he pointed to the fact it took eight months to reach an agreement with Birds Eye Wall's on this initiative. "BEW would not have embarked on such an initiative unless it was right for them. Our target is eight weeks from start of process to first delivery. With BEW it took eight months because it is more complex. But we came up with a process that made sense for us and them," said Wild. He was just as quick to reiterate the fact that Tesco's plans would not be stymied by supplier resistance: "What we find very hard is when suppliers are not prepared to talk about this or we get into discussions that are about procrastination rather than illumination. We want honest discussion about the issues. If there is an issue, get it on the table and we can solve it ­ even if it takes a year." It's clear that as Tesco & Co accelerate the roll out of their initiatives, suppliers will face a stark choice. Either they proactively engage with the multiples in the hope of formulating the best solution for their businesses or they can resist the changes now underway. Based on what Wild and his rivals were saying last week, the second choice no longer looks like being the smart option. n {{COVER FEATURE }}