n The multiples' drive to achieve a least-cost supply chain is set to pile the price pressure on manufacturers, says Belinda Gannaway When backhauling began to make headway in those ECR halcyon days of the mid-1990s, it was good news for all concerned. Food miles and waste were predicted to go down and products get to the consumer more efficiently. But six years on and the big grocers' increasing desire to pick up products at the point of production is about more than gaining green credentials. This push towards a "we collect" supply chain, with suppliers' prices expected to change accordingly, is making manufacturers more than a little nervous. They also have a sneaking suspicion they've seen the whole thing before. And they would be right. Institute of Logistics and Transport chairman Alan Waller says: "More than 20 years ago UK retailers were the first in the world to begin to take control of the supply chain by using third party logistics providers to run regional distribution centres (RDCs). This gave them the ability to consolidate supplies and eliminate the logistical problems and costs associated with large numbers of manufacturers' vehicles turning up at stores. It also took downstream control of the supply chain away from manufacturers, and they didn't like it at all," he says. And it is happening again. But this time the multiples' tentacles are reaching ever further upstream, right up to the factory, or more commonly, manufacturer's warehouse. The reason is simple ­ control. Some 50% of logistics costs in the consumer packaged goods supply chain are incurred at store level, between the point of delivery and the checkout. It is only by taking control of ever-greater swathes of the supply chain as far upstream as possible that retailers will be able to have any significant impact on those costs. Greater control also means they have greater flexibility, crucial in the pursuit of availability. As one multi-national CPG logistics director told The Grocer: "There has been a lot of work done in improving the flow from us to the stores. Six months from now should see real results from the collaborative planning, forecasting and replenishment (CPFR) trials. It's the last 50 yards where all the stuff is left to be done." Waller says retailers need the freedom to "play tunes" on the supply chain as far upstream as possible in order to break the back of the last 50 yards problem. From how vans are loaded ­ costly and error-laden product handling can be kept to a minimum if the right product is in the right place, and on the vehicle in the first place ­ to transport routing and maximisation of distribution centre operations, the decisions will be theirs. Postponement will also become a useful distribution tool. Decisions on how much of what product is delivered where, and when, can be delayed as long as possible, maximising efficiency of deliveries and minimising inventory. But the benefits of control go beyond that. Greater retail responsibility further upstream, coupled with the e-enabled sharing of real-time sales information and the synchronisation of supply and demand, means the vision of just-in-time, retail-ready deliveries becomes a realistic option for the first time ­ the true mark of a least-cost supply chain. Only then will product spend little or no time back of store eating precious retail space and resource. It is not only about dollies ­ merchandising units which transport product from the point of manufacture to the shop floor which are being tested in various trials ­ but supplying product in pack sizes and price points that are more easily transferred to the shelf without being reconfigured. "Put simply it's the next generation in distribution thinking," says Sainsbury's supply chain director Martin White. "In the 1970s and 1980s the advent of distribution centres meant retailers took responsibility for delivering the last bit to the stores. We're now moving one step beyond. Our philosophy is that it is only by putting all of the supply chain at stake you can really drive towards total efficiency. If I don't do it, the competition will. We'll worry about how to carve it up later." But worrying about how retailers plan to "carve it up" is just what suppliers are doing now. A recent edict from Tesco and Sainsbury requiring them to quantify the distribution cost in each product's overall price has done nothing to allay those fears. The premise is this: retailers will, in the future, be nice enough to save manufacturers time and expense by collecting their orders. However, in return, they will expect a reduction in the price they are charged for the product. To ensure they get the discount they deserve, Tesco and Sainsbury are already collating manufacturers' cost breakdowns. Suppliers aren't exactly overwhelmed by the retailers' friendly gesture. Operationally, handing over goods off the production line ­ or out of the warehouse ­ is not simply a case of pushing product down to the front gate rather than on to lorries. It has serious operational and cost structure consequences across the entire business. And at the same time manufacturers fear they are about to be wrung out to dry over margins ­ and the precedents are there to suggest they might. As Sainsbury and co pore over the detailed costings of individual categories, suppliers had better be prepared to account for every last pound ­ or euro ­ under the distribution heading. If Sainsbury or Tesco can find a rival or comparable supplier from another category with cheaper overall transportation, or believe they can do the distribution cheaper themselves, the boat will be well and truly rocked. After all, a couple of pence saved per delivery of a commodity item such as baked beans could prove a significant competitive advantage for the retailer. Ex-factory gate pricing ­ backhauling combined with just such a new pricing regime ­ has saved Booker in the region of £10m over the last two years. As one senior industry source puts it: "The Booker guys found a lot of money lying around and screwed a hell of a lot more out of suppliers. Manufacturers had no idea how much it cost them to distribute their products." But suppliers are not so green this time. The Food and Drink Federation's director of economics Bob Price says it's a "pretty fundamental change" but questions whether the retailers' have yet taken on board all the implications. "There is some doubt among members that Tesco has given this adequate thought and the aggressive timescale being talked about has certainly put some people off. "Tesco is only looking at this in its own partial environment and done the sums from its own point of view. Our members are doing their sums and some serious commercial negotiations will follow." But however loud the protests ­ and Price concedes that there is no evidence that retailers aren't prepared to listen ­ angry suppliers are not going to be able to stand in the way of progress. And where Tesco and Sainsbury lead, others are sure to follow. It may start with own label suppliers, but Sainsbury's Martin White makes no bones about the fact that the easy victory with own label ­ the lack of marketing and other costs associated with branded goods makes it easier to whittle out the cost of distribution from the true cost of the product ­ will be just the starting point. "Own label is easy and will help to inform the economics of branded products," he says. But discussions will not only focus on getting the pricing structures right. The operational implications will be significant, not least as manufacturers begin to lose critical mass in their distribution function. In the law of diminishing returns, distribution could end up costing manufacturers more and more to do less and less. If Tesco has an empty lorry returning to the distribution centre from an early morning store delivery it may as well pick up from suppliers on or near its route. The only cost to the retailer is any additional mileage off the normal route and the loading time. If suppliers have cut their prices as retailers expect, the revenue earning potential for the multiples is clear. The problem arises for the supplier when more of their big customers want to collect, but they still have to deliver to other customers. Manufacturers could then be left with half-full lorries servicing undesirable trips. When four or more big clients start collecting, suppliers' lorries start to drop out of usage. That is bad if you are a manufacturer who has recently invested in a fleet and bad if you have outsourced operations ­ usually on five or seven-year contracts ­ and end up incurring penalties for breaking them. This undermining of the economics of the distribution function was exactly what happened with the advent of RDCs. Golden Wonder supply chain director John Duffy says: "For some small guys this might be in their interest as they struggle with low volumes to get good haulage prices. But the impact on bigger companies' distribution networks could be significant if they become sub-optimised. Many manufacturers have invested large amounts of money in distribution in order to be able to deliver to RDCs. What does it do to them?" Backhauling operations also put the manufacturer at the mercy of the retailer's timetable. If the truck is late delivering to a store, it will be late picking up and have knock-on consequences for your production line, warehousing and ability to service the next collection where penalties may be imposed. And what if your key customers all want to pick up at the same time, such as the prime slot post the early morning store delivery? As the FDF's Bob Price asks: "It's OK when you have normal flow, but what happens at peak demand periods?" The group supply chain director of a multinational producer notes that because of these factors, backhauling is the least predictably efficient of any sort of haulage because it makes manufacturers dependent on retailers' priorities. "The pressure on a driver to pick up the most urgent supplies could well see them driving past a picked order. What is the manufacturer supposed to do then? It completely throws out of the window years of careful planning behind precise manufacturing and distribution processes," he says. For many Booker suppliers, the new regime proved too much and they acquiesced by dropping prices and retaining control of their deliveries. But that is unlikely to prove an option in the long run as it leaves a gap in the jigsaw puzzle that retailers are hoping to put together and does nothing to increase their control of the supply chain. But, for all the debate around ex-factory pricing, backhauling per se is nothing new. Safeway, a leader among the grocers in this area, already backhauls 17% of its products wearing the fact proudly as part of its green credentials, and most retailers do some collection in the chilled and produce category where the supply chain is made up of a large number of small producers. M&S is unique in that it only sells its own label food. It also has a unique backhauling and haulage system ­ used by 60% of suppliers, most of whom are in the chilled and produce category ­ whereby its leased vehicles are used in their downtime by the third party provider to collect from suppliers. While suppliers pay for this service, M&S takes a cut offset against the cost of the lease. Logistics controller Keith Mahoney explains: "We know precisely the cost of our products down to individual ingredients and we also know this is the most cost-efficient transportation for our suppliers because they choose to use our contractors on a free market basis. If it weren't the cheapest option, they wouldn't use them. The reason we have come away from ex-factory gate pricing in the past is that if we impose a contract on a supplier, they may not end up with the most cost-effective solution for their requirements." However, Mahoney acknowledges that things are changing as the company flows product into the store "closer to the point of sale". "That change in operations may lessen the opportunity to offer the same kind of service in the future. So we're looking at various options in anticipation and putting the whole lot up in the air." However, he does not believe ex-factory gate pricing will be the inevitable result. "We're trying to look at things jointly to optimise the supply chain for both of us. It's easier to do that with a single brand. "It seems an anomaly to go for CPFR while imposing on your supplier something that says after it leaves your factory it's nothing to do with you'." No doubt a huge power play is about to unfold. But set against the need for greater collaboration and synchronisation, retailers must handle the changes sensitively. As Golden Wonder's Duffy says: "As long as retailers realise it takes time to realise win-win solutions, I can't see any problems. If they fail to realise the need to manage the potential difficulties of change with sensitivity, then you create a stand-off." Collaboration in the supply chain should produce almost seamless interfaces and improve performance, but terms and conditions of trade still need to be agreed. The fine tuning is a two-way process and problems arise when the multiple or supplier fails to grasp the strategic vision. n {{COVER FEATURE }}