Think of the last time you were ripped off by a taxi and you will see why factory gate pricing is set to get pulses racing in 2004, says the boss of Exel’s retail and consumer division, Guy Elliott.
Five friends book a taxi into town for £25, he says. At £5 each, they have a good deal. If one of them drops out, the fare goes up to £6.25 each - a bit pricey but probably worth it. If a second person pulls out and the price shoots up to £8.33, then they need to rethink their transport arrangements.
And so will a manufacturer if two of his largest retail customers decide to bypass his taxi fleet and collect their goods personally, says Elliott. There is no question that this will happen, with Asda committed to driving factory gate pricing across its supplier base and Tesco now collecting more than half of its goods direct.
More worryingly for retailers without the scale or resources to engage in factory gate pricing is who precisely will pick up the bill. And what will the primary distribution network to smaller retailers and wholesalers look like in a couple of years’ time if more than half the volume in the industry is being picked up by the multiples’ own trucks? By virtue of necessity, says Elliott, retailers not able to engage in factory gate pricing are talking about collaboration to organise efficient distribution to depots without the need to rely on the multiples’ volumes.
Although there hasn’t been much movement yet, when suppliers start ringing these retailers and saying they are putting up prices - or will deliver less frequently because they can’t throw a couple of pallets on to a truck heading to Tesco - things might start moving quickly, he suggests.
Londis has already started to prepare for the inevitable, with about 12 chilled suppliers now delivering Londis orders to Brakes depots for consolidation before they are delivered to Londis’ own depots in full loads. Backhauling is also being stepped up. Likewise, Nisa logistics director Stephen Hunter says plans to set up a Nisa consolidation service are under way, although progress has been slower than expected.
If smaller retailers and suppliers sat down and talked to each other instead of getting “hormonal” about something that isn’t really a core competence, things could move far more quickly, claims Christian Salvesen’s client solutions director David Godsell.
“People are talking to each other, and third parties like us can come in and facilitate, but I am surprised they are not talking more. There are so many under-utilised facilities.”
For the large third-party logistics providers, factory gate pricing has proved a double-edged sword, admits Wincanton MD Graeme McFaull. “On the one hand, part of our business is in chilled primary consolidation for manufacturers.
“And that is being eroded by retailers taking a grip of the primary supply chain.”
On the other hand, the big third-party logisitics providers also operate store vehicles for all the major retailers, and could effectively subcontract out some primary distribution work to themselves - the only difference being that retailers, rather than suppliers, would be paying them.
Similarly, large retailers doing factory gate pricing still need to consolidate goods, says Exel’s Elliott, and if third-party logistics providers prove they can do it competitively and cost-effectively, retailers could subcontract this out too.
However, Safeway’s supply chain director Mark Aylwin says that it remains to be seen whether retailers need to engage in factory gate pricing at all to make the supply chain more efficient.
“We all want better vehicle optimisation and better availability. But you can achieve that without driving it via commercial and buying teams. The point is, are you taking trucks off the road or just squeezing suppliers and hauliers?” he asks.
Safeway prefers a variety of approaches to optimising its primary network, says Aylwin, and has been ramping up its backhauling, driving fresh through consolidation centres (negotiating rates with consolidators on suppliers’ behalf) and using suppliers’ trucks to make store deliveries.
Gist, which consolidates the bulk of goods going to Marks and Spencer’s depots, and also utilises M& S’s secondary fleet extensively for backhauling, is another example of an integrated and optimised network in operation - without factory gate pricing.
However, Tesco insists taking total control at the factory gate is the only way to gain complete visibility, which is the secret to optimising any network.
Distribution operations director John Boulter is blunt. “Yes, we can buy transport more cheaply than most suppliers - and that’s saving us money.
“But visibility and control is what it’s all about. Backhauling is all very well, but when we were just doing deals through our local transport departments, we weren’t getting central control over our inbound freight. And that’s what allows you to get 850 cases on the trucks instead of 800.”
Taking control of inbound supply had also improved availability, says Boulter.
Not least because Tesco is more likely to get everything it orders if its own trucks turn up at a supplier’s door.
Tesco has a database of between 120 and 130 hauliers including its own secondary fleet that it can draw upon for primary distribution, and while its primary and secondary fleets are not yet fully integrated, they will be eventually, he adds.
“The whole point of taking over primary distribution is that we can see, control and optimise what is flowing through our network.”