Factory Gate Pricing

Factory gate pricing could change the line of responsibility.


Factory gate pricing is a supply chain initiative that has been gaining popularity among retailers in England. It is now poised to make a leap to this side of the Atlantic Ocean. Essentially, with factory gate pricing (FGP), retailers buy goods at the suppliers' "gate" and take care of getting it to their stores or distribution centers, either with their own trucks or those of their contracted carriers. It removes transportation costs from the overall price that retailers pay for the goods that they will eventually sell in their stores.

For retailers, factory gate pricing could generate "significant" savings on delivery costs and the number of transport miles, says John Murphy, director of product marketing at Global Logistics Technologies Inc. (G-Log), Shelton, CT, a software provider that has worked with several European retailers in refining transportation management to better handle factory gate pricing.

New York accounting firm PricewaterhouseCoop'ers, one of many financial analysts that has been watching factory gate pricing initiatives, estimates that it could generate savings of 20 percent on delivery costs.

Those savings become increasingly important as transportation costs continue to rise. According to the latest statistics from the Food Marketing Institute, during the late 1980s, some two-thirds of logistics costs were related to warehousing, and about a third was tied to transport. Today, transport costs account for more than half of a company's logistics expenses, and costs are expected to continue to climb as fuel costs continue to reach record highs.

Potentially, FGP allows retailers to drive down the cost of goods by removing the transportation element from them. It also lowers the risk of potential price increases due to fuel cost increases, driver shortages and decreased capacity.

Factory gate pricing "is about improving transportation efficiencies by understanding the true costs," according to the United Kingdom's Institute of Grocery Distribution (IGD), in Hertford'shire, England. "Suppliers who are highly skilled and cost-efficient at providing transport solutions will continue to provide this service to the retailer. Suppliers who do not see transport as their core competency, or do not have highly efficient operations, have an opportunity, through FGP, to transfer the responsibility to the retailer or logistics provider."

Tesco Leads The Way

English grocery chain Tesco was the first retailer to implement factory gate pricing back in the fall of 2001. The retailer, which operates 759 stores offering 50,000 product lines, handles more than 1 million inbound shipments per year from more than 2,500 suppliers. By 2003, it had factory gate pricing procedures in place with 500 suppliers, and by 2004, those numbers had doubled. Currently, as much as 90 percent of its frozen inventory and more than half of its total inventory arrive at the retailer's facilities by some kind of factory gate pricing program.

For Tesco, factory gate pricing has allowed it to reduce costs by more than 10 percent. Other benefits, beyond saving millions in transportation costs, have included a 14 percent improvement in on-time deliveries, a reduction in transport miles and greater supply chain visibility. Visibility, the retailer has found, comes from a greater awareness of orders being placed by individual stores within its network, and greater insight into where costs are coming from.

"Tesco led the way and a lot of folks are realizing that it makes more sense for them too," Murphy says. "Tesco is a good impetus for change. They are leaders in Europe, and if they can do this, it makes others stand up and take notice."

Other British retailers that have implemented factory gate pricing initiatives include Asda, Wal-Mart's U.K. subsidiary operating 265 stores and 19 distribution centers, and J. Sainsbury, which operates almost 600 supermarkets and 160 convenience stores across the United Kingdom. Fellow retailers Somerfield, Safeway, Morrisons and Waitrose are also exploring their factory gate pricing options, and in Spain, Carrefour is experimenting with it among 45 of its suppliers.

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