Factory Gate Pricing

Factory gate pricing could change the line of responsibility.

Already in the United States, some large retailers, including JC Penney, Family Dollar Stores, The Gap and Toys 'R' Us, have also been experimenting with factory gate pricing. JC Penney alone reportedly saved between $8 million and $12 million the first year, with only a small percentage—about 10 percent—of its suppliers participating.

Market research firm Datamonitor, based in London and New York, predicts that factory gate pricing "is set to continue and gather pace as more retailers adopt the system. As the retailers who have led the way in factory gate pricing realize considerable cost savings and supply chain efficiencies, and hence gain competitive advantage, their rivals will seek to close this gap by following suit."

G-Log's Murphy agrees. "Everyone is dipping their toes in the water right now, and I suspect that in about 18 months we will start seeing everyone talking more about it and looking at logistics wholistically," he says.

Whether it's in the U.K. or the U.S., "I believe the driving forces are the same. In general, companies want to take control of their inbound shipments to reduce costs and improve productivity via better optimized pick-ups and deliveries and better receiving schedules and processes at the distribution center," says Adrian Gonzalez, director of the Logistics Executive Council and a supply chain management consultant at ARC Advisory Group, Dedham, MA.

Slow Start In U.S.

So why has it not advanced further in this country? Analysts say that corporate organization has hindered factory gate pricing.

"Companies have historically focused on their outbound operations because it's the customer-facing side of the business, while control of inbound operations was generally relinquished to suppliers," Gonzalez ob'serves.

As a result, many companies have re-signed themselves to the general practice of pre-paying for transportation charges as part of purchasing agreements, Gonzalez continues. "Purchasing managers generally have limited knowledge of transportation. Therefore, purchasing managers generally ask vendors to quote landed cost or all-inclusive prices.

"This lack of control and visibility results in higher transportation costs, lost revenue, diminished customer satisfaction, higher overhead costs and lower productivity," he says.

Trying to overcome this mindset is no easy task, either. "One of the challenges for factory gate pricing, regardless of country, is resistance from the purchasing organization. Factory gate pricing forces them to renegotiate and re-establish contracts with vendors," says Gonzalez.

"Within organizations in the U.S., it often is the case that the buying organization and the transportation organization do not have the same objectives," G-Log's Murphy says. "The buying organization is not concerned with transportation—that is the job of the transportation department, and vice versa.

"When we go to organizations, many are struggling with the idea of transportation and purchasing working so closely. You can make the same argument on outbound and inventory control," he continues. "That's where change management and the way of handling inbound [shipments] have to be looked at from an organizational standpoint. They need to look at transportation, the cost of the items and all that together wholistically within the company."

"Companies where logistics and purchasing report to the same executive have been the most successful in converting from pre-pay to collect freight," says ARC's Gonzalez.

Obstacles To Overcome

Factory gate pricing, Murphy adds, "needs vendors, buyers and suppliers all involved to make it work."

But, vendors have been the largest impediment to widespread implementation of factory gate pricing, according to ARC's Gonzalez. Among their concerns, he says, are:

  • A loss of margin, as they will not be able to mark up freight charges to in'-crease revenue;
  • A disruption to warehouse operations, by having to wait for customers to pick up their products and to provide additional handling to prepare the items for pick up;
  • More expensive transportation costs on their end as their shipping volumes decline;
  • A roll-back of efforts they've already made to streamline inbound and outbound operations; and
  • Uncertainty about new initiatives retailers may pursue next, such as taking control of packaging.

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