Entrance to efficiency, or barrier to business?

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Factory gate pricing (FGP) is here to stay for the UK retail logistics supply chain, although there is still much to learn as the FGP model continues to evolve. More and more suppliers and hauliers are becoming involved in FGP, albeit some begrudgingly. They are realising that they are, to a certain extent, in a ‘do or die’ environment, particularly as an increasing percentage of product to supermarket is now arriving via the FGP model.

For logistics providers, who have a new set of customers – retailers – the pressure is on to become even more competitive and further reduce costs. Most of the major multiple retailers are looking at FGP to reduce their costs as they think they can make their logistics providers more efficient. The argument from the haulier is that rates are already about as low as they can go.

With a lot of questions still to be answered, what is clear is that FGP seems to have been developed with an immediate focus on the cost issue, backed up by an efficient logistics process. Providing consumers with value for money products on the shelves, whilst maintaining profit levels, is the driver of FGP for the retailer. Once in charge of the logistics process, it then has a greater handle on ensuring the cost saving is maintained by an efficient operation.

Third-party logistics companies must work smarter and harder to ensure they stay ‘in favour’ with the retailer, as there is now more at stake. A lost account will mean a lot more to the logistics provider as the customer becomes bigger, with a client base no longer made up of lots of medium-sized suppliers but one large retailer.

The problem facing many of the outsourced logistics companies is being able to reduce costs. E-commerce is playing a significant role in this and will continue to do so as the FGP model becomes more mature. Once it has become a more stable function, time and cost saving operational systems can be introduced.

Most difficult for those suppliers who have been running an efficient distribution operation for their customers. They are consoling themselves that they can now concentrate their efforts on their raison d’être – manufacturing.

However, they still have their fair share of issues to resolve. Although physical product distribution is no longer a concern for the supplier, there are administrative issues with the FGP model outside of who purchases the haulage element. Suppliers are still finding themselves involved in FGP transport flaws – third party equipment such as pallets are being omitted from the FGP model.

All systems involved in the transport of the product, such as all pooled systems where the packer has the responsibility for collection of the equipment, are non-transferable to the FGP model. LPR UK believes this will lead to suppliers and retailers looking for outsourced solutions that deal with the pooling systems to partner the FGP model. Companies that offer this outsourcing will have to collaborate in order to create a total solution.

There is an immediate remedy for this particular FGP headache. The likes of LPR can take the pain of collecting empty pallets away from the supplier, with customers paying one price for delivery, collection and handling, with all repair, sorting and administration undertaken by the outsourcing company.

The open book aspect of FGP, which some believe to be more controversial than FGP itself, leads to a requirement for easily accountable costing for such a solution, which needs to be broken down to a ‘unit’ cost. Currently, there are pooling systems available on both a ‘cost per day’ and a ‘trip cost’ basis. The second of these options, will facilitate the accountability required. The benefits of open book techniques are clear and supermarkets are adopting this approach with an increasing number of suppliers. Duplication of cost is identified and removed, misconceptions are corrected and overheads are reduced.

Current teething troubles ranging from contractual differences between suppliers to the responsibility for re-usable packaging need to be resolved to create a level playing field from which stable operational systems can be put in place and standards benchmarked.

FGP has challenged the way retailers, suppliers and hauliers operate. As long as all parties rise to the challenge, factory gate pricing has the potential to provide a cost effective logistics solution for today and tomorrow’s retail supply chain. n

Jane Gorick is general manager of pallet pool system LPR UK, tel: 01527 523311.

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