Manufacturers start to see benefits
By Rick Pendrous

Greater on-shelf availability, access to more markets and removal of “shrinkage” charges, are some of the benefits accrued by companies that have converted to factory gate pricing (FGP), claims a UK management consultancy.

While FGP has received a “poor reception” more suppliers are seeing “upsides and benefits”, claims Axis Management Consultancy’s Jonathan Smith. “There are challenges” he admits. “But for most businesses there are a range of upsides – and it is not just for the big guys.”

Tesco is spending £450m on its primary supply chain and plans to have two thirds of its suppliers on FGP by the end of the year, says Smith. “FGP is here to stay,” he says, so manufacturers need to make it work for them. But FGP can also help firms better understand their hidden costs, he adds. “In food companies costs are very poorly understood and are not based on true activity costings.”

“As you take time and inventory out of the supply chain the demand placed on you becomes flatter,” says Axis consultant Nick Wright. By synchronizing the supply chain the consumer also gains in better availability and fresher produce.

Wright points to several benefits of FGP for manufacturers. The first is increased on-shelf availability – typically between one and three per cent, he claims. Increased availability has been the major driver for Tesco, which has seen its profits rise as a result. But, some of this benefit will also feed back to suppliers through increased sales, he adds.

Wright concedes that benefits will be greater for firms currently outsourcing their transport through third-party logistics providers and consolidators, than those operating their own fleets. “Why have your own transport,” he asks. “It takes a lot of justifying.”

FGP will also help regional suppliers gain access to wider geographical markets, he claims. But, by the same token, it also opens up the market to cheaper imports of fresh produce from Eastern European countries such as Poland.

With FGP, firms – such as Ilchester Cheese for example – are also benefiting from no longer being liable for charges for losses or ‘shrinkage’ after products leave their factories, claims Axis.

“People are not taking the opportunity (offered by FGP) and unless they do they will continue to be victims,” he says.