What is Factory Gate Pricing?
Factory gate pricing (FGP) is a supply chain initiative which aims to remove unnecessary transportation costs and improve the efficiency of the supply chain. It involves retailers asking their suppliers to release product costs “at the Factory Gate”, that is product costs excluding the cost of delivery to the retailer – i.e. splitting out the product price and the transport price.
Factory Gate Pricing Explained
Source: IGD Research, 2003
Where is the Factory Gate?
The factory gate is the point at which the product is fully assembled and in a ready state to be sent to the retailers distribution centre. It can be at any of the following locations:
- Port of entry into the UK
The retailer or logistics provider can collect the goods from the port, making this the factory gate. Ports of entry are an ideal place to collect goods, as this prevents the manufacturer incurring transport costs in the UK.
- Production / manufacturing site
This is the site at which the finished product is produced. This is not necessarily in the UK. If cost efficiencies demonstrate that the original place of production is the most economic point to take control of the goods, a further link in the supply chain can be removed.
- Manufacturer’s warehouse or consolidation point
A nominated site, allowing vehicle access to the retailers’ vehicles (or agreed logistics provider).
Where are the efficiencies?
FGP helps companies reduce cost at each stage. These reductions can be achieved in a number of ways, including:
Further economies can be made including:
- Removal of traditional geographic transport boundaries where an assigned logistics provider controls all vehicle movement within a particular region for a retailer.
- Better vehicle utilisation as suppliers share vehicles in order to reduce costs.
- Removal of uneconomical vehicle movements through combining additional products from different sources to ensure every lorry is full when it sets out on its delivery route.
The Primary Supply Chain
Source: IGD Research 2003
What are the benefits of FGP?
- Efficient Transportation
FGP is about improving transport efficiencies by understanding the true costs. For example, suppliers who are highly skilled and cost efficient at providing transport solutions will continue to provide this service to the retailer. Whereas 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.
- Improved Availability
Increased retailer / supplier collaboration has a positive affect on the whole supply chain. FGP aims to ensure that more product is available on shelf for consumers.
- Lower Prices for Consumers
Lowering transport costs leads to lower prices that will benefit the consumer.
- Environmental
Higher vehicle load fills leads to fewer journeys which, coupled with increasingly sophisticated route planning systems, results in lower overall emissions.
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