Factory Gate pricing - Essay Example

Factory gate pricing Factory Gate pricing means the sale of goods to the retailer occurs further up the supply chain right at the manufacturer's exit. The sale at the factory gate also includes the physical transfer of finished goods to the retailer either directly or from a transit point. The retailers have to incur the transportation costs. The supplier will benefit from this system as there will be reduction in the transportation charges. The charge will be fixed by the manufacturer. Factory gate pricing gives the manufacturer the scope to set the rates at the production point. The manufacturer will set the prices including the transportation expenses. During the 80's the manufacturer has to send the finish goods to the retailer through the supplier, the cost for transporting the goods to the retailer's warehouse point was incurred on the price of the goods. The factory gate pricing opened up a new viable option for the retailer as the goods were transport by the retailer itself, the pricing of the finished goods was exactly the production cost incurred at the factory. So the pricing of the goods and the process was named as Factory gate pricing. The supplier use to control the transport operations from the factory to the retail distribution centre. As a result of this change, the retail supply chain was separated in two main systems Primary distribution: from the supplier to the retailer distribution center and Secondary distribution: from the retailer distribution center to the stores. Suppliers maintained control of the primary distribution. The quality and the freshness of the product is not assured as they are an external agency. The distribution used to take longer time than it deserved. The retailer as an additional responsibility used to take care of the transportation of the goods from the warehouses to the stores. The advent of FGP has changed the supply chain management of the retail distribution as the retailer used to pick up the finished goods right from the factory; he has the opportunity to transfer it at its desired features. The retailer got the chance to decide the transportation mode. The retailer used to take the necessary preservation techniques and enhanced the distribution either directly to the stores or to his retail ware houses. The retail got the finished goods at reduced prices than before. Prior to the implementation of the FGP the supplier used to incur the transportation costs and the retailers the inventory costs at the warehouses. The factory gate pricing give the option to reduce the investment cost on maintaining the inventory for the distribution centre at times as the retailer will have he option to transport the goods directly to the shops. The retailer has the option of making the entire supply chain operations under one roof. FGP brings the control of primary transportation from the factory to distribution centers and inventory into one hand which likely leads to generate cost savings operations. In addition FGP offers two other sources for savings. Firstly, retailers generally have a vast product range for which they can make the transportation-inventory trade-off at one point of time. The orders from different suppliers that are located close to each other may be synchronized in time, such that they can be combined in the same vehicle route. Secondly, under FGP, primary and secondary distribution can be integrated and can be handled by one single entity. The supply chain initiative can be improved by optimizing the usage of space by the retailer by using the same vehicle to deliver the goods to the shop and to the distribution centre on one single trip. Significance of factory gate pricing The significance of FGP is that it removes traditional geographic transport boundaries where an assigned logistics provider controls all vehicle movement within a particular region for a retailer. Better vehicle utilization as suppliers share vehicles in order to reduce costs by sharing the space in the vehicles. 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. Benefits of implementing factory gate pricing The benefits of factory gate pricing are Effective Transportation as the retailer is involved with the supplier and the time for transportation reduces to a considerable extent. Effective transportation may lead to Improved Availability of the goods in the stores and sustainable stock can be maintained in the shops. Decrease in transport costs leads to reduced prices on the finished goods. Environmentally it will be positive aspect as the vehicles will fully carry the goods of different supplier thus reducing the repeat trips to the same route thus reducing the vehicular traffic which results in reduced air pollution. Collaborative Planning, Forecasting and Replenishment "CPFR is the sharing of forecasts and related business information among business partners in the supply chain to enable automatic product replenishment"1 CPFR is designed to link the supply and demand processes allowing for a more consumer driven supply chain. CPFR aims to seamlessly link the industry from manufacturer to consumer, allowing trading partners to see the entire supply chain from one end to the other. CPFR calls for complete collaboration and information sharing between trading partners, including the merchandising process, item/category selection and seasonal and promotional planning. Combined with real-time updates based on hourly activity, trading partners will be able to engage in total supply chain visibility and forecasting. CPFR system takes care of the supply chain initiative right from the acquisition of raw materials to placing the finished goods on the store shelves. CPFR is the next stage of supply chain initiatives that has been developed in search to streamline the supply chain initiative .CPFR Information such as sales, inventory levels, promotions etc. allows for co-managing the business processes and integration of the distribution network to meet the shared goals of superior service at the least total cost of operation. The benefits of CPFR is the reduction of inventory levels and associated costs in the long run may even be greater than the inventory reduction, reduced complexity, administration, and improved speed to market are benefits. Forecasting the future requirements and placing the right components will depict the attentiveness to the current situation and the possible situations that might occur in future. The CPFR is more of consumer oriented and the system is devised to provide better consumer services. The CPFR allows the retailer to aggregate the consumption and project the demand from different outlets. This process allows the supplier to decrease the delivery time. The customers from different regions were allowed to forecast the need and order it to the stores, the retailer in turn will pass the information to the supplier. The supplier makes the necessary arrangements to deliver the order before it exhausts at the outlets. (Source: http://www.vics.org/committees/cpfr/) Radio Frequency Identification RFI devices is a major innovative technology with an automatic identification method, relying on storing and remotely retrieving data using devices called RFID tags or transponders. RFID is used to locate the objectives or products located in an isolated area the An RFID tag is a small object that can be attached to or incorporated into a product, animal, or person. RFID tags contain silicon chips and antennas to enable them to receive and respond to radio-frequency queries from an RFID transceiver. Passive tags require no internal power source, whereas active tags require a power source. RFID uses radio waves to automatically identify people or objects. There are several methods of identification, but the most common is to store a serial number that identifies a person or object, and perhaps other information, on a microchip that is attached to an antenna (the chip and the antenna together are called an RFID transponder or an RFID tag).The microchip activates a signal when it approaches an electronic reader. Business experts predict that RFID chips will revolutionize supply chain, manufacturing, and retail efficiency. The inventory in-to the store and out to the outlets can be traced and the data when every transaction takes place will be automatically. The RFID is an automatic identification process done which can read and store large amount of data. There are three main types of AIDC technologies: Optical - bar codes etc. Magnetic - magnetic stripe travel cards etc. Electronic - RFID tags, smart cards, sim cards etc .RFID have significant advantages: Ease of use - The RFID can read the data from a distance and can read the data of the object. Information stored - Depending upon the type of data the RFID can be designed from low capacity to high capacity devices and the necessary data to be specified on the tag. Security - The bar codes are extremely difficult to copy and imitate as it is a small chip and the code cannot be translated easily. RFID initial investment is high but when bought in volumes it can be reduced. The RFID devices are mainly of two different types Active and Passive. Active devices have inbuilt battery to supply power to the circuit. Passive devices are active when the reader is in the vicinity. Significance of RFID The RFID system operations mainly depend on several key parameters such as frequency and power: The performance of RFID depends on the frequency, the distant between the reader and the object the power of the reader to absorb the signal. The presence of any opaque substances like solids and liquids may hinder the identification process. The RFID can revolutionize the supply chain industry as the visibility increases. The on- stock, the over-stock, under stock and pilferage can be identified distinctively through this technology. The main concerns of RFID are the standards were not the same in every region which hinders the identification of the goods as the frequency varies according to the standards fallowed. The frequencies and power consumptions standards are not the same in every part which would be another concern. The initiating, the equipment cost and installation costs are high .The above concerns are driving back the retailers from implementing the RFID in firms. Another concern is the privacy of the individuals who would be using the product as they will be monitored without their knowledge. The RFID devices are not categorized into data protection act items, which may be a negative point to the usage of RFID. Significance of RFID Uniform inventory management, preventing out-of-stocks and reducing excess inventory Savings on labor costs delivered through reduced manual supply chain and stock management processes Onsite visibility of stock and enhanced responsiveness across the supply chain Reduction of demand-supply cycles. Enhanced customer satisfaction Reduction in shrinkage, theft, and counterfeit purchases Reference sources: http://www.lcpconsulting.com/pages/leadership/publications_79.html http://www.itels.org.uk/dissemination/Factory%20Gate%20Pricing%20within%20Tesco.pdf http://www.vics.org/standards/DC_Replenishment_Collaboration_-_Business_Process_Guide_Final.pdf http://www.axisconsulting.co.uk/html/Factory_Gate_Pricing_Aids_Availability.htm http://www.klict.org/docs/PPhr202.pdf http://www.ncssuite.com/NewsArticles/FactoryGatePricing.htm http://www.boxwoodgroup.com/pdf/CS140.1%20-%20Factory%20Gate%20Pricing.pdf http://www.ncssuite.com/NewsArticles/FactoryGatePricing.htm http://www.igd.com/CIR.aspmenuid=83&cirid=452 http://www.the-infoshop.com/study/dc13723_factory_gate_pricing.html http://www.scottishfoodanddrink.com/uploads/17960/How%20do%20I%20get%20started%20with%20FGP.pdf http://greywww.kub.nl:2080/greyfiles/center/2004/doc/35.pdf http://www.vics.org/committees/cpfr/ http://www.vics.org/apps/group_public/download.php/26/CPFR_in_Brazil.pdf http://logistics.about.com/library/weekly/aa113001.htm http://www50.sap.com/businessmaps/91039F49E53F11D3874B0000E820132C.htm http://www.microsoft.com/dynamics/businessneeds/scm_chip.mspx http://www.microsoft.com/industry/retail/businessvalue/rfidroadmaparticle.mspx http://en.wikipedia.org/wiki/RFID http://www.liberty-human-rights.org.uk/privacy/rfid-parli-briefing.pdf http://retailindustry.about.com/cs/it_rfid/a/bl_atk111003.htm Read More