Marketing Channels: Factory Gate Pricing, Collaborative Planning, Forecasting and Replenishment - Term Paper Example

Factory Gate Pricing (FGP) Factory gate pricing (FGP) is a relatively new concept in the retail distribution and is the latest trend in retail logistics. Factory gate pricing is a supply chain initiative which aims to remove unnecessary transportation costs and improve the efficiency of the supply chain. Goods are no longer delivered to the retailers distribution centres rather the retailers collect the goods at the factory gates of the suppliers. In this process retailers ask their suppliers to release product costs “at the Factory Gate”, that is product costs excluding the cost of transportation to the retailer. As a result the retailers no longer have to pay the transportation price to the suppliers and the retailers get the products in a much lesser rate. Due to the irregularity in the distribution networks and the better inventory and transport coordination mechanisms in FGP, it is likely to result in high savings both for retailers and ultimately the consumer. FGP helps companies reduce cost at each stage. These reductions can be achieved in a number of ways, which include: 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 (IGD, 2004). 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: FGP has increased retailer/supplier collaboration which has a positive affect on the whole supply chain. The major aim of FGP is to ensure that more products are available on shelf for consumers. Lower Prices for Consumers: Finally the consumers benefit from FGP as lowering transport costs leads to lower prices that will benefit the consumer (IGD, 2004). The promising future of FGP has already been demonstrated in the UK where leading retailers such as Tesco and Sainsbury’s have implemented FGP for a part of their product range. Other British retailers such as Asda, Somerfield, Safeway, and Waitrose have announced plans for FGP (IGD website, Finegan 2002). Potter et al. (2003) report significant potential kilometer reductions due to FGP for the case of Tesco. Interviews with Dutch retailers indicate that they have high expectations for FGP as well (Blanc, et al., 2004). Environmental pollution due to vehicles is a major cause of concern around the world. FGP has resulted in limiting the transportation activities in an organized manner. Higher vehicle load fills leads to fewer journeys which, coupled with increasingly sophisticated route planning systems, results in lower overall emissions (IGD, 2004). Collaborative Planning, Forecasting and Replenishment CPFR is a business practice wherein trading partners use information technology (IT) and a standard set of business procedures to combine their intelligence in the planning and fulfillment of customer demand (VICS, 2004). By involving sales and marketing practices to supply chain planning and implementation processes, CPFR enables trading partners to improve visibility into one another’s critical activities through a structured process of information sharing and joint decision making across firm-level boundaries. As a supply-chain initiative, CPFR can result in an immediate reduction in inventory levels and a raise in sales for both retailers and suppliers (Aviv, 2005; Schwarz, 2004). Compared to the earlier EDI-based supply chain practices, CPFR is characterized as much broader cooperative planning where retailers and suppliers jointly develop forecast by sharing point-of-sale (POS), inventory, promotions, strategy, and production information (Terwiesch et al., 2005). CPFR are well recognized for its economic benefits and proven in practice by successful retail businesses such as Wal-Mart. CPFR minimizes distortion of demand information transferred from Wal-Mart to the vendors when successfully implemented. Consequently, stock-out situations are less frequent, and inventory costs are reduced. It has also been recognized in several studies that the foundation of economic value creation in the CPFR arrangements resides in its efficient utilization of economically valuable information via a networked IT system between vertically adjacent firms (Aviv, 2002). CPFR is one of a series of supply chain initiatives like JIT (Just-In-Time), ECR (Efficient Customer Response) and VMI (Vendor Managed Inventory) driven by organizations to make their supply chains more responsive and keep all the supply chain members in tune with the end customer demand, both in terms of the product and its volumes. CPFR also allows partners to visualize the bigger picture in terms of the entire supply chain rather than their enterprise alone. This will aid in future planning and also help in forecasting demand for particular product. This involves teamwork right from the planning till the replenishment stage. As a result, the supply chain as a whole is in a better position to take action to exceptional circumstances making it a more proactive entity rather than a reactive one. CPFR aims at creating an environment of trust between trading partners where the benefits of sharing information are known. The VICS Association provides information about the structure of CPFR activities and guidelines for implementing them. According to them, CPFR comprises of four main collaboration activities: 1) Strategy and Planning 2) Demand and Supply Management 3) Execution and 4) Analysis Implementation of all four activities is not necessary for implementing CPFR and a subset of these activities can also be implemented (VICS, 2004). The furthermost value of CPFR is derived from the reduction in inventory levels and eliminating out-of-stock situations. Moreover, replacement cycles get smaller as supply chains get more responsive to end customer demand making it more competitive. As out-of-stock situations are removed, sales increase especially in the retail goods industry. As inventory levels are reduced, warehousing costs are also reduced which can result in significant savings. The supply chain becomes more customer-driven and realizes significant advantages from such collaborative activities. The purpose behind CPFR or any other collaborative activity in a supply chain is to influence the competencies of each trading partner in a manner where the entire supply chain benefits. Even if trading partners do not implement CPFR in the structured manner defined by VICS, an environment of trust and a collaborative interaction can greatly benefit each one of them (The Decision Makers’, N.D.). Radio-Frequency Identification (RFID) technologies Radio frequency identification (RFID) is a technology that enables the electronic labeling and wireless identification of objects using radio frequency. RFID systems are a subset of the broader area of Automatic Identification and Data Capture (AIDC) technologies, which include the barcode, optical character recognition and infrared identification systems (Accenture, 2001). The purpose of these technologies is to identify and track people, animals, and goods. While a barcode requires line-of-sight scanning, and smart cards require physical contact with a reader, RFID-tagged objects can be identified at a distance. RFID systems are also faster and more secure than other Auto-ID technologies. Even though RFID tags were invented in 1969 and patented in 1973, the technology is only now becoming technologically and commercially viable (Brito, 2005). In recent years the RFID technology is gaining popularity. It is critically becoming significant to retailers, customers and in various organizations. For instance employee identification cards authenticate the pass-holder before permitting access. A related use of RFID is for event access – to amusement parks, ski areas, and concerts, where tagged bracelets or tickets are used. RFID may lower the costs by keeping shipping volumes leaner and more accurate. RFID tags can be read much faster than bar codes, citing tests indicating that RFID’s scanning capability can result in goods moving through the supply chain ten times faster than they do when bar codes are used. RFID facilitate quicker, more accurate recalls by enabling the tracking of a product’s origin and its location in the distribution chain. Further, RFID will enhance product freshness by monitoring expiration dates of consumer goods, so retailers know when not to offer items for sale (Federal Trade Commission, 2005). The biggest benefit of RFID is the total visibility across the entire supply chain. Inventory Management • Maintain a real-time view of tagged inventory as it flows through the supply chain. • Track discrete movement of tagged inventory. • Trigger alerts around inventory movement based on business rules you construct. • Allowing just-in-time practices. Maximizing warehouse space: With the high costs associated with storage real estate, the goal is to maximize warehouse space. This will improve utilization without undermining the ease with which goods can be moved in and out. Minimizing goods shrinkage: Theft combined with imprecise inventory management can create a significant shortfall in actual versus expected goods available. Within the retail environment goods shrinkage is widely perceived to account for up to one per cent of stock, representing a significant dent in profit margin. Benefits to Consumers: RFID can go beyond just intangible cost savings, as RFID can play a role in food safety, counterfeit control, and warranty programs. Businesses must avoid focusing too intently on the ways RFID tags can be used and instead stay focused on how RFID can improve consumer value and address complex business issues. Value Innovation in customer service: Marks & Spencer, a British retailer, has just extended a trial in which tags are applied to suits, shirts and ties for men, allowing retailers to monitor and replenish stock levels with far more accuracy at the end of each day to make sure that every size, style and color remains in stock. Beyond improving efficiencies, the smart tags could help to drive sales. One example of improving customer service: a customer could take a tagged suit to a kiosk, which could then suggest a matching shirt and tie. There are many additional areas where accurate, real-time goods tracking can deliver significant improvements. For example, lost luggage is estimated to cost the airline industry in excess of $100 million annually. Improvements in this area not only reduce the cost of compensation payments but also significantly improve customer service. Minimizing errors in delivery: Misdirected deliveries or incorrect orders can immediately result in on-shelf out-of-stock situations leading to reduced sales and damaged customer relationships. Supply chain efficiencies are being driven by improvements in information accuracy and availability (Nikam, N.D.). Despite the promise of RFID, many are concerned about the privacy implications of the technology. RFID systems could also pose a fatal threat if stalkers manage to adapt the technology to monitor a victim’s belongings, embedded with RFID microchips, and track their whereabouts. A key concern is regarding the “bit capacity” of Electronic Product Codes (“EPCs”), which enable the assignment of individual identifiers to tagged objects. RFID technology could be used for targeted marketing; Retailers already track people’s purchases to better market to them. Supermarkets and other retailers issue customer loyalty cards that help them track consumer spending patterns in order to better stock stores and price products. RFID systems would expose consumers to needless risk by allowing tech-savvy burglars to inventory a victim’s house from a distance. RFID has great potential to transform business and industries and successful implementation of this technology need to be economical for consumers. Existing law and, more importantly, consumer attitudes and the market forces they spawn will restrain undesirable use of RFID. References Accenture (2001, November). Radio Frequency Identification White Paper. [online]. Available from: [9 May 2006]. Aviv, Y. (2002). Gaining benefits from joint forecasting and replenishment processes: The case of auto-correlated demand. Manufacturing & Service Operations Management, 4, 1, Winter, 55-74. Aviv, Y. (2005). On the benefits of collaborative forecasting partnerships between retailers and manufacturers. Working Paper, Olin School of Business, Washington University. Blanc, H.M., Cruijssen, F., Fleuren, H.A, and Koster, M.B.M (2004) Factory Gate Pricing: An Analysis Of The Dutch Retail Distribution, [online]. Tilburg University, Discussion Paper. Available from: [10 May 2006]. Brito, J. (2005, May). Relax, Don’t Do It: Why RFID Privacy Concerns are Exaggerated and Legislation is Premature. [online]. Available from: [10 May 2006]. Federal Trade Commission (2005) Radio Frequency Identification: Applications and Implications for Consumers. [online]. Available from: [10 May 2006]. IGD (2004) Factory Gate Pricing [online]. Available from: [10 May 2006]. Nikam, M. (N.D.) RFID: Changing the face of Supply Chain Management [online]. Welingkar, Available from: [11 May 2006]. Schwarz, L. B. (2004). The state of practice in supply-chain management: A research perspective. In Geunes, J., Akcali, E., Pardalos, P. M., Romeijn, H. E. and Shen, Z-J. (Max) (Eds), Applications of Supply Chain Management and E-Commerce Research. Dordrecht, Netherlands: Kluwer Academic Publishers, 325-62. Terwiesch, C. T., Ren Z. J., Ho, T. H. and Cohen, M. A. (2005). An empirical analysis of forecast sharing in the semiconductor equipment supply chain. Management Science, 5, 2, February, 208-20. The Decision Makers’, (N.D.) Collaborative Planning, Forecasting and Replenishment. [online]. Available from: [10 May 2006]. VICS CPFR Committee (2004). Nine-Step Process Model [online]. Available from: . [10 May 2006]. Read More