Factory gate pricing (FGP) could soon become an approach commonly used by manufacturers in dealings with their own suppliers, following the success of a UK pilot project by one pan-European food company.
Logistics company Exel has been working for the past six months with the unnamed ambient food manufacturer to use FGP with its ingredients and packaging suppliers. Under the deal Exel manages the third-party collection and delivery of supplies once an ex-works price has been successfully negotiated with the firm's suppliers.
By drawing upon the expertise and buying power of its European Managed Transport Centre in Belgium, which uses Manugistics software to optimise lorry movements, Exel claims to have driven up efficiency in the upstream supply chain for frozen, chilled and ambient ingredients and packaging materials. The Centre already handles around euro 75m of freight a year, working with several of the world's leading food manufacturers.
Following the successful UK trial the pan-European manufacturer is rolling out similar FGP operations at its many other European factories.
"They are changing their buying terms and have negotiated an ex-works price with their suppliers to deliver the savings," says Exel general manager for development Paul Ryan.
While more "resistance" was encountered with larger packaging suppliers which had their own transport fleets than smaller ingredients suppliers that tended to use local hauliers, savings of typically 15 to 20% -- and occasionally as high as 40% -- have been accrued on transport costs, says Ryan. Savings in the pilot have been divided between Exel and its client on a "value share" basis and this financial model is expected to be used elsewhere.
"As you go back up the supply chain our experience is it becomes less and less sophisticated and less well managed -- especially with smaller companies," says Ryan. "If we can put together a more focused and more reliable supply chain then that should enable suppliers to start looking at stock reduction."
One of the biggest problems encountered with suppliers was in the co-ordination of collections. "One of the first things we had to do was to understand exactly where the product would be coming from to make sure it could be collected on time," says Ryan. "We needed to start building in specific rules about where the product comes from and the timescales and lead times."