Factory Gate Pricing (FGP) Definition - Essay Example

Factory Gate Pricing (FGP) Definition FGP is a price without the transport cost element. Business thought of this concept in order to look for economies in moving goods between layers and links of the logistics chain, but it has also become a basis of negotiations between producers, trading partners, and consumers. It is now an international convention to have a product price that excludes transport costs (Potter, 2003, 4). Every FGP results in the release of margin information and cost structure that commercial firms and individual entrepreneurs would not like to disclose. FGP in the Groceries Industry The business of groceries is a favourite target for FGP because rural producers and urban consumers have traditionally been separated by more steps than usual for more durable and value added goods. TESCO pioneered FGP in the UK groceries business (Potter, 2003, 7). Most other retail chains have followed suit. It has promoted price transparency (Potter, 2003, 10). FGP also helps the industry has a whole to optimise costs of moving goods from a variety of producers to a web of storage points and outlets. Every link or level in the chain between producers, wholesalers, and retailers can offer FGPs. Since the business of groceries involves a variety of different skills at each level of the supply chain, FGPs can make value addition transparent and encourage channel members to specialize in the greater consumer benefit. Agriculturists should not have to worry about transport and logistics, and should focus on productivity and food safety instead. Recent incidences of mad cow disease and bid flu have put new premiums on growing technology. Concerns about chemical pollution also need dedicated attention. Farmers should have attractive FGPs for quality produce that meets specifications at affordable rates. Processing uses a completely different set of technologies. Processors need FGPs which encourage proper investments in dressing meat, removing harmful microbes and extending shelf-life. Processors may also contribute to visual appeal of grocery products through preservation techniques which retain original forms and qualities. Transportation and logistics are specialized areas of operational excellence which other members of the chain need not duplicate. Equitable and transparent FGPs will benefit all stakeholders involved with groceries. FGP and the Groceries Supply Chain There are 3 levels at which FGPs can operate in a country's grocery business structure. The first is at the level at which produce enters the country. Traders who are in the import business for other product categories may find economies by lifting grocery consignments for national distribution at the points of entry. The second level of FGP would be at the level of individual farms. Individual growers would probably be less efficient at getting farm produce to the market than associates specialized in logistics. The third FGP level is at wholesale storage points. Entities in the catering business, retailers who shop around for other product categories or who have transport fleets to feed chains of outlets, and even consumers who live in the neighbourhood of warehouses, may all benefit from FGPs at the level of wholesale storage points. New entrants can use FGPs to forge market share in the market for groceries, and established players may use it for aggressive competition as well. Partners in the grocery supply chain who lack core competencies in Information Technology may face potential exclusion with the introduction of FGP (Potter, 2003, 10). Participants and traders who do not have sophisticated product costing systems in place may lose many revenue opportunities by understating their FGPs. This is especially the case with agriculturists who may not have very detailed and accurate accounting systems. FGPs do exist in the grocery business already, but there is little transparency of how these price levels are fixed. They are also unrelated to value addition, and are influenced instead by negotiating leverage. This rarely operates in favour of producers or consumers, with large benefits for intermediate links instead. Ethical and Environmental Issues in FGP Small producers in areas with poor infrastructure, as in Wales, are hesitant to hand over their goods to third party transporters because they fear that freshness and other quality parameters could suffer ("Problems Faced by those in the Food and Drink Industry", not dated, 2). There are indeed a number of groceries in which cost cutting measures in transportation can affect produce quality. FGP also makes inventory holders vulnerable to disruptions in peak transport capacities. The relatively short shelf-life and seasonal nature of many groceries deprives entrepreneurs at all levels of opportunities which use FGPs to add value through timely and organized deliveries at downstream points. FGPs can be used to promote organic farming, wine literacy and community agriculture. Urban families may wish to buy groceries from farms where pesticides and other chemicals are not used. Vineyards can entice aficionados to taste wines on the farm and share in the inventory costs of ageing wines. Children in cities can enjoy the simple joys of harvesting fruit and vegetables by literally 'picking up' their table requirements direct from fields. FGPs can encourage people at large to appreciate the benefits of farm fresh produce that meets the most stringent food safety norms. FGPs can also help the environment by reducing the total amount of fossil fuels used in moving groceries from sites of production and processing to family and restaurant tables. Collaborative Planning, Forecasting & Replenishment (CPFR) Definition CPFR is a collaborative effort to minimise inventories carried throughout a supply chain. Replenishment is the pivot on which CPFR works. Joint forecasting is the starting point for CPFR. CPFR is especially meant for retailers and their suppliers (Lowson, 2002, 82-83). It applies to all phases of the supply chain, and works best if all the links and levels subscribe to the effort. CPFR chains have to be built upwards from the most downstream point possible. Agreement on customer demand projections determines the success of CPFR. CPFR in the Groceries Industry The groceries business has many potential benefits from CPFR. The vagaries of consumer tastes and preferences combine with uncertainties at the farm production level, to result in most wasteful losses in groceries. Producers are always vulnerable to being left with worthless inventories once consumer preferences switch. Consumers may often be disappointed because their choices of groceries are not available. Everyone stands to gain from CPFR in groceries provided that stakeholders can agree on demand projections. This can be tricky because consumer needs may be seasonal and very difficult to predict over long periods of time. CPFR can produce new values and yield competitive advantage as well, when consumers and producers are able to interact directly and closely to match production with actual and committed needs. CPFR also allows retailers to reduce the number of suppliers with who they have to work, which produces significant inventory benefits (Anderson, 2003, 206). However, this move also involves working closely with the selected and remaining suppliers, including sharing of proprietary information on inventories and forecasting. CPFR therefore serves to exclude existing members from supply chains, and generally work to the disadvantage of small and poorly resourced chain members. The latter should be organized along cooperative lines with professional management to survive in modern times and to participate in CPFR benefits. Wal Mart has used CPFR successfully and set the pace for other retailers (Simpson, 2005, 24). However, scope for more vertical integration in grocery CPFRs remain. Caterers and owners of retail and service chains can create most value by making CPFR networks. The Grocery Manufacturers of America strongly supports CPFR and has sponsored a number of baseline studies on the subject. A majority of its members use CPFR, and others plan to do so. It is apparent that CPFR is set to become a standard practice in the US grocery business. Third world producers may no longer be able to enter this market without CPFR network inclusion and expertise. Association members have realized savings in inventory carrying costs as a result of CPFR. The US example is worth studying and adapting for other markets as well. CPFR and the Groceries Supply Chain Restaurants, hotels, owners of processed food brands, industrial and military canteens and cooperatives of consumers are the best targets for CPFR in groceries. These entities have some captive consumer demand which can be used to make firm demand forecasts. Specialized groceries such as organic produce and crops with industrial applications are also suitable for CPFR. The average farm crop has a cycle of about 3 months, and it is generally a year for most fruits. CPFR is very difficult for such items as no one can be sure of trends in tastes and preferences over a long period. However, there are some seasonal groceries with very high peak demand for which CPFR is suitable. Wholesalers can use CPFR in a limited way to occupy retail shelves and to shut out the competition. However, knowledgeable and aware retailers may capture most of the resulting value and erode wholesale margins, which are never large, further. CPFR is a way for established wholesalers with large shares, to extend their dominance and to erect new entry barriers for potential competition. Wholesalers may also use CPFR to negotiate better terms of trade with producers. Associations of grocers recognize the value of CPFR ('Collaborative Planning, Forecasting and Replenishment (CPFR)', not dated). CPFR allows seamless links between manufacturers and consumers, bringing greater efficiencies and new values to the business. It calls for tight coordination between trading partners. Many grocery chains have started using CPFR ('Collaborative Planning, Forecasting and Replenishment (CPFR)', not dated). CPFR helps vertically integrated grocer networks with suppliers to improve margins and to reduce inventories as well. Grocery CPFR should also be horizontally integrated to reduce slow moving shelf space and to minimize write offs of groceries which become unfit for sale and consumption. The perishable nature of groceries makes CPFR an important source of value in the business. Ethical and Environmental Issues in CPFR CPFR will eliminate producers who excel in the technical aspects of rearing, fishing and cultivation, but who may lack competencies in the management aspects of this technique (Anderson, 2003, 206). There is also the aspect of having to share sensitive information with third parties. Demand forecast information can be especially sensitive in the groceries business. CPFR may attract anti-trust litigation unless it is formally structured to comply with national and local laws. Responsibilities for losses arising out of incorrect demand forecasting should also be spelt out in advance. Hence CPFR should operate only under the cover of carefully thought out and detailed legal agreements. CPFR which crosses national boundaries must contend with differences in food safety standards, especially in terms of acceptable pesticide residue and phyto-sanitary standards. The production of most groceries is subject to weather conditions, and there could be frequent disruptions during natural calamities and during extreme weather conditions. There are many impediments to smooth CPFR operations in the business of groceries. Radio-Frequency Identification (RFID) Definition RFID is a digital technology in which electronic chips embedded in objects emit distinct identification radio signals that receivers out of line of sight can pick up and recognize. It can therefore be used to keep track of the location and movement of groceries which are not within eyesight. RFID is revolutionizing the way large companies do business. The following citation describes the important advantages of RFID over older bar codes: Radio identification "tags" offer many of the same benefits as barcodes, but also include many other advantages. Several significant advantages of RFID tags are that they are radio devices and can be read while they are moving, do not require a line-of-sight positioning, and can store large amounts of data (Deal, 2004, 23). RFID in the Groceries Industry RFID has enormous implications for perishable goods such as groceries. All members of a supply chain can keep track of even small consignments, and plan for their arrival at specific points in the chain. Producers in remote areas and those with poor infrastructure can benefit by providing real-time tracking of their products in transit to customers. This can in turn stimulate new demand for exotic groceries and for those which consumers have hitherto been unable to access on a regular basis. RFID can help grocers differentiate themselves by providing superior and customized service (Dennis, Fenech, and Merrilees, 2004, 252). Preferential customers can be warned of stock outages, price changes and new products. It can also be used for regular replenishment of supplies to large consumers. RFID is unsuitable for groceries that use special materials for packaging, especially some metals, which interfere with radio signals ("RFID Technology Promises Gains", 2005, 31) RFID and the Groceries Supply Chain Since RFID is relatively new and expensive, it is yet to find regular use in low value items such as groceries. However, the situation could change as the technology becomes more affordable. Channel partners can make a start by tracking the storage and movement of high value products which have to move over long distances, and for which shelf-life is a key concern. Thus, consignments of specialized fruits such as mangoes and sea food delicacies are good candidates to start using RFID for groceries. Ethical and Environmental Issues in RFID RFID is in use to counter bio-terrorism and detect diseases and pathogens in world food resources ("New Food Safety System", 2004, 42). Though this is a rare and extreme example, it provides a template for more broad-based use of RFID in grocery chains. Most groceries are subject to decay and to pest attack, so the technology can help to hold down spoilage costs and to plan timely control measures. Inventory holding and logistics are important instruments of competitive intelligence. RFID compromises privacy (Deal, 2004, 23), which is one of the main concerns with this technology. A major concern in grocery retailing is that individual customers may lose their privacy as RFID chips embedded in loyalty and identification cards records their shopping behaviour, spending patterns, exact locations and personal preferences (Dennis, Fenech, and Merrilees, 2004, 252). References Anderson, J. The International Seafood Trade. Boca Raton, FL: CRC Press/Woodhead Pub., 2003. 'Collaborative Planning, Forecasting and Replenishment (CPFR)', Grocery Manufacturers Association Website, not dated, retrieved May 2006 from < http://www.gmabrands.com/industryaffairs/docs/whitepaper.cfmDocID=880> Deal, WF. "RFID: A Revolution in Automatic Data Recognition." The Technology Teacher 63.7 (2004): 23+. Dennis, C, Fenech, T and Merrilees, B. E-Retailing New York: Routledge, 2004. Lowson, RH. Strategic Operations Management: The New Competitive Advantage. New York: Routledge, 2002. "New Food Safety System" Journal of Environmental Health 67.4 (2004): 42. Potter, A, 'Factory Gate Pricing within TESCO', Cardiff University Website, 2003, retrieved May 2006 from http://www.itels.org.uk/dissemination/Factory%20Gate%20Pricing%20within%20Tesco.pdf "Problems Faced by Those in the Food and Drink Industry." Western Mail (Cardiff, Wales): 2. "RFID Technology Promises Gains for Retailers: Radio Frequency Identification Is Being Widely Used by Retailers Abroad to Keep Track of Stock. South Africa's BCA Provides Specialised Equipment for Barcode Labelling and Printing and Is Well Positioned to Help Clients Implement Technical Advances Such as RFID." African Review of Business and Technology Oct. 2005: 31. Simpson, K. "Supply Chain Management Is Big Business in SA: "Bits and Bytes Are Easy to Move. Containers Are a Little Heavier," Writes Kevin Simpson, Marketing Director at SCS Africa." African Review of Business and Technology Nov. 2005: 24. Read More