Marketing Channels in Grocery Distribution - Essay Example

Running Head: Marketing Channels in Grocery Distribution Marketing Channels in Grocery Distribution (School) Marketing Channels in Grocery Distribution In the food industry, distribution becomes more important than in most other industries. Some of the reasons for this are shorter life cycles for goods and an increasing need for freshness of product. Retail grocery chains are under pressure because suppliers outnumber retail distribution centers. In an effort to cut costs, both suppliers and retailers are looking into new ways of moving product. Factory Gate Pricing: What Is It A recent Dutch study (leBlanc et al 2004), revealed that retail logistics in various grocery chains are going through drastic changes in an effort to improve methods of delivery, and one method presently under scrutiny is called Factory Gate Pricing (FGP). The factory gate is the point at which the product is fully assembled and ready to be sent to the retailer's distribution center (Factory Gate Pricing 2004). Under FGP, the retailer takes over the primary distribution from the supplier which means the retailer no longer has to pay the cost of transportation that was previously included in the price the supplier charged for product. The retailer buys the product "at the factory gate" and arranges transport. Instead of several separate vehicles making delivery to a central point, one vehicle can make several stops to pick up goods from suppliers in a specific geographical area. Also, goods can be collected at port of entry into the UK which will cost less, and collecting goods at a manufacturing site located outside the UK could create additional savings. Effects of FGP on Marketing and Strategy FGP has been in use in the UK by a number of grocery retailers and, as stated earlier, offers component costs of product with transportation costs separated. According to Scottish Food and Drink, there is a lack of knowledge about FGP among suppliers, but the majority of those suppliers using FGP have had a positive experience and believe it is here to stay (How Do I 2004). According to them, certain areas need exploration in deciding whether FGP is the right solution. Determining the right level of resource in product quality, innovation and service levels. Understanding supply chain costs Having thorough understanding of logistics operations Putting cross-functional teams in place Making top-level commitments between organisations, for instance, CEOs Once these factors have been considered and FGP is put in place, it becomes obvious that transportation costs are a key area of concern. Effect on Supply Chain Partners and Customers According to Potter (2003), FGP was first introduced in the UK by the fashion and automotive sectors in order to establish organisation and optimisation of transport by purchaser to point of delivery. Applying FGP in the UK grocery sector, however, is probably its most complex application. Tesco was the first to implement it, then Sainsbury's, Asda and Carrefour. A Tesco case study realized the following FGP benefits: 1. Reduction in transport miles 2. Reduction in transport costs 3. Supply chain visibility Aware of orders being placed on suppliers Analyses of the extra costs of demand amplification on transport Better use of transport through backloading Higher service levels The more consolidation, the more savings on wider scale Potter, p. 20 Collaborative Planning, Forecasting and Replenishment: What Is It According to the Grocery Manufacturers association, collaborative planning, forecasting and replenishment (CPFR) is a revolutionary business process wherein trading partners use technology and a standard set of business processes for Internet-based collaboration on forecasts and plans for replenishing product (Collaborative Planning 2002, par. 1). Because it is a new process within the industry, intended to develop a collaboration strategy among trading partners, a study was undertaken by GMA outlining basic tenets of CPFR in an effort to create a baseline for industries to assess their own CPFR. It was evident from the study that there was better communication, a smoother working relationship and improved focus on building the business rather than on managing crises. In 2002, however, when this study took place, software was not necessarily capable of crossing barriers from one company to another, let alone from one country to another. In addition, companies were not used to sharing among competitors although this is a necessary application if CPFR is to be successful. Sharing Information as a New Business Concept It has only been recently that enabling technologies have developed to a point where businesses are able to communicate easily with one another across great distances. Rick Carman of Trading-partner Optimisation for Profits (TOPs) encourages a collaborative relationship which is, he says, "one that defines the business as a team of suppliers, manufacturers, distributors and retailers providing goods and services to consumers" (Collaboration Strategy, n.d. final par., p. 1). Carman goes on to say that sharing information leads to success even though it is a new business concept, one that is difficult to put in place in a business culture that has always worked on competition. However, central data sharing among partners has been shown to be beneficial. Shared information through collaboration can result in optimisation of supply chain activity. Carman considers benefits to be as follows: Retailer Benefits Better in-stocks Lower inventory Higher sales Lower logistics costs Manufacturer Benefits Lower inventory Faster replenishment Higher sales Better customer service The Internet has become a communication vehicle for e-commerce activity, and any business which ignores this trend will quickly lose ground. Collaborative management practices will be a key component of successful business models in this millennium. New technology may not be a requirement for collaboration yet, but the ability of trading partners to share information increases as more applications are put in place. For trading partners to optimise profits, Carman stresses that software advancements must be utilised. The Future of CPFR as a Collaborative Process CPFR has been used more and more to streamline global business practices and has been seen as the way of the future, as long as organisations are willing to collaborate and share information through innovations in electronics. GS1 UK is a not-for-profit business association that is part of a global network dedicated to improving electronic identification and communication in the GS1 system. Established GS1 UK standards include bar coding, electronic business messaging, radio frequency identification and data synchronization. Over a million companies globally use these standards to make their businesses more efficient. It is GS1's contention that "the highest levels of customer service and sales at the lowest total costs and thereby the greatest profits, can only be achieved if trading partners share information about their common objectives, plans and performance data" (Collaborative Planning, 2005, par. 2). This approach to trading practices shows that much information previously contained within an organisation can be shared with other companies without compromising competition in the global market. What Are Radio-Frequency Identification Technologies As defined by Gupta (2003), radio-frequency identification technology (RFID) is an e-tagging technology which can provide electronic identity to any object. With an RFID reader, the electronic identity can be read wirelessly by using radio waves. This is different from bar coding scanning which uses optical recognition. For RFID, no line of sight is necessary and multiple tags can be read simultaneously. When a container passes by a gate, all tagged objects within the container can be sensed. Tags can be passive (cheap with no battery) or active (costly but with embedded power source) and the ID can be fixed or dynamically updatable (Gupta 2003). RFID is already widely used in animal tagging and 'oyster cards' for electronic payments. Improving supply chain efficiency is being investigated, and retailers are looking at the tagging of individual products to allow for better control and better targeted marketing campaigns. Tesco undertook a RFID trial at one store in 2003 and found that it improved stock visibility and customer service (Postnote 2004). Some of the benefits of RFID are better return on assets through better supply chain management, high performance through greater return, tagging assets with RFID reduces losses and increases supply chain accountability, asset identifier acts as proxy for goods in container, better rotation of product and food freshness ensured. Once infrastructure is in place, the ROI at the next level is much easier and quicker to realize (High Performance 2005). According to the Office of Communications, "there is an increasing demand for new spectrum for RFID, particularly from the retail industry . . . Ofcom is responsible for the civil use of radio spectrum in the UK" and "seeks to deregulate in order to increase the amount of licence-exempt spectrum used by business to bring new technology and services to market" (Ofcom 2005, pars 2-3). As of 11 September 2005 the "equipment can be used without a licence under the Wireless Telegraphy Act 1949, subject only to regulations intended to minimise potential interference" (Ofcom 2005, par 4). Ethical and Environmental Issues Several organisations are making an effort to create standards nationally and internationally, but at the present time, some problems exist. Spectrum allocation might mean RFID works in one country but not another at present. The European Commission is drafting legislation to increase compatibility. Installing and integrating RFID systems into existing setups in addition to the cost of the tag itself is cost prohibitive at present, and as of 2004, 85 percent of UK businesses were not considering RFID. An ethical concern in the supply chain of companies is the possible use of data by a third party, an increase in targeted direct marketing and the ability to track individuals (Postnote 2004). As set forth in a draft of an International Strategic Framework, the government vision for Corporate Social Responsibility is to see UK businesses taking account of their economic, social and environmental impacts. Multinational companies are urged to take the lead in specific countries in keeping with a global view (Corporate Social Responsibility, 2006). References Carman, Rick. 'Collaboration Strategy'. n.d. [online] About.com. Available from: http://logistics.about.com/od/collaborativescm/a/uc012003a_b.htm [18 March 2006] Collaborative Planning, Forecast and Replenishment (CPFR). 2002. [online] Grocery Manufacturers Association (GMA) . Available from [17 March 2006] 'Collaborative Planning in the Supply Chain'. GSI UK. Available from: http://www.gs1uk.org/txt_temp.aspfid=161 Corporate Social Responsibility - a Draft International Strategic Framework. n.d. Department of Trade and Industry. Available from: [17 March 2006] 'Factory Gate Pricing'. 2004. [online] IGD Services Ltd, free factsheets, 9 September 2004. Available from: [16 March 2006] Gupta, Puneet. 2003. 'The Future of Radio-Frequency Identification'. [online] TechRepublic, ZDNet UK. 18 August 2003. Available from: [17 March 2006] 'High Performance through Radio Frequency Identification: Getting a Return from Returnable Assets' Accenture 2005. The Chartered Institute of Logistics & Transport (UK) [online]. Available from: [17 March 2006] 'How Do I: Manage Factory Gate Pricing' 2004. [online] Scottish Food & Drink, April 2004. Available from: [16 March 2006] leBlanc, H.M., Cruijssen, F., Fleuren, H.A. & deKoster, M.B.M. 2004. 'Factory gate pricing: an analysis of the Dutch retail distribution'. [online] Tilburg University. Available from: [16 March 2006] 'Ofcom deregulates wireless electronic tags'. 2005. Office of Communications [online]. Available from: http://www.ofcom.org.uk/media/news/2005/11/nr_20051109_2 [24 March 2006] Potter, Andrew. 2003, 'Factory Gate Pricing within Tesco', Integrating Transport into Supply Chains Conference, 1-32. Available from Integrating Transport and e-Commerce in Logistic Supply Chains (ITeLS) at [16 March 2006] Postnote. 2004. 'Radio Frequency Identification (RFID)'. Parliamentary Office of Science and Technology, No. 225. Available from: , pp. 3-4. [23 March 2006] Read More