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Grocery Distribution Activities

For each of the following three terms applicable to:

• Factory Gate Pricing (FGP);
• Collaborative Planning, Forecasting and Replenishment (CPFR); and
• Radio-Frequency Identification (RFID) technologies

Answer the following:

1. Define the term and explain what the term involves.
2. Review the current situation in the industry for the activities involved with this term, with particular emphasis on the effects of the term on a firm's marketing activities and strategies.
3. Consider and discuss the effects of the term on the supply chain partners (Manufacturers, Distributors, Wholesalers and Retailers) and Customers.
4. Mention any ethical or environmental issues associated with the item

Factory Gate Pricing

1. Factory gate pricing is an initiative designed to enable retailers to increase the efficiency of their supply chain, by removing unnecessary transport costs. It involves retailers asking their suppliers to release product costs at the Factory Gate (Fernie and Sparks, 2004), in other words, to quote their product costs excluding the cost of delivery to the retailer. It is then up to the retailer to arrange distribution to whichever store requires the merchandise Factory gate pricing changes the dynamics of the supply chain to give retailers greater control and visibility over when and where they receive their stock. It also relieves suppliers of the need to arrange transportation for goods.

2. With the current drive to reduce costs in the grocery retail sector, firms are currently looking at attempting to reduce the costs of production and transportation as much as possible. With the increasing use of factory gate pricing by the major UK grocery retailers, it is likely that the costs of product and transportation will be driven down as retailers exert more control further back down the supply chain. Further, trends and preferences in the grocery sector are changing all the time, thus additional advantages to retailers include the ability to improve stock availability, whilst maintaining lower stock levels and being more responsive to demand. For example, during the last major heat wave, Tesco was able to sequence its deliveries to cope with a huge upsurge in demand for bottled water, whilst not needing to maintain excess stock (Fernie and Sparks, 2004).

3. Factory gate pricing is a sign of a very mature retail supply chain (Fernie and Sparks, 2004). It not only provides wholesalers and retailers with complete visibility of all the costs involved in production and distribution of their goods, but also gives them the ability to organize their supply chain for maximum efficiency. However, it does require a high level of co-operation between suppliers and retailers to extract all the benefits of a fully controlled supply chain. Factory gate pricing can also provide advantages for suppliers, who no longer have to arrange transport, and distributors, who are able to plan their business on a large scale.

4. Factory gate pricing is being driven by retailers, who have the most to gain from its implementation. Suppliers can also benefit, but only if they take care in understanding the full implications for their business. However, the high market concentration in the grocery retail sector means that the major supermarkets have very high levels of buyer power over their suppliers. As a result, there is a risk that the increased visibility that factory gate pricing provides will be used by supermarkets to further squeeze the margins of their suppliers. Also, there may be environmental issues around increased emissions and congestion when supermarkets experience higher than expected demand, and distribution becomes a question of speed rather than efficiency.

Collaborative Planning, Forecasting and Replenishment (CPFR)

1. Collaborative planning, forecasting and replenishment is an initiative which has mainly been implemented by the retail industry, in which trading partners share all sorts of critical planning and forecasting data in an effort to streamline inventories, eliminate waste, and create a more efficient supply chain (Fernie and Sparks, 2004). It also focuses strongly on minimising the damaging occurrences of retailers experiencing goods being out of stock because; when goods go out of stock everybody loses: the retailer, the supplier and the consumer. Thus, collaborative planning, forecasting and replenishment involves sharing demand and forecast data from retailers up to suppliers. Suppliers then share their planning data downwards to the distributors and retailers, thus retailers know when to expect peaks and troughs in supply and can adjust their marketing strategies accordingly.

2. The need to adopt new collaborative planning, forecasting and replenishment technologies stems from the panoply of pressures marketing companies face today. These pressures include: increasingly global competition; constantly escalating customer service requirements; rising costs; and scarce resources, particularly in the area of highly skilled human resources Collaborative planning, forecasting and replenishment is thus designed to enhance the trading partner relationships between collaborating companies and, in this context, one of collaborative planning, forecasting and replenishment's goals is to have better visibility into partners' plans, thus resulting in better communication and faster market responsiveness.

The working relationships are thus aimed at becoming smoother, and more focused on building their mutual businesses, brands and marketing strategies, rather than constant crisis management. This is in stark contrast to previous years: trading partners working together and sharing forecasts was unheard of just a few years ago (Fernie and Sparks, 2004). However, modern industry pressures have lead to dozens of companies now sharing planning data on a regular basis. Those companies that are beginning to align their production with demand are beginning to reap the benefits, which include reductions in inventory costs and lead time costs, as well as out-of-stocks (Fernie and Sparks, 2004).

3. Better planning, and collaborative efforts on planning have the potential to generate major benefits for trading partners. Fernie and Sparks (2004) examined some of the improvement figures currently being experienced by companies, at all levels of the supply chain, which collaborative planning, forecasting and replenishment strategies and technologies. Visibility and forecast accuracy has been seen to improve by 10 percent to 40 percent, inventory costs have been reduced by 10 percent to 25 percent, sales have increased by 1 percent to 3 percent, service levels have improved by 0.5 percent to 2.0 percent and shelf in-stock levels have improved by 1 percent to 4 percent.

Effective supply chain collaboration and planning can also reduce or eliminate the bullwhip effect, whereby inventory buffer levels are amplified at each step in the supply chain, often leading to distributors being left with consignments they no longer require, and suppliers having large levels of excess wastage (Fernie and Sparks, 2004) This amplification is a direct result of uncertainty: uncertainty that stems from a lack of visibility up and down the supply chain, as well as a lack of effective information sharing and collaborative planning. Upstream and downstream blindness takes a significant toll on companies throughout an extended supply chain. It can result in excessive inventories; forecasting processes that overreact to changes in order patterns; and inefficient batching of orders for transportation, administrative, and handling (Fernie and Sparks, 2004).

Recognizing these negative effects, all members of the supply chain work hard to reduce the impact of time on the supply chain, as time has a direct impact on inventory levels. They also create supply chain communities, cultivating preferred relationships both up and down the supply chain and cultivate customer/consumer intimacy by focusing planning and execution efforts on serving customers better (Fernie and Sparks, 2004). Collaborative planning, forecasting and replenishment gives suppliers a more accurate picture of customer demand, allowing them to optimize production for key trading partners and to reduce inventory while at the same time maintaining service levels, saving costs and maximising efficiency.

4. Collaborative planning, forecasting and replenishment is not easy to implement: it's a huge commitment for any organization. As a result, there is a risk that the dominant partner in any supply chain, often the retailer in the grocery market, will force its supply and distribution partners into implementing systems which they cannot really afford, in order to stay in business with the retailers. This may result in the suppliers and distributors being forced to take on excessive debt, risking their long term future for their short term viability. This could potential result in smaller suppliers not being viable business propositions in the marketplace, reducing consumer choice and resulting in job losses.

There is also a risk that the systems will be abused by retailers, who will share inaccurate forecasts with suppliers, in order to ensure that they have plenty of stock available in case of unforeseen extra demand. Environmentally, collaborative planning, forecasting and replenishment should not have any major negative effects, as it should reduce levels of waste caused by excess inventory and production.

Radio-Frequency Identification (RFID) technologies

1. Radio-frequency identification technology is predicted to be the next potential major technological breakthrough that will have a significant impact upon supply chain costs. A radio-frequency identification system is a system for wirelessly tracking stock at all levels of the supply chain. Such systems typically consist of a tag or label attached to an item of stock and embedded with a single chip computer and an antenna; and a reader, much like a wireless LAN radio, that communicates with the tag (Fernie and Sparks, 2004).

This basic system structure however contains a number of alternative choices for implementation. For example tags can be passive or active. Passive tags pick up energy from the reader to operate and communicate with the reader and thus, in essence, they are simply read to obtain data around the item they have been attached to. They have no power source and are short read-range, but are cheap and likely to last longer. In contrast, active tags have an embedded power source that provides for a greater range but reduces tag life and raises costs. Active tags can thus store a variety of data and can be read and written to (Fernie and Sparks, 2004). With readers being fixed position or hand-held/movable, tags able to transmit in a field rather than one direction, and various choices of frequency depending on the range required or the product involved, radio-frequency identification technologies can serve a variety of functions within a supply chain.

2. Currently in the industry, shrinkage costs retailers between 1 and 2 per cent of sales per year, and out-of-stock occurrences, as discussed above, remain a key challenge for retailers and suppliers alike (Fernie and Sparks, 2004) Radio-frequency identification could ultimately lead to the effective tracking of goods from the factory until they leave the store, and even to the customer's home, this the potential benefits to retailers are claimed to be immense. However, it is probable that the technology will be rolled out in stages, focusing on the obvious current issues and bottlenecks in supply chains.

Initially the focus will be on tracking pallets, dollies and bins as they move from picking to the backroom of the store, which will give sizeable cost savings in labour through greater automation of tracking and more visibility. Also, shrinkage and stockholding levels should be reduced (Fernie and Sparks, 2004). However, as the cost of the tags falls, and if fears over consumer privacy can be addressed, radio-frequency identification tags could be used at the item level, and implemented throughout entire stores. For retailers seeking to maximize the on-shelf availability of products, this should give ongoing up-to-date information on sales, consumer preferences, and in-store inventory, with significant implications for marketing activities and also the organisation and management of the supply chain.

3. The radio-frequency identification tags can be used at a variety of levels throughout the supply chain: they could potentially be applied to every single item produced, as well as to every carton, box, crate or pallet in which the product might be handled, and non-stock items can be tagged as easily as stock items. The tag could be visibly attached to a product, possibly detachable later, or hidden invisibly or even woven into the fabric, for example a sweater or even a bank note. In comparison with bar-codes, tags can be read around corners and through materials, meaning that a pallet of products or a trolley of groceries can be simultaneously read (Fernie and Sparks, 2004).

This has major implications for all members of the supply chain. Suppliers will know exactly when their goods are produced; when they are moved and where to; and when they finally leave the factory. Distributors can likewise track when goods reach their distribution centre, how they are moved and arranged within the centre, and when they leave. This can help suppliers and distributors streamline and automate their operations similar to the effects, discussed above, on retailers' operations. Equally, the system can help with demand planning and forecasting, as it will better show all parties when the peaks and troughs in supply and demand are. It will also be a driver for better supply chain integration, as integrated members of the supply chain will be able to use each others' tags, thus sharing the cost and increasing the benefits of the system.

4. Mention any ethical or environmental issues associated with the item

There are still choices to be made in terms of data storage on the tag. Tags can be read-only, thus containing a unique identifier and unable to be altered by other parties. Alternatively tags can contain read and write capabilities allowing additional information to be held or added to each time they are read. A tag for example can be programmed to hold all information about a product as well as the distribution points it passed before it reached the customer. As a result, concerns over consumer privacy threaten the implementation of radio-frequency identification, as some systems allow data to be stored on the tag in a portable dynamic database, and in the case of active tags this could potentially be used to assess customer shopping habits. Others allow data to be edited, added to or locked, which can be valuable in different circumstances, but could allow hackers to undermine the system for their own gain, programming chips to store credit card or other details. Another one of the big ethical issues in radio-frequency identification has been the agreeing of standards for data as, similar to accounting standards, different radio-frequency identification standards could be used by different companies to give misleading data to partner companies.

References

• Fernie, J. and Sparks, L. (2004) Logistics and Retail Management: Insights into Current Practice and Trends from Leading Experts, Second Edition. Kogan Page.

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