Factory Gate Pricing

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Description of Factory Gate Pricing. Explanation.


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Definition Factory Gate Pricing. Description.

Factory Gate Pricing (FGP) is an approach to purchasing goods, under which (low) ex-works purchasing prices are agreed for products, and the buyer is responsible for arranging the transportation of the product from the supplier to the delivery points. Typically, the customer is also responsible for insuring the products against damage during transit.

FGP requires and leverages efficient transport systems of (large) buyers (alternately a large 3PL can also be used). This is why Factory Gate Pricing is popular in retail and automotive environments. Big retailers and car assemblers can combine primary Less Than Truckloads shipments from several suppliers into Full Truck Loads. Such primary distribution can even be combined with secondary distribution (shipments from distribution centers or assembly plants to retail outlets). This combination is called "Backhauling".

The main benefits of Factory Gate Pricing are:

  • Lower distribution costs (through efficient combined transportations, better control and coordination, centralized information).

  • Increased supply chain visibility for retailers.

  • Enables lower inventory levels and improved availability (Just-in-time, Efficient Consumer Response).

  • Vertical Integration.

  • Increases barriers to entry for new entrants through being more efficient.

  • Decreases the bargaining power of suppliers through decomposing the product price.

  • Transport Economies of Scale through backhauling. Better Capacity Utilization.

  • Lower prices for the end consumer.

  • Environmental benefits through lower emissions of full trucks.

Just as Vendor Managed Inventory, the Factory Gate Pricing concepts is centralizing the responsibility for stock levels to reduce supply chain costs and realize lower prices for end consumers.

Factory pricing is also referred to as supplier collection or ex-works pricing.

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Compare with: Vendor Managed Inventory | CPFR | Just-in-time | Vertical Integration | Third Party Logistics

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