The food industry bemoans being forced by powerful buyers to operate on low profit margins for most lines. Not only are margins low and under constant downward pressure, but costs are rising as fuel costs and duty soar and retailers find ever more complex and expensive ways of ordering just what they want, precisely when they want it.
A key variable is transport, which is a commodity in the ambient temperature sector (less so in frozen and chill) so such transport buyers should achieve the market rate - but it seems they don't.
A survey of 26 grocery sector companies found all except a small number of very large manufacturers paid according to a matrix using distance and consignment size. If you buy this way, the cost per pallet of a one pallet consignment will be four to five times as much as a 26-pallet consignment travelling the same distance.
But mid-sized companies were paying the lowest prices, riding on the back of larger buyers at rates that would not make them a profit if offered to all.
Some manufacturers have agreed backhaul rates with major multiples where the retailer organises the collection and the manufacturer pays either the retailer or the retailer's nominated carrier. I have seen rates set by nominated carriers at 60% of market rate (as determined by the primary, low-cost cluster of buyers) at one end of the buying spectrum and at 175% of that same market rate at the other. Flat rate agreements, where a single rate covers all order sizes and destinations, are to be avoided because their lack of transparency makes the value-for-money equation very hard to manage over time.
Buying transport well is almost always possible if you go through the right process. Transport can cost as much as the profits some manufacturers declare, especially if they are own-label specialists. If you are a profitable branded manufacturer paying over the odds, shame on you!
Tim Knowles is partner at supply chain consultancy TKA.