EU: ALL CHANGE IN EUROPE - TRANSPORT AND DISTRIBUTION 2. - With the arrival of the internal market, there is a shift away from country-focused warehousing towards centralisation.

by Malcolm Brown.
Last Updated: 31 Aug 2010

With the arrival of the internal market, there is a shift away from country-focused warehousing towards centralisation.

On 1 January this year, so quietly that most people in the countries concerned almost certainly didn't notice it, the 12 member states of the European Union and five of the seven EFTA nations (Austria, Finland, Iceland, Norway and Sweden) adopted the principle of the internal market. What that means in practice is that there is now - or should be soon - free movement of goods, services, capital and people throughout most of western Europe.

The 1 January agreement will increase the pressure on pan-European companies to rationalise, probably even centralise, their warehousing. That will call for some major strategic decisions and, if past experience is anything to go by, is likely to cause quite a few headaches.

Traditionally, most companies have organised their European distribution on a national, rather than a regional basis. Each distribution area operated more or less independently of the others. The company would have a warehouse in each country to receive incoming products then distribute them locally within the national boundaries.This kind of distribution pattern had a logic to it because distribution was often very closely tied to the marketing function, and marketing is usually nationally focused in order to cope with things such as differences in taste and language. Therein lies a problem, says Professor James Cooper, Director of the Centre for Logistics and Transportation at Cranfield School of Management. As soon as national barriers come down, as they have in Europe, an internal contradiction is exposed. Organising distribution and warehousing on a country-by-country basis breaks a cardinal rule of distribution, which is that you should locate your storage according to patterns of demand. 'And patterns of demand don't necessarily relate very closely to where, by an accident of history, the countries' borders are.' Many logistics managers are now investigating how they can locate warehousing to service actual patterns of demand without regard to national boundaries.

'The key issue companies face is increasing competition throughout the whole range of their activities and that has forced them to react in two ways: first, to improve levels of service to their customers - in other words make sure the goods get there when they want them - but, second, to do that at least possible cost. If you store your products in country-focused locations that's very heavy on inventory costs.'

Centralising, on the other hand, tends to cut stockholding costs. The mathematics of centralisation are interesting. The so-called square-root law of inventory means that if you cut the number of warehouses you dramatically reduce the inventory requirement in the warehouse system as a whole. Thus, under ideal conditions, a single warehouse handling, say, one million units a year should require only half as much stock as a system of four warehouses each handling 250,000 units a year.'The more you divide things up,' says Professor Cooper, 'the more you are prey to errors in forecasting and you have to cover those with safety stock.'

If you agglomerate, the forecasting process becomes much smoother and therefore you don't need so much safety stock.

Several multinational companies have already gone quite a long way down the centralisation route. Du-Pont, for example, has focused elastomers on a single, central warehouse in Belgium, and Bosch-Siemens has consolidated all its white-goods warehousing and shipping facilities for the Nordic countries in Sweden.

Sometimes, however, there are what doctors would call 'contra-indications'. When those are present, centralisation may be a bad idea. For example, having goods that are very country specific, because of, say, differing safety requirements, may be a big barrier.

'Smoothing the forecasting process only works if you can combine the inventory requirements of, let's say, a pair of countries,' says Professor Cooper. 'If the inventory remains country specific and you centralise it you don't save anything at all.'

The scale of the potential benefits of centralisation, then, is very much dictated by the level of product standardisation. Usually, of course, the choice will not be an either-or one. For many, perhaps most, companies the question will not be should their distribution be country-based or totally centralised, but how far along the road towards centralisation they should go.

At the end of the day, says Professor Cooper, the company must ask itself some very basic questions about costs and benefits. 'You have to be very clear about whether the benefits are worth it. For example, if you're going to get 2% savings in distribution costs because you haven't taken into account a low level of product standardisation, is it worth going for?'

Cooper thinks that one of the most interesting secondary results of centralising and rationalising distribution in Europe is the scope that it provides for heavy rationalisation in the use of service providers such as road carriers.

'Where you have had country-based distribution systems, large multinationals serving Europe have often had many hundreds of service providers working for them. Centralising and rationalising distribution has enabled that to change.'

Recent research, for instance, has shown that multinational chemicals companies have cut the number of carriers they use dramatically. DuPont (Europe) cut back from 80 in 1989 to under 30 by 1992. Monsanto reduced the number of carriers from 155 in 1989 to 44 in 1992 and carried on cutting after that. Exxon Chemicals was down from 50 in 1989 to 10 in 1992.

The cost savings should be significant: 'If you are working with a large number of carriers,' says Professor Cooper, 'it is expensive and difficult to develop information system links with them and the transaction costs of simply setting up contracts and managing relations with a large number of carriers are high.'

This kind of rationalisation also makes possible closer working relationships between the companies and their individual service suppliers. 'It's becoming very important to develop more of a partnership arrangement with these carriers. When there is a limited number of large carriers you can decide together what's the best way to go forward, rather than just trying to keep the lid on dozens and dozens of carriers that are working for you.'

That, of course, is the ideal, but there is obviously quite a way to go yet. A comprehensive study of European logistics, prepared last year by Cranfield and Andersen Consulting for the US-based Council of Logistics Management, was less than ecstatic about the performance of the road haulage industry in this regard. 'The overall professionalism of the road haulage industry is low,' said the report, Reconfiguring European Logistics Systems. 'Many carriers are not ready for the partnership-style business dealings now being demanded of them'.

Central and Eastern Europe

The Berlin Wall and the Iron Curtain may have come down as the former communist nations have adopted democracy but in transport and distribution terms, Europe is still very much a divided continent; not just two Europes but three - western, central and eastern Europe. Seen from a logistical perspective the three blocs are still very different from one another.

Analysts such as Melvyn Peters, teaching fellow in logistics at Cranfield, separate Poland, the Czech republic and Hungary from the countries further east. The internal distribution systems in these three are being restructured relatively quickly. Everywhere else is much slower.

'The main state carriers in these countries are already being privatised,' says Peters. 'It has been achieved in Poland, has happened to some extent in Hungary and is about to take place in the Czech republic. They've moved much faster than everywhere else because they've restructured their economies more quickly. It's made them think about distribution before, say, Russia or the Ukraine, which really haven't had any major privatisation programmes going through.'

Poland, the Czech republic and Hungary also had quite strong freight forwarding links with western Europe, even under the communist regimes. To earn hard currency, they had set up their own large, state-owned trucking companies to handle that business.

'That meant they had good equipment and western-style trucks,' says Peters. 'They also had relatively good management structures. For instance, Hungarocamion, Hungary's main international operator, has a good reputation in the West and it also spent quite extensively on information systems.'

In fact, the east Europeans often used Hungarocamion or the Polish equivalent for their own operations.

The industries of countries further east are still structured in the way they were before the political changes.

Peters says: 'If you take a typical Russian operation, the trucks themselves are relatively small (a 10-tonne payload is a big truck), there are hardly any articulated trucks and the average operator would have 30 - 40% of its trucks idle for lack of spare parts.'

Should western transport and distribution companies be thinking of expanding eastwards? It is very difficult to assess the opportunities at the moment because most of the markets are depressed.

'The output of most of the central and east-European markets is badly down, there's excess capacity and quite a fierce price war,' says Peters. 'The opportunities seem to centre around a pretty comprehensive package of services through information, warehousing and trucks. In many instances, particularly the further east you go, the provision of warehousing and trucks is often a separate activity. Western operators have good experience of providing a more complete package.'

The implications of the differences between western, central and east-European blocs for the users of distribution systems are profound. 'Companies are being forced to have an alternative system for eastern and central Europe at the moment,' says Peters.

'They aren't able immediately to integrate their central or east European operations into their western one. It's not just an organic growth, more a question of having to set up a completely different system.'.

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