Four years after the opening of the European single market, only a fraction of companies have truly pan-European distribution networks in place.
Five years ago the American sportswear company Nike had a European distribution system of mind-numbing complexity built around 25 warehouses scattered across the continent. Today it has just one - a huge facility at Laakdal in Belgium which receives clothing and footwear from manufacturing plants in the Far East, America and Europe and ships them out to customers.
Nike is a model of pan-European distribution, treating the whole continent as though it were a single country without any borders.
The reconfiguration of European logistics systems is a recent phenomenon.
To understand it, one needs to look at European business in an historical perspective. From the second world war until the late-1980s business in Europe developed along national lines. Companies which wanted to expand within the continent did so on a country-by-country basis. They set up subsidiaries in each country and gave each a large degree of autonomy and local power. The national subsidiaries built up their own sales and marketing operations and established local distribution systems. Each country's distribution network operated more or less independently of the others. The company would have a warehouse in each country which received and distributed its products locally within the national boundaries. Since a country's borders were not just political dividing lines but barriers to trade, the system made sense. Crossing borders, where trucks and products were often held up endlessly at customs posts, was a time-consuming and expensive business.
All that changed in the 1990s. The arrival of the single European market on 1 January 1993 meant that Europe was no longer a collection of a dozen or more independent national markets but had become a single market without borders, a place where goods, services, capital and people could move freely across national frontiers as though they did not exist. An immediate consequence was that companies began to ask themselves whether, if they were facing a single Europe-wide market, they should reorganise themselves as regional entities, approaching their customers wearing a European rather than a national hat and cutting out layers of cost by centralising functions such as accounting, sales and marketing. They also began to look very critically at their transport and distribution arrangements.
It soon became apparent that distribution systems designed for the old Europe were ill-suited to the new one, particularly if a company's manufacturing, marketing and sales strategies were to be Europeanised. As the late Professor James Cooper, former director of the Centre for Logistics and Transportation at Cranfield School of Management, put it shortly after the single market came into being, the new Europe exposed a contradiction. Organising distribution and warehousing on a country-by-country basis, he said, broke a cardinal rule. This was that storage be located according to patterns of demand.
'And patterns of demand don't necessarily relate very closely to where, by an accident of history, a country's borders are.'
As the realisation of a mismatch dawned on companies heavily committed to Europe, they examined other models and began to look enviously at the US. American companies capitalise on economies of scale by using a few very large distribution centres to serve huge geographic areas. If it could be done in America, why not Europe? If a single distribution centre could service the whole of France, what was to stop it also covering the Benelux countries and Germany, or indeed the whole of Europe?
Without borders, after all, Europe would be not unlike America.
A senior Nike finance man brought over for a brainstorming session on European distribution in 1992 put it succinctly when he pointed to a map of Europe and exclaimed: 'How can we possibly justify having more than one warehouse in an area no bigger than Texas?'
Nike, taking its 'Just do it' slogan literally, decided that there was no justification and the Laakdal project was launched. The first bit of the facility, handling all of Nike's apparel business in Europe, opened for business in September 1994, followed quickly by footwear.
The economic case for centralisation like this is compelling. Centralisation leads to increased transport costs as delivery distances from warehouse to customer are greater - a Nike consignment for London, for instance, comes from Belgium rather than a UK-based warehouse - but the increased transportation costs are usually more than offset by a reduction in warehousing costs. The capital costs of storage are lower because there are far fewer facilities - in the case of Nike this means one distribution centre instead of 25 - and there are also big potential savings from what logistics experts like to call the square root law of inventory. In simple terms this says that if the number of warehouses is cut, the inventory requirement in the warehouse system as a whole is reduced dramatically too. The more warehouses the company has, the more it is prey to errors in forecasting and the more buffer stock it is required to carry. Consolidate warehousing and distribution and the forecasting process becomes more efficient, and much less buffer stock is needed.
As a rough rule of thumb combining two warehouses into one usually means a 30% reduction in buffer stock.
Just how powerful the arithmetic of centralisation really is can be seen from the case of Becton Dickinson, an American diagnostics manufacturer and supplier which, like Nike, has gained major performance improvements and cost savings from centralising its transport and distribution system.
Becton, which supplies everything from bottles of chemical reagents to analytical instruments, had built up a network of national distribution centres as its European business expanded in the early 1990s. But it soon found that the system was riddled with inefficiencies. It had high inventory costs and stock write-offs due to the shelf life of products expiring. It also suffered from poor stock availability and high distribution costs.
With the help of Derek Bell, managing director of UK-based consultants Compass Logistics, the company recast its whole distribution system. It closed national distribution centres in Sweden, France, Germany and Belgium and shifted operations to a single, purpose-built, fully-automated facility at Temse in Belgium. The results were astonishing. In less than a year, stock levels were down 45%, write-offs were reduced by 65% and stock non-availability had been reduced by 75%.
Bell also helped another company, Roche Diagnostics, a division of the Swiss-based pharmaceutical group, sort out its European supply chain, replacing 10 warehouses dotted around the continent with a single European distribution centre at Strasbourg. This firm too is beginning to see major improvements in performance.
But companies like Nike, Becton and Roche are still comparatively rare.
Despite the obvious attractions of centralisation, companies have been slower to adopt the rationalised system than was originally anticipated.
A recent survey by management consultants Coopers & Lybrand suggests that, while the corporate spirit is willing, the flesh is weak. Of 62 companies which had set themselves a target of 1 January 1993 to go pan-European, says Coopers, only 10% of them had managed it by last year, already three years late.
What has become apparent, according to Alan Waller, Coopers & Lybrand's senior logistics partner, is that the firms are encountering a number of internal and external obstacles. 'The external obstacles are things like transport infrastructure and the resistance of customers to change,' he explains. 'Internal barriers include quality of management, language and local politics and power play. Streamlining organisations means that somebody locally loses power,' Waller adds.
Most experts agree that transportation - actually carrying the goods from place to place - is one of the main limiting factors at the moment. A pan-European distribution system requires carriers with a pan-European capability, but to date none has developed. Some carriers are strong in northern Europe, some in the south, but nobody has yet pulled the whole lot together. A 'chicken and egg' situation seems to have developed.
Companies which are Europeanising their operations and would like to move to pan-European distribution are looking to third-party carriers to develop pan-European transportation, while the carriers, for their part, are waiting for the companies to develop their pan-European distribution strategies before they commit serious money to continent-wide transportation systems.
Peter Allred of Deloitte and Touche Consulting, Nike's advisers, believes that ultimately the initiative will have to come from the companies. 'The change will only happen when the likes of Nike and other large organisations demand that sort of service,' he says. 'People won't set up to provide the service on spec in the hope that companies will come along and use it. They simply won't set up that sort of capability until it's demanded.'
Raymond Jewitt, logistics partner at Andersen Consulting, agrees that transportation is a limiting factor but thinks another obstacle may be even more significant. He believes companies need to do much more work on the information technology systems that support their European operations and on the business systems that the IT enables. A pan-European distribution system is driven by the needs of a pan-European business, but if the business is to be able to analyse, forecast and plan on a European scale, it will often have to re-engineer its business systems (and the enabling IT) to do so. At present many companies have a hotchpotch of business systems and IT in their different national subsidiaries. That may not have mattered too much when the focus was local, each country looking after its own needs, but you cannot simply bolt those disparate systems together to get a European perspective.
'To operate a business effectively in a pan-European environment, you need to have good sales order processes, good financial information, good planning and distribution information. You need a lot more integrated information and that means you need standardisation of systems and processes,' concludes Jewitt.
Waller of Coopers & Lybrand also thinks getting the information systems right is of the essence. If companies are to harness their procurement, planning and inventory management functions to meet pan-European demand, their information systems have to be able to support things like the centralisation of key functions. 'Systems are an essential enabler,' says Waller. 'If you want to integrate supply chain activities between functions, between supply chain players, between different countries along the supply chain, then the only way you can actually do that is through data processing and telecommunications. You're managing by information, rather than managing the physical assets and in managing information, you have to have information systems that are responsive and respond rapidly.'
While most other companies are still in the early stages of reconfiguring their European distribution systems, Nike is looking ahead to the next step. The company is growing so fast that it has already had to increase the capacity of its central distribution facility.
'Nike grows at 20%-30% per annum,' says Deloitte and Touche Consulting's Allred. 'We're just doing another facility exactly the same size in Belgium as we finished two years ago. If you're going to do that every two or three years there won't be much space left in Belgium. We're now looking at alternative ways of structuring the supply chain. At present Nike consolidates stock into a distribution centre and releases it when the retailer requires it. A more radical solution may be to find ways you could deliver direct to the retailer or in which you could pass stock through the distribution centre more quickly so you don't need so much storage area. That's what Nike's exploring at the moment.'.