Pan-European Logistics: Fact or Fiction?

Logistics managers who are realigning their companies' European operations may find the detailed discussions of Pan-European logistics strategies in the following two books useful in their planning.

By Toby B Gooley -- Logistics Management, 3/1/1999

On Jan. 1, 1993, Europe changed forever. That's when the European Union (EU) came into being, bringing harmonized business laws, product standards, fiscal policies, and customs procedures to most of Western Europe. Pro-EU economists and politicians triumphantly predicted that barriers to economic prosperity would fall and Europe would enter a period of strong--perhaps unprecedented--growth.

Six years later, that enthusiasm has become muted. Although few dispute the potential economic benefits of European unification, cultural, political, and psychological barriers to achieving that golden vision remain.

That's not to say that European unification has been a failure. Unification is having a generally positive effect on consumer and business costs, and some industries are using Europe's economic, legal, and political changes to their advantage. This is particularly true in the logistics arena, where shippers' newfound license to consolidate their European manufacturing and distribution operations into a single location has produced substantial gains in efficiency and reduced logistics costs for many companies.

Although the benefits of managing logistics on a Pan-European basis became clear early on, that strategy has not been as widely implemented as most observers had expected. That raises some questions: If there are so many economic incentives for moving toward Pan-European logistics, why has it been so slow to take root? What are the roadblocks to implementation? Is Pan-European logistics destined to remain more theory than practice?

Consolidation Trend

Legal and regulatory changes in the European Union undoubtedly will drive large manufacturers to consolidate their European logistics operations. Certainly, manufacturers no longer need to maintain manufacturing and distribution operations in every country in which they sell their products. The harmonization of product standards across the EU, the elimination of most customs formalities between EU countries, and the need for multinational manufacturers to manage inventory regionally or globally via a single information system all favor consolidation of European facilities and suppliers.

A company that manages logistics on a Pan-European or regional basis, rather than country by country, stands to achieve enormous cost savings in transportation, inventory, real estate, taxes, personnel, capital equipment, and more. One United States-based manufacturer of medical equipment, for example, formerly operated 13 warehouses in Europe but for several years has been managing all inventory, warehousing, and distribution functions in Europe from a purpose-built, highly automated facility in Belgium. In the first two years after the new distribution center opened, inventory levels dropped by nearly half, stock-outs were reduced by more than 75 percent, and total distribution costs fell by more than 20 percent.

Other companies are discovering the benefits of Pan-European operations. A 1997 survey of more than 300 European, U.S., and Asian manufacturers located in Europe, conducted by United Kingdom-based consultants P-E International, found that nearly half of the survey respondents already had reduced the number of manufacturing sites they maintained. Just over 90 percent, meanwhile, reported that they were in the midst of restructuring their distribution networks.

Although those results seem to indicate that the development of Pan-European logistics is spreading quickly, acceptance of that concept is far from universal, say industry observers. For one thing, the commitment to Pan-European operations varies from industry to industry, says John Towers, editor of MT Logistica, a monthly logistics magazine published in the United Kingdom. "The chemicals industry is entirely Pan-European. The automotive industry is becoming that way, mostly on the part of the big U.S. makers," he says. But other industries, such as pharmaceuticals and electronics, he observes, still face many local restrictions despite progress toward harmonized product standards.

National product preferences, moreover, are likely to change slowly--over generations, rather than over a few years, says Brian Bolam, president of third-party provider Penske Logistics Europe. He predicts that the majority of goods movements will remain local, changing from 80 percent domestic/20 percent cross-border traffic to perhaps 70 and 30 percent domestic and cross-border, respectively. Results of a recent survey of European logistics executives conducted by the European Logistics Association supports that belief: 45 percent of the respondents said they planned to continue doing most of their sourcing within their home countries.

Such cultural biases, in fact, will play a big role in delaying the march toward Pan-European logistics, says consultant Nicholas Seiersen of KPMG. "There are some fairly strong cultural types and languages that make it more difficult for people to work together," he says. "Foreign-based multinationals can centralize, but even a German multinational would have trouble pulling operational control from [a subsidiary] in France."

Still other problems are discouraging many shippers from fully adopting a Pan-European logistics strategy. Europe's legendary road congestion, for example, poses significant challenges for centralized distribution systems, especially in a just-in-time (JIT) environment, Bolam points out. Inconsistencies between national and EU transportation policies exacerbate that problem. And the difficulties of creating an information system that can function in multiple currencies and languages while seamlessly communicating inventory, shipment-tracking, and other data throughout the continent also are hindering development of Pan-European logistics networks.

Encouraging Developments

At the same time, there are several developments under way that are likely to help make Pan-European logistics operations a reality for more companies in the near future.

Some European national governments and regional economic-development agencies actually are hastening the consolidation of distribution facilities in Europe. As they see the number of distribution centers shrinking, they are competing fiercely to offer tax breaks, site-selection consulting services, and other incentives designed to sell shippers on their region as the best place to locate a manufacturing or distribution facility in Europe. The Netherlands, Belgium, France, and Denmark have been particularly aggressive.

Another important development is the EU's phased-in adoption of the euro as its official currency. That probably will not in itself push a single logistics market forward, but it will make centralized operations easier to administer by simplifying billing, payments, and information management across borders, says Seiersen of KPMG. It also will make it easier to benchmark costs between logistics operations in different countries--which very likely will pull manufacturing more strongly toward lower-cost countries in Southern and Eastern Europe, adds Bolam.

That's potentially problematic because those regions still lag behind their Western and Northern European neighbors where infrastructure, service quality, and information technology are concerned. But logistics-service companies are so certain that Southern and Eastern Europe will become part of mainstream European operations that they are making significant investments to bring them up to par, Bolam says. The predicted shift toward lower-cost countries also is likely to increase the number of shippers that establish regional satellite operations in well-situated countries like Austria and Denmark, which offer sophisticated logistics capabilities paired with easy access to Eastern Europe.

In the meantime, third-party logistics companies, both European and United States-based, are making progress toward building Pan-European service networks. The cooperative relationship between Schenker International and its parent company, Stinnes AG, and Sweden's BTL AB, for example, has created a European logistics giant employing more than 20,000 people in 30 European countries with annual revenues of more than $3.5 billion. The two companies offer a wide variety of domestic and international transportation and logistics services, including complex warehouse-based solutions, says Robert Laird, vice president of logistics services for Schenker International. Stinnes is expected to increase its investment in BTL this spring and is said to be investing millions of dollars to integrate the companies' information systems, so a full merger may well be in the cards.

Penske, meanwhile, has made some acquisitions and owns some assets in Europe but has focused more on contracting with providers that are managed by its Pan-European Routing Center in Maastricht, Belgium. That's cost-effective, but maintaining proper control and customer confidence requires some measure of asset ownership, Bolam says. "We want to own enough [assets] but not too many," he notes. "Non-asset-based companies are not as accepted in Europe as they are in the United States." Balancing the two approaches provides more flexibility when working in multiple countries, he adds.

It's still unclear whether the kind of investments that Penske, Schenker, and their competitors are making actually will translate into a significant number of Pan-European contracts, Towers says. Laird agrees that Pan-European logistics service is still in the early stages of development: "People are talking a Pan-European game, but very few people actually have it," he says. But he believes the economic forces at play in Europe today will make it happen. "Every action causes a reaction, and the third-party logistics companies' reactions are market driven," he says. "We have to be able to offer [Pan-European service] because that's the pattern the movement of freight is taking."

For More Information ...

Pan-European Logistics and Reconfiguring European Logistics cover a wealth of topics, including drivers of Pan-European logistics; strategies for Pan-European supply chain management; physical, cultural, and legislative barriers to implementation; support services for Pan-European operations; information technology issues; and the role of logistics service providers. Both books include case studies and results of original research.

The encyclopedic Pan-European Logistics (1998) is published by the Financial Times' Retail and Commerce Division and was edited by Martyn Pellew, former head of British third-party logistics firm NFC. It is available from the Financial Times for $821; call +44-171-896-2325 or fax +44-171-896-2333 for more information.

Reconfiguring European Logistics (1993) was researched and written by Andersen Consulting and the United Kingdom's Cranfield School of Business. Published by the Council of Logistics Management, it is available for $30 for CLM members and $60 for nonmembers. Call (630) 574-0985 or fax (630) 574-0989 for more information.