Eight steps to a European logistics strategy

Logistics expert Hans van der Hoop explains what U.S. companies should do to succeed in the new European marketplace.

By -- Logistics Management, 4/1/2000

The European Union (EU) has been operating in a new, competitive mode for several years. Slowly but surely, the efficiencies promised by the creation of the "Single Market" in 1993 are synchronizing the economies of the member nations and allowing true pan-European distribution to develop along the U.S. model. Nonetheless, U.S. companies should never assume that the strategies that work in North America will be equally effective in the European marketplace. The differences still outweigh the similarities.

But that doesn't mean U.S. companies can't take advantage of the open borders and improving logistics services that are evolving in Europe today, says Hans van der Hoop, principal of the Rotterdam, Netherlands-based consulting firm Logistics International. If these companies understand both their customers' needs and the changing logistics marketplace, he says, they can build effective supply chain strategies that will achieve their goals.

Van der Hoop, a frequent presenter at the Council of Logistics Management's annual conference who has helped many U.S. companies develop their European logistics strategies, says there are eight caveats that U.S. companies need to keep in mind when developing their European distribution networks. They are as follows:

1. Although it's possible to use one central European DistributionCenter (EDC) to serve all of Western Europe, it may be wise to consider using several facilities.

According to van der Hoop, the vexing border controls are gone, but road congestion, narrow delivery windows, and the differences among the many national and cultural identities in Europe require flexibility in any distribution network.

"The EU is only one-third the size of the United States, but it is a far more complicated market to operate in," says van der Hoop. "Companies must always consider alternative strategies, both to deal with customer-service issues and to take advantage of new opportunities."

Many companies are developing two central distribution centers: one for Northwestern Europe and one for EU countries situated south of the Alps, where transportation bottlenecks often occur. Most companies also treat the United Kingdom as a separate market because of its size and its isolation from the Continent. Other companies are creating satellite distribution centers that maintain limited inventory in major markets or outlying areas. These satellites, which are replenished from the central EDC, can simply be cross-docking operations in crucial market areas. "Whatever choice is made [regarding DC locations]," says van der Hoop, "the important issue to have a well-coordinated, integrated system."

2. Congestion and environmental regulations will be increasingly important constraints in logistics operations.

Road congestion is being exacerbated daily by growing intra-European trade, centralized manufacturing, time-definite delivery requirements, and the move toward placing smaller orders. "Consider that Europe moves almost the same amount of truck freight as the United States in one-third the [geographic area]," says van der Hoop, who adds that population density in Europe is 45 people per square mile compared with 11 people per square mile in the United States. Not only does this congestion cause delays and add extra costs, but it also has evoked a political reaction from an environmentally conscious public, which has called for restrictions on truck movements and higher road fees and taxes.

"These constraints must be considered when locating EDCs, planning and scheduling distribution, and [choosing] modes [of transportation]," says van der Hoop. He adds that consolidation of deliveries to specific areas is one way to address those problems, if the company is careful to balance its need to gain economies through consolidation with the customer's requirements.

3. Trucking is still the fastest mode, but shippers should seriously consider alternatives where possible.

With 85 percent of all intra-Europe freight traveling less than 100 miles, it is not surprising that motor carriers move 64 percent of the total ton-miles in Europe, while rail moves only 14 percent. In the United States, the mix is 30 percent for truck and 41 percent for rail.

Freight transportation has become a hot political issue in Europe. "There is strong pressure from governments to shift more freight to rail and waterway transport," says van der Hoop. Government pressure, though, can't force shippers to use railroads if service isn't up to par. The national railroads may provide good service for longhaul container movements out of the major ports, but intermodal service for inter-city movements is still noncompetitive, he reports.

That's not to say that it should be discounted altogether. "The intermodal option should be seriously considered in the European transport mix because of the environmental and cost advantages, as long as the service meets the need," van der Hoop says. Rail is not the only alternative to trucking, he adds; barge carriers that offer scheduled services are shifting a growing portion of container traffic off the highways and onto the rivers.

4. Outsourcing is a good way to gain competitive advantage, but consider all the options.

Van der Hoop makes a distinction between the outsourcing of warehouse and EDC operations, transportation, and other services. Unless a U.S.-based company has a very large operation with highly specific needs, outsourcing EDC operations usually makes sense, he says. For example, intra-European truck transportation, which is the same as dedicated contract carriage in the United States, is almost always outsourced in Europe, because traffic lanes are too unbalanced for private carriage to be viable.

There are many types of providers from which to choose. If, for example, the company needs value-added services and information integration, there is a growing pool of large third-party logistics companies (3PLs) that provide these services. Van der Hoop recommends finding a third-party provider with the appropriate industry focus. "No 3PL can handle all industries equally well," he says. Because of Europe's higher degree of regulation and government oversight, he recommends that companies outsource only to providers with special expertise.

According to van der Hoop, the concept of "one-stop-shopping" for logistics services usually is not realistic for a pan-European distribution system. "I know of no third-party logistics companies that can perform total logistics outsourcing on a Europe-wide basis within their own organizations," he says. "Although many 3PLs offer the one-stop-shop service, they have to subcontract. Once they do that, control and reliability are often lost."

Van der Hoop also notes that a new breed of 3PL is developing in Europe. These companies are similar to the nonasset-based providers that manage carriers in the United States. They earn their revenues from fees that are based on achieving pre-determined goals. "For many companies with a complex European traffic mix," says van der Hoop, "these providers may offer a good alternative to the one-stop-shop 3PLs."

5. Customer-service requirements vary widely in Europe, and logistics networks should reflect this reality.

Europe's national and cultural differences produce very different expectations for delivery times, packaging, order completeness, and other aspects of customer service. "Whatever the service strategy," says van der Hoop, "there has to be room for flexibility and differentiation."

In Southern and Eastern Europe, customer-service expectations are less rigid. In Northwestern Europe and the United Kingdom, however, on-time delivery and responsiveness are assumed, even though these expectations often conflict with the desire for order consolidation and selection of environmentally friendly transportation. "Hard strategic choices have to be made," says van der Hoop. "Service segmentation has to be part of the total strategy."

6. Focus as much attention as possible on information and communications technology (ICT).

Not only does providing information to suppliers and service companies save time and money, but it also represents a competitive advantage in Europe. "This is no easy task," says van der Hoop. "Systems and hardware between countries and companies can differ greatly. Companies may have to place restrictions on whom they do business with if ICT is a critical need."

7. Because there are so many individual markets within Europe, an assembly-postponement strategy usually makes sense.

Waiting until orders are received to finalize finished goods or components will save time, expense, and inventory while increasing flexibility. Even if postponement is used simply to apply the appropriate label and documentation for a particular country or region, there will be savings compared with stocking separate lines of finished products for every market. Usually postponement can be extended to take into account specific product characteristics such as color or accessories.

The tradeoff for implementing a postponement strategy is extra handling time and smaller shipment sizes, but usually the inventory savings offset those added costs. This type of value-added service is readily available in Europe.

8. Eastern Europe is gaining in importance, both as a manufacturing location and as a market, but logistics capabilities in this area differ from those in the EU.

The Commonwealth of Independent States, including Russia, Belarus, Ukraine, and Romania, cannot be treated like the Western European countries. Just filling orders and making deliveries requires a great deal of improvisation, van der Hoop says. On the other hand, Central European countries like Poland, the Czech Republic, and Hungary are moving quickly toward the EU model.

Some of those markets can be supplied from an EDC, van der Hoop says. "You still have to cope with remaining rigidities of the old system-not to mention border delays of up to 48 hours-but the backbone for successful logistics is developing," he notes. He suggests companies experiment in these markets with an eye toward making adaptations to local circumstances.

Thomas A. Foster has written extensively on logistics and distribution.