Optimizing for European Distribution

Dr. Jos Vermunt's enthusiasm for logistics shows. Throughout a discussion of European logistics developments, his voice rises to emphasize an important point. He says that European logistics is entering a new era of responsiveness and agility.

Before he even begins to talk about "location," Vermunt, professor of distribution logistics at the University of Tilburg in the Netherlands (www.tilburguniversity.nl), wants to be clear on the role logistics plays in market strategy and positioning. When we think of differentiating, he says, we often think "product." Those who stop there focus on providing the low cost product. Logistics plays a role when cost is the central issue, but the service around that product is also important, and that's where he says many companies can differentiate themselves.

Reliability has helped manufacturers position their products on a basis of operational excellence, an area where logistics shines. With a focus on operational excellence, much of the emphasis is on having the right product in the right place at the right time and in the right quantities and condition. Today, those are core expectations, Vermunt believes. Some company leaders have recognized that the next stage—customer intimacy—has become more relevant.

Customer intimacy, relative to the product, means providing a more customized product, mass customization in the vernacular. Another side of customer intimacy centers on responsiveness, lead-time and frequency. All of this translates into agility, says Vermunt, the ability to react to quick and fundamental changes from the outside.

With a strong emphasis on demand, Vermunt offers various models of the European market to illustrate different logistics responses. Central to his discussion is a gravity point analysis that divides Europe into 1,200 small regions.

"We count the number of people who live in each of the 1,200 regions, then we ask, what's their buying power?" There is a difference between a small village of 5,000 in Holland and an average small town in Czechoslovakia or Poland in terms of buying power, explains Vermunt. Using this model of buying power, it is possible to project demand.

While sales and marketing analyze potential sales demand, logistics can examine fulfillment strategies. Here, Vermunt offers three basic structures: the central European distribution center, a bulk distribution center with satellite facilities and regional distribution centers. To this, he adds rapid fulfillment centers, pointing out that some company executives want to have inventory instantly available in any market with over 100,000 population. Of course some companies use a hybrid of the more conventional models to maintain certain key inventory items close to consumers and then use rapid replenishment to ensure consistent service.

Customizing product closer to consumption, and developing network strategies that are highly responsive, lead to agility and customer intimacy, says Vermunt. Making it all work means taking maximum advantage of Europe's logistics capabilities.

Starting with a simple model that brings ocean containers into a port and puts them on trucks for delivery, Vermunt asks, "What is the hinterland of a port?" This, he notes, will depend not only on infrastructure, but on market demands and customer service strategies. How much service must be provided overnight, in 24 hours, 48 hours, etc.?

With the answers to these questions it is possible to calculate the cost to move product through a port to any or all of the 1,200 small regions in the gravity model. Targeting certain consumer markets, it is possible to look at the effect of using the ports of Rotterdam, LeHavre, Hamburg or any other European port. Based on location and infrastructure, the Port of Rotterdam handles about 19% of total European volume. Its hinterland may look small, says Vermunt, but it is an area with lots of buying power.

Taking a more multi-modal approach, Vermunt notes, about half of the containers-that arrive in Rotterdam are not leaving by truck but rather by rail or barge. But barges require large volumes to make economic sense since each barge carries so many containers. Here, frequency becomes an issue. In the customer-intimate environment, Vermunt describes a connection that runs once a week as "no connection."

Still, of 1 billion metric tons of freight moving through European ports, 44% goes through the Dutch ports of Rotterdam and Amsterdam, reports Dirk 't Hooft, president and CEO of Holland International Distribution Council (HIDC, www.hidc.nl). Germany also has a strong rail network with a north-south orientation, so serving the prime consuming regions by rail may also suggest using a German port.

Using a pure air cargo model, Vermunt says the important factor is connections. There are many direct flights to Frankfurt, Barcelona and Amsterdam. Germany's Frankfurt airport is number one for Europe. A company that has 100% of its goods coming into Europe by air and being distributed by road, Frankfurt may make the most sense. If the Europe-bound goods use a mix of air and ocean, the strategy changes. When a distribution network has a combination of air and sea, says Vermunt, and most companies have more sea freight than air freight, Frankfurt is a "very bad" location. Looking at a model where both the port and airport are within 50 km (about 30 miles) of each other Vermunt suggests a comparison of Hamburg/Frankfurt, Rotterdam/Amsterdam and Antwerp/Brussels.

With the elimination of border issues following the formation of the European Union, the model for European distribution shifted from one that all but required a distribution center in each country served to a mix of possibilities. Using the gravity model to determine the most lucrative markets, Vermunt says a network to deliver products to 98% of Europe within 24 hours would need six distribution centers.

Raising the bar on customer intimacy and response, Vermunt asks, what happens when corporate managers raise the service requirement to delivery within eight hours or less? Such short lead times might require 20 small distribution centers that would carry small amounts of inventory with a strong replenishment system connecting the central distribution center to the rest of the network.

There are, of course, other costs associated with developing a distribution network, says Vermunt. It is very important to consider the number of connections each location has. Airports must provide connections with the outside, but also have access to internal markets and with other modes to reach those markets. The same is true of ports, including the capability of handling large container ships efficiently with connections to barge, rail and road that are important to either a centralized European distribution model or a bulk distribution center with satellite centers in key markets.

Any logistics network discussion eventually turns to labor costs, taxes and other factors. Despite the elimination of border controls, each European country or region has its own approach to labor matters. HIDC's Dirk 't Hooft says the inflexibility of the labor force may be exaggerated outside Europe. It's true that Europe has stronger work councils that participate more in management decisions at companies in Europe, but, says 't Hooft, that's the normal state for European companies and managers understand how the system works.

Ron Roest, general manager of logistics for HIDC, adds that in The Netherlands, use of temporary workers is a common practice and that there are plenty of workers with logistics skills. Companies use a small fixed workforce and supplement with temporary workers when they are needed. This helps reduce overall cost, says Roest.

There are stronger protections for labor in Europe, explains 't Hooft, but the works councils understand economics, so it is possible to make changes if managers are open and clear. The amount of protection offered to workers for non-economic layoffs vary by country, and some have stricter rules on terminations.

Taxes and incentives are another matter. In some areas of the European Union, the corporate tax is lower than others, but many countries, including The Netherlands, see this and respond. In other cases, there are strong incentives for certain types of companies to select a particular location. In pharmaceuticals, for instance, where the value added in manufacturing makes them subject to high corporate taxes, Switzerland and Ireland offer attractive venues for manufacturing. But for distribution, where there is less value added, the taxes are less of an issue and the focus is more on material flows.

Vermunt and the executives of the Holland International Distribution Council easily admit the face of Europe is changing with the continued expansion of the European Union, but the newly added countries are still developing, both as potential consuming markets and as possible sites for manufacturing and logistics operations. Longer term, changes will occur, and the powerful economic center of the European Union may look geographically different in years to come, but some of the central themes of connections and access by air and sea will continue to dominate logistics decisions.

Though there are exceptions, the evolving model for European distribution seems to be leaning towards a bulk distribution center with satellites or a regional distribution center strategy over a single European distribution center model. As Vermunt concludes, much of that decision will depend on the amount of customer intimacy demanded by a company's markets.

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