A Strategy of ONE

Feb. 28, 2007
Running somewhat counter to most approaches to European distribution, biotech firm Amgen Corp. operates out of a central European Logistics Center (ELC).

Running somewhat counter to most approaches to European distribution, biotech firm Amgen Corp. operates out of a central European Logistics Center (ELC). Growth has been the central theme over the roughly nine years that Amgen has occupied its facility in Breda, Netherlands. In the last three years alone, Amgen's European revenues have quadrupled.

As Pim van der Aar points out, the ELC isn't strictly European since the distribution network it supports includes exported goods to the United States. He is the local director of business development for the Thousand Oaks, Calif.-head quartered company (www.amgen.com).

Though proximity to the major Ports of Rotterdam and Antwerp were considerations in the initial selection of Breda, Amgen wasn't shipping by ocean at the time. The geographic position about halfway between the two ports is mirrored by its proximity to Amsterdam's Schiphol and Brussels' Zaventem airports.

In addition, Breda offers easy access to Köln (Cologne), Germany. Brussels and Köln are key links for Amgen because they are home to international hubs for DHL and UPS, respectively. A heavy user of air and express parcel services, Amgen uses DHL for about 90% of its products and supplements that with UPS where DHL's service is not as strong, explains van der Aar. This strategy is repeated in the United States where Amgen distribution operations are located in Louisville, Ky., to take advantage of the UPS hub there.

The Breda facility receives unlabeled inventory by air from factories in Puerto Rico. It uses larger carriers, KLM Royal Dutch Airlines and Martinair to Amsterdam, but frequency is limited. When a new production facility in Ireland is complete in 2012 or 2013, it will produce some products and serve as a backup to Puerto Rico, which van der Aar describes as a potential "single point of failure." Describing his concerns about the single production facility, van der Aar says the weather in Puerto Rico led them to build a warehouse able to withstand hurricane winds.

"We have actually built a bunker which can deal with the wind force," he says. But even if the warehouse is spared in a storm, van der Aar acknowledges that the houses of the workers might be damaged or blown away and, he says, "people can have something else to worry about besides making sure the Amgen inventories are okay."

Ireland was selected, mainly because of tax incentives. Says Dirk 't Hoof, president and CEO of the Holland International Distribution Council. Looking at the business case, he says company CFOs see the low corporate taxes in Ireland and Switzerland and even though they know it's an island, the CFO will often push for Ireland.

Such financial arguments carry a lot of weight in the pharmaceutical, biotechnology and other industries where the value added in the production process is so high. Language and culture are also contributing factors in site selection for U.S.-based companies. But as Amgen's van der Aar notes, the Irish location likely won't suffer from the limited direct air service he has to cope with from Puerto Rico. Gaining a couple of hours on distribution won't hurt either, but van der Aar doesn't put much emphasis on that as a major advantage.

Amgen's European distribution network is more diverse than in the United States. In Europe, Amgen serves about 50,000 customers, shipping about 20 million units. Breda handles about 120,000 shipments per year. As far as stock keeping units (SKUs), it has roughly 670 finished products. Though it has only seven or eight primary products, it must multiply these products by the various dosages and packaging and configurations required for the various markets.

Of the nearly 40 countries it serves, France accounts for 24% of the Breda facility's shipments. Germany is 17%. The United Kingdom, Ireland and Spain account for about 10% each, and Italy is 7%. By contrast, van der Aar says 90% of Amgen's volume in the United States goes to a handful of the biggest wholesalers.

"I mentioned transportation partners," says van der Aar, "and most regular [ outbound shipments] are directly with courier companies." It's important to stress the word "regular," he says, "Do not try to convince the DHLs and UPSs to do anything special for you. [For them], it's just a chain of thousands and thousands of parcels going out every day.... If you expect special treatment, they may promise, but they never can fulfill the promise. So, you have to adapt your business model to what [the courier companies] can deliver."

And adapt Amgen has. Much of its product requires refrigeration so it must be delivered quickly, even if rapid deployment were not part of the customer service goal. Inside the four walls of Amgen's facility, it maintains cold rooms and has a lot of redundancy built into fire protection, production equipment, computer systems and electrical back up. The company has developed packaging that retains a 45°F temperature for 48, 72 or 110 hours to accommodate the roughly 95% of shipments that move by courier services. The remaining 5% moves by special courier or in bulk cooled transport.

To deliver on its strategy of providing its shipments on time, in full, with zero defects and at a reasonable cost, Amgen maintains inventory in bulk, unlabeled form as long as possible and relies on flexible packaging in the distribution cycle to allow fast reaction, prevent stock outs and maintain lower stock levels. With country specifications accounting for many of its SKUs, this tactic has proven cost effective. It is also one of the justifications for operating a centralized logistics center.

But the Breda facility is not only the home of a centralized distribution operation. It also houses a customer service center and a variety of "shared services" that serve the entire continent. For instance, says van der Aar, an Italian customer calling Amgen's customer service will talk to an Italian representative and never know they aren't talking to someone in Italy.

Among the goals for the European Logistics Center is a move to more "finish to order" fulfillment using "lean manufacturing" and Six Sigma principles. Ideally, says van der Aar, they'd like to be doing make to order, but the value-added logistics operation is able to support a more "Europe generic" packaging approach and also keep inventory at a more generic level longer. This approach eliminates much of the bulk, local warehousing, and will ultimately help Amgen move away from distributors and wholesalers to provide more customer-direct service.

Amgen's strategy for Europe has helped it cope with rapid growth that continues at a pace of 30% to 50% per year while maintaining its service goals and containing costs. But, cautions van der Aar, Amgen's success with the centralized logistics strategy isn't a recipe for success for every company. It clearly works for the biotechnology company, and as Amgen continually reviews its logistics strategy, its questions, as much as its answers, can be illuminating for other firms entering or operating in Europe.

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