Despite the fact that the European Union expanded by removing internal border restrictions among 10 Eastern European countries, many companies operating in Europe still acknowledge the invisible boundaries. Country operations are often treated as independent profit and loss centers, observes Carl Fransman, managing director of Europe, Middle East and Africa for MCA Solutions (www.mcasolutions.com), a provider of supply chain solutions.
Despite the fact the borders have fallen away, many corporations still manage operations like conglomerates of smaller entities. "The reality is not what we thought it would have been once the borders opened and after the expansion," Fransman says.
The reason to be in Eastern Europe for the short term is to profit from a price reduction, he continues. The long-term reason to be there is the hope there will eventually be a local customer base. The customer base isn't there yet because the Eastern Europeans generally do not have the purchasing power.
Fransman has seen some companies begin to centralize distribution operations in Europe and then pull back from that strategy. "They want to sit closer to the customer. Too many companies sell the same product or a similar one, so you differentiate on service." If you can guarantee faster response time, especially in a business-to-business market, that will get you the contract, he continues.
A decentralized network is harder to manage, says Fransman, but it can be cheaper and provide better performance with the right systems to manage. Even some third-party logistics (3PL) operations will decentralize when they take over a company's operations, he adds. "When a company like DHL takes over your warehousing, they have such a vast network of warehouses they can store wherever they deem most appropriate."
In Europe, he adds, products are differentiated by market — not so much on product characteristics but on the packaging and documentation that goes with them. That's because of the many languages represented across the European market.
When you add up minimum order quantities and safety stocks for goods stored in multiple country-stocking locations, total inventories can be huge, according to Fransman. While the country approach may be important to maintain service levels, there's a need for companies to eliminate barriers within their networks so they can manage assets more effectively.