European Supply Chain Management Characteristics and Challenges
European consumer and business markets are depressed, reflecting both a fall-
off in economic activity worldwide and unresolved structural problems at the European
Union (EU) and constituent national levels. Despite this comparatively gloomy
outlook, an accelerating pace of change is a hidden but common characteristic
of European supply chains. Driving that acceleration is a combination of structural
change, arising from the continuing impact of the single currency and the forthcoming
expansion of the EU, the impact of new technologies, and, arguably most significant,
a renewed focus on practical supply chain issues in response to tighter market
conditions.
Market Unification
The euro and the development of a single market continue to intensify competitive pressures across Europe, driving companies to cut costs and raise service standards to unprecedented levels. With the recent adoption of the euro and corresponding increased price transparency, cross-border trade within the EU is increasing faster than its GDP growth. Manufacturers and distributors are combining economies of scale with improved levels of customer service as they restructure and relocate production and distribution assets.
In the 1980s, it was countries such as Spain and Italy whose lower production costs attracted inward investment in manufacturing. Now, it's the turn of the new democracies of Eastern Europe. The Czech Republic, Hungary, Poland, Slovakia, Slovenia, and the Baltic States will all become full members of the EU in 2007, and their growing consumer markets have been attracting substantial inward investment since the early '90s. Following close on their heels, countries such as Croatia, Romania, Bulgaria, and the Ukraine are in turn trying to become attractive industrial zones.
Despite all this progress, there remain important barriers to market unification. One of the most glaring anomalies arises in the prices of popular cars, which can vary by more than 100 percent across the EU.
Pan-European Network Optimization
Almost without exception, key industries are restructuring their supply chain networks in a bid to realize the economies of scale offered by the single market. Already networks based on a combination of European distribution centers and local, often third-party managed, trans-shipment and delivery centers are becoming common. Pharmaceutical companies, for example, anticipating further deregulation and harmonization, are setting up cross-border networks, while automotive spare-parts distribution is now almost completely "Europeanized." Iveco, an Italian truck manufacturer, has succeeded in transforming its pan-European after-sales and parts business through a lean distribution network and dealer-managed inventory, resulting in a significant decrease in stock, obsolescence, and logistics costs.
But while greater European integration drives a pan-European approach to distribution, congestion on Europe's transport networks is causing something of a counter-reformation. Thus, retailers such as Sainsbury's in the United Kingdom have achieved significant benefits by centralizing inventory and warehousing and are now encouraging third-party logistics providers to create multi-retailer relay centers near source transshipment points to serve the single-retailer regional distribution centers. The aim is to take inventory out of the regional centers as the multi-retailer centers make more frequent deliveries possible without a corresponding increase in transportation costs. Conversely, some companies are moving inventory back to locations closer to the point of use in a bid to overcome congestion. Nor is that the only discernible countertrend. Some organizations that had previously achieved substantial benefits by outsourcing key aspects of the supply chain are now insourcing the outsourced model at the point when no further significant benefits from outsourcing appear to be forthcoming. Examples include Thames Water's procurement function in the United Kingdom and Fiat New Holland's Europe-wide spare parts distribution.
Meanwhile, the long-anticipated move to fewer, larger, and more specialized pan-European manufacturing plants is becoming a reality, particularly in industries such as automotive original equipment manufacturing, white goods, fast-moving consumer goods, and consumer electronics. That, in turn, requires the creation of mixing and local customization centers, the establishment of new layouts, and the adoption of new technology as organizations rethink how to coordinate manufacturing and distribution.
Consumer Values
Although consumers across Europe have widely differing values, they are increasingly developing a common focus on such issues as quality, health, the environment, and time. Manufacturers and retailers are responding by building consumer loyalty through product and marketing strategies based on consumer values. It's an approach that also helps to contain costs, especially in low-growth industries. Unilever, for example, has embarked on a brand-simplification strategy, reducing its number of key sites to 150. Similarly, Procter & Gamble selects "power SKUs" as drivers for growth. Similar trends are discernible in other areas including, for example, white goods. In all these cases, the trend is toward rationalization of product lines across Europe while developing locally specialized, bespoke, or personalized products. Overall, the theme is one of "less is more" as manufacturers square the circle of reducing complexity on a pan-European basis while offering the individual consumer more choices.
Retail
Consolidation in pursuit of efficiency, coupled with intense cross-border expansion, characterizes Europe's retail industry. According to Elsevier Food International, there were more than 1,600 cross-border moves involving European retail companies during the 1990s, and the trend is accelerating. It's also benefiting the inner ring of eastern European countries where such retail formats as hyperstores, supermarkets, and discount stores are now well-established. Moreover, cross-border expansion is not just an internal EU phenomenon, with Wal-Mart bringing its expertise into the United Kingdom through its ownership of ASDA and its more recent interest in Safeway.
In general, European consumers have benefited from increased retail competition through greater choice, improved on-the-shelf availability, and keener prices, while supply chain executives have had to overcome demanding challenges in order to deliver the required levels of service while reducing total costs. To that end, leading retailers have in hand or have already completed supply chain re-engineering in pursuit of much higher levels of efficiency. United Kingdom retailers in particular have been seeking to extend their supply chains backward to their suppliers, a trend that is also gathering strength in France and Spain.
It's an approach that demands much tighter control of the supply chain as traditional warehousing is replaced by cross-docking in a supply chain based on replenishment on demand. New technologies such as real-time event monitoring and tracking are key to such developments, but even more important is a complete change in the way that retailers manage their suppliers. That, in turn, implies a much greater understanding of the upstream and downstream impact of new approaches combined with an uncompromising operational excellence that demands excellence from each member of the chain.
A number of United Kingdom retailers have launched supply chain and collaboration initiatives with their suppliers, while ASDA, Metro, ICA, Sainsbury's, and some 19 manufacturers and their suppliers have launched a collaborative planning, forecasting, and replenishment initiative in Europe under the sponsorship of ECR Europe.
Similarly, in non-food sectors, retailers are beginning to share point-of-sale information with suppliers. One example is Danish consumer electronics manufacturer Bang & Olufsen, which has access to information from its 2,300 retail clients. Just how far such an approach can be taken is indicated by Spanish fashion retailer Zara, which now operates some 500 stores worldwide. Zara makes sure its young customers come back time after time by delivering as many as 12,000 new designs to the market each year, none of which stays on its retail shelves more than a month. To keep abreast of current trends, its store managers communicate customer feedback directly to its designers using handheld devices, thereby ensuring better inventory management and reduced obsolescence. Short manufacturing runs and access to real-time demand data have allowed the company to cut time to market for new designs from an industry norm of nine months to just two weeks, enabling it to achieve optimal pricing. At the same time, a combination of sophisticated IT and advanced supply chain management tools allows it to optimize manufacturing, managing capital-intensive operations in-house and outsourcing labor-intensive operations to a network of small suppliers with whom it maintains exclusive relationships. The end result is a company growing 20 percent per year while maintaining greater than 20 percent profit margins.
A Congested Europe
No discussion of supply chains in Europe can progress very far without running up against transport congestion. It's an issue made all the more topical by the recent introduction of congestion charging in central London. Road freight traffic grew 2.1 percent faster than European GDP between 1992 and 1997 and 3.5 percent faster between 1997 and 2001 — and there's no sign of a slowdown. The resulting congestion costs an estimated 0.5 percent of European GDP and is predicted to rise to 1 percent by 2010.
EU and industry specialists argue that any solution will necessitate radical changes, which may include, for example, the emergence of a 24-hour economy. It is estimated that allowing the freight industry to deliver at night, conditional on the introduction of "silent transport," would reduce congestion, speed, and pollution levels, and would in turn liberate capacity and enable a step change in asset optimization. United Kingdom retailer Safeway, for example, predicts that extending 24-hour deliveries to the 42 percent of its stores currently under curfew would cut costs by 20 percent.
Rail's small share of freight compared with road is caused in part by daytime congestion on the rails themselves but also by the slow pace of deregulation of rail in key countries, notably, because of its central geographic position, France. Private companies can own and operate freight cars in France, but they rely on the single, state-owned, monopoly supplier, SNCF.
Other beneficial changes proposed include a greater commitment by governments to intermodal rail-road-sea transport and the development of intermodal nodes, the more efficient integration of transport operations into supply chains and the development of clearly defined and separate transport management models for urban and non-urban networks.
At the micro level, IT and Web-enabled collaborative transportation management is enabling shippers to share transport capacity along specific lanes in dynamic short window environments. Some collaborative transportation companies such as Agoratrans and eLogistics are offering multi-party optimization under partnership agreements with and among shippers, thereby reducing empty returns and increasing asset turnover.
At the macro level, the EU has developed a strategic framework and a range of specific initiatives. Key components of this strategy include the creation of a matrix of Europe-wide freight corridors and the establishment of a combined transport trans-European network, or CTTN, to define pan-European distribution via road, rail, and ports and to address national and regional distribution. EU infrastructure optimization schemes include upgrading public transport, introducing heavy transport management regulations, reserving lanes for buses and taxis, and setting up vehicle location centers and special multi-client urban delivery centers. La Rochelle in France, for example, now has a multi-shipper urban distribution center using electric vehicles to deliver to urban stores.
Some experts believe some form of road pricing in Europe is inevitable and are watching the London experiment closely; others look to even higher fuel taxes to reflect the opportunity costs of lost time and infrastructure. Either way, supply chain managers will have to reassess optimal network solutions and may even conclude that the reintroduction of regional stockholding and micro-manufacturing, similar to that of U.S. microbreweries, provides the best way forward.
Unity in Diversity
European supply chains are reacting both to global trends and to the changes brought about by the continued expansion and ever-deeper integration of the European Union. The drive to unity is strong, but the diversity of competitive practices, labor laws, and regulations across Europe's different countries and regions is rich. Thus, while European supply chain executives are confronted by the same challenges as their colleagues in other developed markets, they also face challenges that are specific to Europe, including how to develop pan-European cross-border distribution and manufacturing, how to achieve continental intermodal arrangements, and how to plan for virtual supply chains while coping with widely differing degrees of IT development and a plethora of legacy systems. The winners will be those who can continue to create new opportunities through the implementation of optimized networks and the development of collaborative partnerships on a Europe-wide basis.
