Building a Case for LSP Mechanization

Is your LSP actually taking advantage of economies of scale resulting from servicing multiple clients? Put another way, does your LSP leverage the total handled volume of multiple clients thus allowing for profitable investments in mechanized processes which can lead to increased productivity, lower costs and hence lower rates for you?  Or on the other hand, are the economies of scale limited to the volume he handles on your behalf and likely limited to your contract period?

If your situation is like most you probably have to answer with a resounding NO. Usually an LSP relates investment to a specific client and makes a separate business case for each individual client and considers the contract period of the client alone in its calculations. A result of this approach is that the business case has to achieve a profit within the contract period of the specific client. A contract period of 2 to 3 years is common; however, an ROI of less than 3 years for a mechanized system is very short. As a consequence, the business case typically does not show much of a positive result, if any, and thus the typical LSP will elect not to invest in a mechanized solution to support your logistics. One can argue that this short ROI period requirement forces them to invest and implement only those mechanized projects that are deemed substantially profitable from this type of business case analysis. This holds some validity. Then again, I would propose that a wider scope of opportunities needs to be considered.

One of the main questions for an LSP to consider when contemplating investments in mechanized systems, is whether the characteristics of the handled units will change in the long term after the current contract period. Unfortunately, at least from our experiences, if you were to pose this question to most COOs in the recent past, the COOs would have likely responded that in most cases this would not be factored into their investment decision. Yet the need for this fundamental question is supported by the fact that LSPs tend to focus on customer type and hence on product characteristics per site.

So is the LSP holding back on investments in mechanization even though it could achieve lower costs levels and higher productivity that would in turn lead to more business and lower rates for you as the client? If not, what's holding them back? Risk mitigation is the argument that is often put forward. The biggest fear is that flexibility of mechanized systems is limited. And, therefore there is a potential risk of ending up with a lot of steel that does not have a function anymore after a contract period concludes. However, it's Groenewout's experience that the flexibility of mechanized solutions can be increased by implementing flexible solutions to the system's hard-and software by applying a modular design and construction. This will lower the risk substantially. 

Some more forward thinking LSPs are beginning to slowly adopt a broader concept in their mechanized solutions investment decisions. I suspect that the forced reflection period brought on by the economic crisis in Europe and elsewhere in the world will change the approach of LSPs regarding warehousing strategies, focusing more on long lasting partnerships, collaboration and the willingness to invest in a multiple client concept instead of a single customer concept. This type of approach can provide a win-win for both the LSP and the client.

I would be delighted to receive personal accounts of logistics obstacles and challenges that readers of this blog have encountered.  Please email me at mail@groenewout.com

  

Does one size fit all? The influence of logistics in e-retailing.

There is no doubt that the Internet is very important to corporations and to consumers alike. It offers us convenience and a lifestyle that we can all appreciate very much. I venture to say that our generation, and certainly our children, are so addicted that we can't live without this technology. Imagine when we want information about a company or a product which we intend to buy; we just surf to the most popular search engines like "Google" and within seconds we receive a plethora of links. Two decades ago we would have wasted a half day for the same search. The Internet makes our life easier and more effective.

Internet access for the households in the EU27 is well represented for only a small number of countries. However, there is still huge potential of new e-customers in Europe. We expect that the e-shopping culture, given the digital century that we live in, will grow enormously in the coming years. More and more European companies are aware of the Internet's role as an additional sales channel but aren't quite sure how to organize the logistics back-office.

Before you start to explore all kinds of sales activities via the Internet, you need to be aware that logistics (your back-office) is critical to your success. A good looking website is absolutely not enough! The road to e-tailing is crowded with the corpses of enterprises that failed because they lacked the "back-office" support, i.e the original eToys.com is in itself a case study of how not to do it. A good website must be supported with an efficient logistics infrastructure. That's the basics! It's not as easy as it might appear at first glance; certainly not for those Click retailers which don't own assets (no warehouses and no inventories) and/or have limited visibility into their supplier's inventory levels. These e-tailers mostly use the so called "drop-shipping" concept. Under this business model, supply chain connectivity between the different IT-systems is business rule number one.

The other category of companies, namely the Clicks and Bricks retailers (Tesco.com, Staples.nl, etc.) which also aim to operate along the Internet, have the advantage of having their own assets (warehouses and inventories). From an in-house e-fulfillment point of view, the Bricks retailers have a relatively easier job to launch an e-tailing business because they already possess an existing distribution infrastructure and available products on stock to deliver.

From an outsourcing perspective, warehousing and/or distribution activities could be operated by a logistics service provider. The question is whether or not outsourcing is part of the overall company strategy? Outsourcing can at least minimize capital entry hurdles like buildings and equipment requirements. In this case, all categories of companies have more or less the same level of difficulties to operate an e-commerce business.  

Room service or not?

It depends on the customer's choice. If for instance, a guest of a hotel chooses for room service, he or she normally gets the service that they asked for delivered quickly but pays a premium for the service. If we expect the same treatment on a logistics level, it is only normal that additional services, like home delivery, must carry a premium. In doing so, the promised services (the right products along with the agreed upon conditions and price) must be respected by the seller. Unfortunately, this is not always the case. The customer pays for room service, but sometimes receives a lower service level than the standard service levels.

The e-customers will almost always go for the best quality as compared to the lowest price and best service. If you don't meet the customer's expectations, he or she will go somewhere else. Moreover, the customer is better informed about your competitors than you might think. If we assume that the quality level and price of your products are very competitive and that the e-customers know it, he or she will go for the best service. But what is service for him or her? Service is delivering the right product and the right amount in the right packaging mode within the right time-frame, preferably as soon as possible. Now we enter the realm where you can make the difference and that's with logistics. You can only deliver your e-customers the expected service levels if you succeed in developing the best and most cost-effective logistics network. Therefore "One size fits all" is not the solution!

I would be delighted to receive personal accounts of logistics obstacles and challenges that the readers of this blog have encountered. Please email me at mail@groenewout.com  My colleague, Mo Lasgaa, co-wrote this blog.

  

  

  

   

Logistics as a business discipline has experienced a remarkable evolution in professionalization; the MRP concepts (late '70-s), the Theory of Constraints of Goldratt (mid' 80-s), the Collaborative Planning Forecasting & Replenishment (CPFR) initiated by Wal-Mart (mid'90-s) and the Sales & Operations Planning (S&OP) in ('00-s). This begs the questions - does your current logistics organization mirror these developments, or does your logistics structure still consist of just a transport- & warehouse manager/director with a direct report to the plant manager?

Where the classical logistics manager presents himself/herself as the budget owner for transport- and warehouse costs, the modern VP Supply Chains has become an initiator for multi-disciplinary process improvements with the objective of providing a competitive advantage to the company as a whole. The VP Supply Chains strives to optimize the end to-end supply chains through collaboration with external partners in the supply and demand network.  

Without expressing a judgment, it's clear that these two roles operate on different business levels with different stakeholder: i.e. the operational efficiency within the transport- & warehousing arena versus the strategic financial interests of inventory working capital and cash-to-cash cycle time. Particularly within the large multi-nationals, both roles are separated between different staff members; however, more often than not reporting through the same hierarchical lines. Mid-sized companies typically combine both roles into one function (FTE), under the assumption that both roles separately do not require a full working week.

Selecting the right person for the right job is of the utmost importance as both roles require different management styles. A business process manager will not necessarily be able achieve the maximum operational output in the daily warehouse operations, as where an operational manager will not necessarily be able to do this within an S&OP setting. 

Global versus local

A logistics manager focuses mostly on improvements on a national/regional level, e.g optimization of warehouse operations or the negotiation of lower carrier rates. In most professional organizations such initiatives are coordinated and standardized on a European/global function; however, the European/global organization is typically just a facilitator, as the practical implementation remains the responsibility of the local legal entity. For this reason a logistics manager is most effective when directly reporting into the country organization with a dotted line to the VP Supply Chains. 

The preferable organizational structure for the supply chains management role is however distinct from that of the logistics manager. Principally, Sales & Operations Planning is an integrated management process that synchronizes different business functions as sales, production, logistics, purchasing and finance. The S&OP concept looks for international coordination rather than in-country optimization. Apart from that S&OP should embed global escalation procedures, for instance, determining which countries are awarded product volumes in periods of inventory shortage. From this perspective supply chains should per definition be impartial and positioned above all parties involved, both geographically as well as hierarchical.

In today's environment, competition is more broadly defined than just companies competing against companies, but rather supply chains competing against supply chains. Companies that adapt to implement a dual logistics structure will be able to achieve a competitive advantage. By using a top- down approach, the VP Supply Chains can ensure that market demand will be fulfilled with the most effective use of resources. However, in order to service today's agile consumers, the bottom-up approach of the logistics manager is equally crucial to guarantee that an efficient, flexible logistics operation is steadfastly maintained. In such a setup, 1+1=3, provided that both logistics roles pursue the same goals and continuously align their actions. 

Cross supply chain control centers, what's in a name...?

The Dutch government recently affirmed Logistics and Supply Chains to be one of its focal points for the foreseeable future. This of course comes as no real surprise inasmuch as about 10% of its total workforce is employed in this sector. With this strategic choice to focus on logistics the government has expressed the desire to turn The Netherlands into a “supply chain orchestrator”. To fulfill this function they seek to encourage cooperation amongst different supply chains rather than cooperation within any one single supply chain.

 

 

 

Unfortunately, most companies still only focus on vertical supply chain efficiency, rather than also on horizontal alignment, though there are some examples of those that do. Consider the two competitors in sanitary products, Kimberley Clark and Lever Fabergé, they deliver their products out of the same warehouse, and within the electronics sector two electronic manufacturers, Samsung and the major household appliances firm, Miele, both operate out of the same warehouse to increase volume per drop.

 

In order to achieve operational excellence and maximize sales margins, competition today must be won between supply chains rather than just between individual companies. Therefore it is crucial that companies recognize that that the optimization of their internal/vertical supply chain be assigned a high strategic level of importance. However, given the fact that most corporate supply chains reach maturity in a short span of years, it is vital to actually start looking now beyond the boundaries of your own supply chain. By being an early adopter, you can gain a significant advantage over your competitors.

 

Without a doubt, not joining now would not only be a missed opportunity, but it could also be a direct threat to your competitive advantage and consequently your business continuity. This is not the case just because the Dutch government sees the potential of cross supply chain initiatives, but especially because the largest supply chain opportunities in the next decade are likely to be found in cross supply chain collaboration initiatives. This will happen without question in Europe and certainly as well in the USA.

 

I am very curious if any of the readers of this blog will be amongst the first adopters of this new direction. I would be pleased to hear about any great examples of parties collaborating with other supply chains.   

 

www.groenewout.com

mail@groenewout.com

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

European Transport: How to cope with a fragmented marketplace?

Despite the fact that the creation of the European Union in the early 90's established a free trade zone that erased (administrative) borders throughout much of Europe, the execution of transportation within the EU is still very country oriented and fragmented. This is a very specific characteristic of the EU that business planners must be keenly aware of when setting up or restructuring a supply chain and transportation activities in Europe.

The Marketplace: multinational carriers versus national focus

An excellent example of this fragmentation is the European integrator DHL. DHL recently announced its intention to sell off its parcel business for day definite deliveries in the United Kingdom and France. DHL will instead focus on 'time definite' parcel deliveries (with its higher rates and margins especially at the international level.)  It's obvious that DHL hasn't been able to make its day definite parcel business profitable in these markets although these are two of Europe's biggest countries.  

We know that carriers like DHL, TNT, UPS and FedEx are strong in international express throughout Europe due to their air-lift capabilities to connect national road based networks. However, they have not been able to establish their own complete networks all over Europe. For years now these integrators have tended to subcontract out their deliveries to lower density areas. In fact, in each country there are strong national carriers with road based pallet-and parcel networks with which these larger transnational carriers have found it very difficult to compete with. So, if one is striving for the best value for the money all over Europe and lead-times of 48-72 hours are acceptable, the best solution could be a patchwork of the best-in-class of local carriers.

4PL Solution: their added value versus European culture?

This type of patchwork of carriers requires a professional organization with sufficient resources to manage. You have to cope with maintaining and developing relationships with local carriers and local know-how, addressing operational issues/concerns and aligning internally with one's (local) sales offices and IT support.

This challenge can be resolved (at a cost) by contracting with an integrator that provides you an account manager who will look after your business by supervising local managers, who in turn will again work partly with other subcontractors for any non-core activities.

True 4PL transport-management solutions are still scarce in Europe. Penske has a European organization that is merely a satellite of the US and works on corporate contracts of US-based companies.Schneider Logistics has just closed its offices in Europe after 10 years of trying to build a winning business model. Even with having Ford and Philips as major clients, Schneider failed over the long run in Europe. The lesson learned might be that it is difficult to add value as a 4PL in Europe or it could simply be the difference in business cultures between the US and Europe; managers in Europe tend to want to keep control in their own hands more so than in the US.

All things considered, the best practice for pan-European transportation is perhaps a properly managed patchwork of (local) carriers. If you're quality/costs ratio is disappointing and your own organization is not capable of improving quickly, you might still consider using a 4PL. However, once you have achieved a steady state situation, consider in-sourcing again.

Heavy Snowfall in Europe: What's the logistics impact?

Heavy snowfall in Europe this winter has impacted logistics operations on all fronts; airports have closed runways, large numbers of people weren't able to get to their work places, traffic at shops has been significantly lower, transportation of goods has been delayed, rail tracks have been frozen and roofs have been forced to carry more weight then usual. All in all, this weather disaster has caused lots of logistics chaos across Europe.

There is a direct influence on your logistic operations if roads or airports are not accessible. Usually, the government will only maintain the main roads and on some occasions there is even a need to close roads for safety reasons. This results in huge transportation chaos due to delays of inbound trucks and affords little guarantee for the delivery times of your outbound trucks.

Under such weather conditions your problems are further compounded given the uncertainty as to whether all your own personnel will be able to reach their work destinations. This prospect leads to lost productivity at the worst time. Imagine this occurring during the immediate weeks leading up to the Christmas holidays. Consumers react to these weather conditions by limiting their trips outdoors to buy only necessary things, accordingly some shops, for example luxury items or furniture, will have less sales which will in turn impact stock levels up and down the supply chain. Consequently, your stock and day to day normal processes have to be monitored and adjusted to the situation day by day.

During a long period of low temperatures and snowfall, ice dams form on plant and warehouse roofs. Ice dams are formed as follows; the heating in your plant, warehouse, office or just the sun, causes the snow to melt, the melting water will flow towards the gutters and downspouts. If the temperature is significantly below the freezing point the water will start to freeze when it hits the cold surfaces. Gutters and downspouts will get filled with ice, so the remaining melting water will be stopped by the ice dam and cannot properly drain off the roof. The remaining melting water will try to find its way via other holes and possible cracks in your roof. After leakage, the other major risk is that the roof cannot handle the weight of the snow and water and could eventually collapse, injuring personnel and/or damaging materials or stock. Such an event could literally force the closure of an operation, at least until repairs are made. In most cases, it's better to take preventive measures and remove the snow from your roof. To avoid such circumstances, it's best that you inspect and clean your roof, gutters and downspouts on a regular bases to prevent ice dams or leakages.

These are just a sampling of the kinds of logistics nightmares that can accompany such drastic and harsh weather conditions as we have just witnessed throughout Europe. These weather induced events can put your business at risk. Is your organization prepared to cope with such severe weather conditions? If not, it would be prudent to develop contingency plans for just such an event. This type of planning can make a big difference in how well your firm can weather the storm.

Distinctly different roles, but equally important

Logistics as a business discipline has experienced a remarkable evolution in professionalization; the MRP concepts (late '70-s), the Theory of Constraints of Goldratt (mid' 80-s), the Collaborative Planning Forecasting & Replenishment (CPFR) initiated by Wal-Mart (mid'90-s) and the Sales & Operations Planning (S&OP) in ('00-s). This begs the questions - does your current logistics organization mirror these developments, or is your logistics manager still a transport- & warehouse manager with a direct report to the plant manager?

Where the classical Logistics Manager presents himself/herself as the budget owner for transport- and warehouse costs, the modern VP Supply Chains Manager has become an initiator for multi-disciplinary process improvements with the objective of providing a competitive advantage to the company as a whole. The Supply Chains Manager strives to optimize the end to-end supply chains through collaboration with external partners in the supply and demand network.  

Without expressing a judgment, it's clear that these two roles operate on different business levels with different stakeholders; i.e., the operational efficiency within the transport- & warehousing arena versus the strategic financial interests of inventory working capital and cash-to-cash cycle time. Particularly within the large multi-nationals, both roles are separated between different staff members; however, more often than not, reporting through the same hierarchical lines. Mid-sized companies typically combine both roles into one function (FTE), under the assumption that both roles separately do not require a full working week.

Selecting the right person for the right job is of the uttermost importance as both roles require different management styles. A business process manager will not be able achieve the maximum operational output in the daily warehouse operations, as where an operational manager will be not be able to do this within an S&OP setting. 

Global versus local

A logistics manager focuses mostly on improvements on a national/regional level, e.g optimization of warehouse operations or the negotiation of lower carrier rates. However in professional organizations such initiatives are coordinated and standardized on a global/European level via the exchange of lessons-learned or global/European transport contracts. This global/European function however is just a facilitator, as the practical implementation remains the responsibility of the local legal entity. For this reason a logistics manager is most effective when directly reporting into the country organization with a dotted line to the VP Supply Chains. 

The preferable organizational structure for the VP Supply Chains Manager's role is however distinct from that of the logistics manager. Principally, Sales & Operations Planning is an integrated management process that synchronizes different business functions as sales, production, logistics, purchasing and finance. The S&OP concept looks for international coordination rather than in-country optimization. Apart from that, S&OP should embed global escalation procedures, for instance, determining which countries are awarded product volumes in periods of inventory shortage. From this perspective supply chains should per definition be impartial and positioned above all parties involved, both geographically as well as hierarchical.

In today's environment, competition is more broadly defined than just companies competing against companies, but rather supply chains competing against supply chains. Only those companies that adapt to and implement the dual logistics structure will be able to achieve a competitive advantage. By using a top- down approach, the VP Supply Chains can ensure that market demand will be fulfilled with the most effective use of resources. However, in order to service today's agile consumers, the bottom-up approach of the Logistics Manager is equally crucial to guarantee that an efficient, flexible logistics operation is steadfastly maintained. In such a setup, 1+1=3, provided that both logistics roles pursue the same goals and continuously align their actions. 

Tax Effective Supply Chain Management, a European Imperative

The concept of tax effective supply chain management isn't a new concept; nonetheless, its importance in Europe can not be over emphasized. In order to attain a competitive edge within Europe, every component of supply chain planning and management should be woven within a thorough analysis of tax effective supply chain management.

Consider for instance VAT and its impact on cash flow. Businesses in Europe are in principle able to recover VAT on the materials and services that they buy to make further supplies, products and services that are directly or indirectly sold to end-users. The key determinate within the EU in deciding which member state collects VAT is where the supply and consumption occur. The current maximum standard VAT within the EU is 25% (this is the rate in Sweden) and the EU's standard minimal rate is 15%, as is the case in Luxembourg. The period for recovery of VAT can span from two months in France, three to four months in Germany and eighteen months in Italy. When a company imports goods into any EU country from outside of the EU, VAT becomes due. Herein lies the problem, the interest cost necessary to finance VAT payments prior to reimbursement can be significant. One needs to look beyond just a member state's official rate and investigate country specific VAT payment schemes. A number of EU countries offer VAT payment postponement schemes, typically 30 days. However, The Netherlands and Belgium (with some limitations) offer complete VAT deferments with quite reasonable administrative requirements.

The Dutch system of VAT deferment for imported goods is without a doubt in this author's opinion the most convenient and cash flow friendly scheme. Under this scheme, the import VAT is declared in the VAT declaration but it doesn't have to be paid. For companies struggling to maintain positive cash flow in tough market environments or companies just beginning direct distribution in Europe, the impact of such schemes on cash flow can be significant. Therefore, it's critical to calculate and analyze the potential impact of VAT on cash flow and available deferment schemes in selecting countries for the importation of goods and the placement of distribution operations.

As with VAT, import duties have similar impacts on cash flow. Normally, duties are due on importation within the EU. Import duties are the same throughout the EU, however, as with the case of VAT, EU countries offer differing schemes for postponing payment of duties. Many have significant restrictions and administrative hurdles in such schemes. Once again, The Netherlands and Belgium offer attractive schemes through the use of customs bonded facilities. While not a novel concept, the advantage of these facilities is that goods don't have to be stored within specific trade zones; instead, companies can have their own warehouse facilities  designated as customs bonded warehouses, which are self administered. In these facilities duties are not paid until the goods are shipped out of the facility into free circulation within the EU. However, if goods are shipped out of the bonded warehouse directly to customers outside of the EU, duties for those goods are no longer due to that EU country. Such advantages are not limited to The Netherlands and Belgium, but the key take-away point is that not all schemes are the same. Do your homework in advance.

Duty payments are assessed on goods based on the county of origin, the type of goods and the goods'  value. Therefore, there could be an certain monetary advantages in shipping products into the EU as sub assemblies instead of finished goods depending on the difference in assessed duties. There is no question that companies have realized substantial savings by employing this strategy. Another consideration is whether to produce or assemble the final product in non-EU Eastern European countries that  have achieved candidate or pre-candidate ascension status. Such countries, like Macedonia, have been granted preferential trade status which has provided them with subsequently lower duties for products imported into the EU. Given the trend toward more onshoring and nearshoring, the combination of extremely low labor rates, proximity to market and the incremental reduction in import duties, companies should seriously evaluate the opportunities afforded by locating certain production in Eastern Europe.  

Perhaps the most critical factor in planning and managing a supply chain in Europe is developing an optimal structure for the procurement of goods, production and sales/distribution of product and services in Europe that minimizes corporate tax liability. I have personally witnessed companies reduce their annual tax liabilities by tens of millions. The most popular structure is accomplished by the formation of a Principal company in a country that offers a specific tax ruling for this type of structure. The two countries known for giving the most competitive rulings for Principal companies are Switzerland and Ireland. These ruling reduce corporate tax liabilities respectively in these countries to effective rates of about 9.6% and 12.5%.

Without going into too much detailed tax law, a Principal must assume certain activities and risks; i.e. raw materials/component procurement, contracting for consignment/contract manufacturing within or outside the corporate group, outsourcing logistics to providers inside and outside the corporate group, demand/planning, IT,  R&D , supply chain management, etc. In order to make this structure work, European country affiliates are converted to legal entities know as either "Commissionaires" or "Limited-risk distributors" with only slight differences between the two. The sale and distribution is then done in each country by the  foreign distribution affiliate for and on the account of the Principal company. Thus, only a portion of the sales profit is attributed to the "Commissionaire" or "Limited-risk distributor" which is typically located in a much higher corporate tax base country. The logic behind the concept is to reduce exposure of profit in these high tax base countries and have it flow up to the low tax base country; i.e., Switzerland.

This structure takes some extensive planning, organization and execution (such as acquiring tax rulings in all the host countries affected and relocation of personnel). Nevertheless, the tax savings can be substantial. Moreover, there are a lot of synergies that can be gained and redundancies avoided by this structure. In particular, it allows for centralization of pan-European supply chain management teams which in turn avails itself to enhanced visibility and dash board controls. This kind of supply chain management centralization is increasingly crucial to sustain the many hybrid distribution models, i.e., virtual inventory management, that are being utilized throughout the European region; a region with many unique and fractured markets.  

By no means is this an exhaustive or in depth discussion of why good tax effective supply chain management is so important in Europe. None the less, it hopefully defines why this is a salient issue that must be given careful attention across all levels of management, and it especially behooves senior Supply Chain management to grasp the big picture. In a world where so many products have become mere commodities, those companies that thoroughly grasp and execute good tax effective supply chain management can not only survive but also profit from its practice.   

 

 

 

  

  

Going Green in European Supply Chains

Although green pressure groups have been around for a long time, Al Gore's movie "An Inconvenient Truth" in 2005 was the first statement in this area that shocked audiences worldwide and made them realize the importance of having an opinion on this subject. Supply Chains are typically global in both reach and impact, thus they offer highly visible areas where important gains can be won when it comes to sustainability. Yet prior to 2005, developments toward greener logistics and supply chains were still moving at a snail's pace. Many companies found it fashionable to incorporate it as part of their social responsibility mission statement but only a few companies really invested in it around 2005.

Two developments have tipped the scale in Europe and put it in capital letters on corporate agendas. The current recession has added a heavy hitter in the game. Due to substantial government investments made in order to keep their economies going, governments in Europe are now without a doubt in the driver's seat. This has provided them with a vehicle by which they can accelerate the implementation of their own agendas, and sustainability unequivocally happens to be on the top of most lists. Accordingly, governments and green lobby groups are stepping up the pressuring on corporations to reduce CO2 footprints and some avant-garde corporations are already wisely maneuvering to use the issue as a competitive advantage. In the not to distant future the lack of sustainability will become a dissatisfier. The second development was the rapid climb in energy prices in 2007/2008. While somewhat temporarily abated, this event has served to dramatically draw corporate focus to the reduction of their energy consumption, which has the added immediate benefit of driving down transportation and operating costs.

One doesn't have to look far in Europe to witness numerous examples illustrating the green movement in supply chains. In the UK a label for groceries has been developed that shows in a boarding ticket style the origin of the product and the amount of CO2 related to transporting the product ( e.g. apples or kiwis) from the point of origin to the grocery store. This serves to educate the consumer and empowers them to affect change. Our own experience in distribution network studies buttresses the notion that the CO2 footprint criteria is gaining fast in importance. France is preparing laws that will dictate that with every shipment the CO2 output will need to be shown on the invoice.

In the recent past, investors were generally only focusing on their fixed investment costs rather than facility running costs. That was a concern more or less for the tenant. It's not enough any longer to just build boxes that meet structural guidelines (e.g. floor flatness) and adher to safety and building codes (e.g. sprinkler systems, wiring, etc.). Instead, investors in new warehouse real estate now need to focus on technology and building techniques for facilities that will promote energy conservation and sustainable materials usage as keys to insure that they will be able to find tenants for their warehouses ten years out in the future.

If developments in sustainability keep at the current pace, companies operating in Europe need to be sure that they get on the bandwagon in time.  If they don't they shouldn't be surprised to wake up one day and discover that it is dramatically affecting their business or that they are even going out of business!     

I was recently in a meeting with a senior corporate supply chain manager who told me that his company had the intention to start selling its products in Europe. He showed me some plots of expected customer densities. He had obtained a European map depicting the "blue banana", a region which represents the heart of all trade flows, where most of the customers, wealth and industry in Europe are clustered. They were looking for a site location for their proposed European distribution center only within this specific region.

 

He prompted me several times for my opinion as to where that I would recommend they locate within this specific region. I responded that it wasn't so cut and dry. Instead of giving him my opinion in response to his question, I asked him some probing questions in return which triggered him to go back and do some additional research, such as:

Do you know which countries (e.g. The Netherlands) provide tax ruling, whereby you only have to pay VAT duties once you have sold your products? That could save you substantial funds in the long-run since you won't have to prefinance your taxes.  

Did you consider whether it might be advantageous to assemble your products in Europe? Import duties on sub-assemblies for some products are far less than import duties on the final products. For example, one electronics sector company brings in sub-assemblies in from Asia and then assembles them in Poland, thereby saving 14% on import duties.

Are you aware of local subsidies / incentives to settle in non-hot spot areas? These could influence your business case for a preferred location. You need to be keenly aware of specific subsidies that might be available in these less popular locations; e.g., reduced square meter price for land, temporary reductions in employment taxes, tax holidays, etc. All of these can add up and can be very financially beneficial. Such costs savings can be critical in the initial European market penetration as your fixed costs are spread over fewer sales.   

Needless to say that there are numerous other issues impacting your supply chain footprint in Europe and its overall costs. Site location is one that you typically have to live with for a significant number of years and one that can have a major impact on your initial investments and running operational costs. It's essential to recognize that both EU and country specific rulings and regulations can greatly influence your supply chain costs. It's easy to follow the herd instinct and follow your competitors to the prevailing popular locations, but that can be a costly pitfall. Try to avoid entering the site location process with a preference to just follow what is trendy with the industry; instead, do your own thorough analysis and calculations trying hard to avoid entering the process with preconceived notions. On the other hand, be cautious about arriving at site location decisions that are solely financially beneficial in the short-run but won't meet the needs of your business model in the intermediate and long-run.   

As a result of today's economic crisis numerous companies throughout Europe are scrabbling to identify various means to reduce their operational costs.  Inasmuch as the supply chain is the linking pin between the different company processes of production, sales, marketing and purchasing, the supply chain accordingly plays a vital role towards the achievement of these costs savings.  Unfortunately, the typical supply chains solutions that I so often see implemented are rather knee jerk and can have a converse effect, even from a short-term perspective, but especially when viewed in the intermediate-and long-term.  This of course is not exclusive to companies operating just in Europe but can be witnessed globally among companies operating internationally.

One of the first supply chain measures frequently implemented is the reduction in inventory levels (even greater than the actual demand drop), i.e. reduce working capital.  On a company level this is generally considered as a financially effective, practical and agile response.  However, if one reviews this measure on a multi-company supply chain network level, it has a different effect.  On top of the actual demand reduction in the market, the upstream supplier of raw materials is confronted with an additional demand fall because its B-2-B customer is also actively reducing its inventory.  Because this effect accumulates upstream, companies at the start of the supply-demand chain can experience tens of percent demand reduction in a period of just weeks.  In my opinion this is one of the reasons why the chemicals industry is hit so hard by the recession, being the early source of most supply- & demand networks.

Another easy gain that supply chain professionals typically pursue during a recession is a cut down on the day-to-day cost of transportation.  Logistics Service Providers (LSP's) are confronted with companies conducting all kinds of logistics tender procedures with the sole objective to renegotiate their current transport rates and find the cheapest LSP.  Shippers have the opportunity because of the on hand surplus in transportation capacity during a recession.  This transport rate erosion however is disastrous for the quality of the transportation- & warehousing sector in the mid- & long-term.  The already small profit margins in the transportation sector leave no room to any further extent for structural investments in transport quality- & efficiency.  This is especially troubling when one considers the fact that in some industry sectors in Europe over 60% of companies outsource logistics activities.  In the long-term such a logistics standstill could cost shippers more than the short-term savings.

Today's supply chains have developed from single line logistics supply chains to international, global supply- & demand networks.  Product sourcing is done from different continents, competitors are used as co-packers or perhaps the customer manufactures as well for its supplier.  Suppliers have a far going logistics dependency with their customers through concepts as Vendor Managed Inventory and different supply chain structures are operated within the same company for each individual product/market combination.  In such complex network structures there are no simple one-company solutions anymore.

Supply chain professionals should especially understand this and prevent sub-optimization during a recession by thinking in terms of multi-user networks and long-term partnerships. Ultimately the cost savings you realize  as an individual company are only as big as the savings of the weakest link in the supply-demand network that you are part of.  In these economically challenging times this kind of an approach takes courage and a multi-disciplinary vision.  If there is one business discipline which should (already) have adopted this management vision, it is Supply Chain Management.  No doubt tough economic times sometime dictate tough decisions, but supply chain professional must be careful to avoid the silo mentality that so often takes place in the other functional areas of corporations.  If anyone should have the big picture, it should be the supply chain professional.