The challenge of the East

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[asset_ref id=”69″]In Moscow today it is not unusual to see many fashionable, affluent women dressed in Armani – three years ago that would have been quite unheard of. The market for Western consumer goods in both Russia and the EU accession countries in Eastern Europe is literally exploding. Virtually every major consumer brand is targeting these markets and demand for warehousing and supply chain support services are burgeoning. And that is the biggest problem.

In many Eastern European countries not only does the logistics infrastructure lag well behind what these major branded players take for granted in the West, in some cases it is almost totally absent, while local rules and regulations can be a pitfall for the unwary.
In Romania, for example, there are just 50km of motorway in the entire country – elsewhere it is single or double track roads with a very good chance of encountering a horse and cart around the next bend. In Russia you have to use Russian trucks and truck drivers which can mean transferring to local carriers at the border, while crossing into Belarussia (next to Poland) will take at least a day for truck drivers to negotiate both customs, and another day when exiting the country.

There is a dearth of warehousing facilities, too, in many areas which means that Western companies used to exclusive distribution centres must generally opt for common user operations, which may not always be in their preferred location.

In search of a strong work ethic
Top of the ‘issues’ list, especially in Russia, has to be HR: recruiting and retaining good staff can be a major headache. There is a considerable lack of the basic warehousing skills – such as knowing how to drive a forklift truck – that we take for granted in the labour pool in the West, which means that far greater effort is needed in training. Productivity can also be significantly lower in some countries and staff churn is high. Obviously there are exceptions, Polish workers, for example, are excellent and we have, from time to time, used Poles to train our Russian warehouse staff. Younger Russians, too, have a strong work ethic and we have some very talented junior managers who will certainly go far. Even so, finding the right basic warehouse operatives can be a challenge.

And it is not just different work ethics or skills shortages that are the problem. In Russia language is a real issue. Very, very few people speak English and because Russian uses the Cyrillic alphabet (as indeed, does Serbia) almost all IT systems within the warehouse must be translated, which can be a major undertaking when you look at the sort of hand-held RF devices commonplace in Western distribution centres.

In addition there are public transport issues. It is difficult to replicate the sort of shift patterns we have in the West as in many parts of Russia the public transport which would enable staff to get to and from work at night or in the early morning is simply not there. Instead of running warehouses 24×7 you are limited to a single shift – so reaching the same levels of efficiency and productivity as in the West is inherently unachievable.
If you are planning a new distribution development in the West then you generally start with the operational concept and look for a warehouse site with staff recruitment well down the list. In Russia it is almost reversed with planning and training staff often the key priority if the development is to run smoothly and to schedule. Last May we opened a new distribution centre in Russia for an automotive customer with just 20 fulltime staff. Ideally we need around 130 full-time employees with perhaps 30 or so agency staff for peak times, but six months later we’re still only at 90 full-timers, with 50 agency people, and I expect it will take us another nine to 10 months to reach a full and stable complement. You just have to accept that everything in Russia takes a great deal longer to deliver.

At the same time, the growing volumes of affluent and sophisticated shoppers expect the same sort of service levels that are familiar in the West – as indeed do the Western companies supplying them. The Muscovite shopping in Ikea expects the shelves to be well-filled and not half-empty because the shift’s delivery drivers failed to report for work.

Most of these consumer goods have to be shipped in from the West as at present there is very limited production capability for this type of merchandise – even less as you go further East. Simple things like shampoos, hair sprays as well as those Armani fashions, all have to be transported across challenging borders, as with Belarussia, and that takes time. Western supply chain concepts, such as demand-driven replenishment, can no longer be applied and, if the shelves are to be kept filled, both CPG suppliers and retailers have to depend on far greater safety stocks than they would in the West.

It’s the same with the automotive industry: affluent Russian consumers buying Volkswagens expect the same sort of world class service and after sales support as their counterparts in Berlin or Paris. However, when you have a logistics infrastructure which lags a number of years behind Western Europe, delivering the brand promise is a challenge, but it has to happen.

While CPG companies selling to the East face distribution challenges, so too do manufacturers moving production plants into these areas. Developing the basic production facility is straightforward enough – simply a matter of replicating standard operations. It’s the raw materials supply and export of completed products that are difficult. Just as Western retailers selling in Russia have to carry high safety stocks, so too do manufacturers: they have to adjust all their just-in-time methods, at least for the time being, if they want to avoid interruptions to the production line due to stock-outs.

As a logistics service provider, DHL Exel Supply Chain is working hard with local companies in Russia and other Eastern European countries to accelerate learning and understanding of Western supply chain methods and demands. Even so, it will take at leastthree years for these local businesses to approach the ‘world class’ operations Western companies expect.

Selecting the right management team
We’ve learned from our mistakes and realise just how important it is to have the right management teams in place and how long it can take to achieve a stable workforce. Usually in a start-up operation we initially bring in ex-pat managers to establish processes and operations, but we always aim to bring on local staff as soon as possible. We have some very good managers based at our Moscow operations, but they tend to be significantly younger than their Western European equivalents, so they often require experienced mentors to guide them.

If HR is top of the ‘to do’ list when planning operations in the East, then finding a good partner has to be second. It’s vital to work with companies which have experience of Eastern markets and their challenges. DHL Exel Supply Chain operations are growing very rapidly: we’ve taken on around 1,300 staff in Eastern Europe in the past 15 months and I expect we’ll add another 1,000 over the next year, giving us a total workforce of more than 3,500.

We’ve also recently opened common user distribution centres at Pushkino North-east of Moscow and at Gostomel in the Ukraine.

Moving into Eastern markets takes planning – far more planning than simply opening operations in another Western European country – but it is certainly worth the effort and investment. These markets are expanding very rapidly indeed: typical growth rates are seven to eight per cent which is more than twice that of many Western European countries. These are young economies with an increasingly affluent and aspirational emerging middle-class eager to buy Western goods. There are also a great many of them: Russia’s population may be declining but there are still around 144 million Russians with some 51 million people in the Ukraine, while existing Eastern European accession countries have already added 73 million people to the EU and Bulgaria and Romania will add 32 million more.

It will take time for these economies to reach Western European standards but they already represent highly lucrative markets for Western CPG suppliers and retailers. As their standards of living improve, these markets will grow still further. Moving East does not bring quick wins, its tough and requires considerable effort to develop the labour force and management skills: it’s a long game – but the younger generation learns fast and they are the future.

Leigh Pomlett is CEO for DHL Exel Supply Chain, Eastern and Western Europe. He can be contacted at:

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