The new Europe
Up until April 30, 2004 the EU comprised 15 member states, known as EU-15. However, that changed the next day on May 1 as the EU enlargement process began with the addition of ten new member states – known as the Accession Countries – and will now be referred to as the EU-25 (see Box 1). Furthermore, a number of other countries will seek EU membership at a later date.
EU enlargement has been dominated by new membership, mainly from east European states including Poland, Slovakia and Slovenia. The media, responding to the enlargement debate, has concentrated attention on the perceived likelihood of a massive east to west labour migration. Concern has been expressed that countries, such as Britain, would be to the forefront in attracting a disproportionate influx of new migrants. Indeed, much of the concern in Western Europe has centred on the financial cost of admitting East European countries and the corresponding impact upon the labour market, housing, schools and social fabric of society.
But this is not the whole story. If considered from the logistics industry’s perspectives there are other aspects of the EU enlargement debate that need to be addressed. One includes the issues surrounding the location of future distribution centres (warehousing and freight multimodal developments), which form an essential and important element in the logistics supply chain. Two comprehensive reports just published help towards filling this knowledge gap. These publications include:-
*A report by DTZ Research, European Logistics Markets (see Logistics Manager April 2004 for a summary).
*A report, EU Enlargement: European Distribution Centres on the Move, produced by Cap Gemini Ernst & Young (CGE&Y)
DTZ report
The first report by DTZ, while broad in scope in highlighting and discussing some of the key issues across the European logistics markets, does nonetheless directly address the aspect of locations in the new enlarged Europe. According to the report, logistics will be one of many industry sectors that will be affected following the EU enlargement. The DTZ map (see Map 1) illustrates the attractiveness of regions in the EU as locations for logistics operations.
The New Europe map shows the results of a weighted index constructed by DTZ Research. The index comprises various economic, business environment and transport infrastructure factors, such as labour costs, employments, proximity to population centres and business environment measures across 27 countries. The results give an indication of the relative potential for logistics activities in different European regions. This indicates that the top ten locations include logistics locations such as Paris, Milan, London, the Randstad and north-western Germany.
The report concludes that although EU enlargement will no doubt have an effect on the logistics requirements, key locations in the EU-15 markets are unlikely to be affected by the expansion of the border eastwards in the short term. For example, the concentration of skills and advantages in the Dutch-Belgian border area would make a rapid eastwards shift of pan-European distribution away from the area unlikely. However, in time important locations in the new member states are predicted to strengthen their positions.
CGE&Y report
The second report by CGE&Y is more specific, providing a detailed insight into current and future EU country competitiveness with regard to attracting new distribution centre investments following the enlargement. In terms of location criteria the report focuses on EU country competitiveness, with trends analysed and conclusions drawn. The report is specifically focused on distribution centre investments and is intended to answer two key questions:-
lHow will the current and future EU countries compare to each other when attracting distribution centre investments?
lWhat will the effect of EU enlargement be on location decisions for distribution centre investments?
According to the report, effective distribution structures are very dependent on industry and individual company characteristics, but points out that in general a European distribution structure does not exist. However, the report maintains that in most distribution structures it is possible to distinguish the following types of distribution centres functions:-
lWorldwide distribution centre: This centre is often located close to the worldwide manufacturing plant and serves to distribute goods to the different worldwide geographic regions.
lEMEA distribution centre: This centre serves as a central storage of goods for the European, Middle East and Africa (EMEA) regions, and takes care of replenishment of the different regional distribution centres.
lRegional distribution centre: This centre serves as a main distribution centre for a specific region within the EMEA, for example the UK/Ireland region or the Nordic regions.
lCountry/local distribution centre: This centre serves for the final distribution to the customers.
It is important to note that the above distribution structure is a functional structure for global organisations. In practice, there are physical distribution centres that, for example, would combine the functions of worldwide, EMEA, regional and local distribution centres. The report says this could be a company that has a global manufacturing plant in France with a distribution centre close to that serving as a worldwide distribution centre – it distributes goods to the Asia Pacific and US/Canada distribution centres. This distribution centre also serves as the EMEA distribution centre as well as serves southern Europe and takes care of final distribution to customers in northern France.
Supply chain trends
Irrespective of country or company the distribution centre is an important element of the logistics supply chain. The report details some general supply chain trends that have had effect on most companies’ European supply chains for the past five to ten years. These include:-
lCentralisation of European supply chain structures. Many barriers for cross-border transactions between EU countries have decreased. As a result firms have been able to centralise European supply chains structures, leading to major cost savings.
lShorter product life cycle. In many industries product innovation has become a large competitive factor. This has led companies to compete in a rat race to be the first to launch new products and technologies. As a result the average product life cyc-les have decreased.
lOutsourcing of warehousing and its transport operations to
logistics service providers. Many companies have acknowledged that warehousing and transport are not part of their core business, and have outsourced their operations to logistics service providers. It is indicated that in Europe 94% of companies have already outsourced part of their warehousing and transport operations to logistics service providers.
lConsolidation in the logistics service provider industry. Over the past few years a large industry consolidation has started within the logistics service provider industry but there is still a lack of logistics service providers with pan-European coverage. As a necessity most companies have therefore outsourced their European warehousing and /or transport operations to multiple logistics service providers. The large logistics service providers recognised the need for pan-European logistics service providers and this resulted in the acquisition of numerous other companies to improve their European supply chain network.
lCountry or customer specific assembly or kitting operations taking place as close to the customer as possible. Many products need to be made country or customer specific (labelling, kitting, adding manuals in local languages etc) before they can be delivered to the customer. Historically, these country or customer specific activities were mostly done in the factory, and this led to high inventory levels because each product had to be stocked in sufficient quantities for each country or customer. Due to the fact that in most industries the number of different products has increased and product life cycles have decreased, it was impossible to continue this approach, as this would have led to very large inventory levels. Many countries have therefore chosen to move their country and customer kitting or assembly operations as close to the customer as possible, resulting in large decreases in central inventory levels as the number of article items on stock has decreased. A counter effect to these developments however has been that supply chain complexity has increased because some smaller manufacturing activities have to be planned and executed (mostly in the warehouses) before final delivery takes place.
For typical distribution centres functions the report assumes the location decision criteria set out in Table 1. The level of importance attached to each location decision criteria is based on CGE&Y experiences. Especially the existing transport infrastructure and the wages and benefits costs are relevant for locating distribution centre functions. Also important is the proximity to ports (most raw materials and volume goods are transported by sea), airports (most expensive small volume goods are transported by air), rail hubs (chemicals and raw materials are mostly transported across Europe by rail), customers and suppliers / sources. Because distribution centres are relatively labour intensive, labour availability and labour flexibility are important.
Most distribution centres need a lot of space, therefore making real estate costs an important decisions criterion. In addition incentives offered by central and local governments often play a key role in locating distribution centres. Multilingualism is also important since a lot of distribution centres also contain customer service or call centre functions.
The report analyses those countries that are the best for investing in distribution centres. Accordingly, Belgium, Germany and the Netherlands are identified as the best places to locate distribution centres. Countries such as Bulgaria, Czech Republic, Denmark, France, Hungry, Ireland, Luxembourg, Poland and the UK follow these leaders (see Table 2).
According to analysis in the report the top three countries are the best locations for worldwide or European distribution centre functions for a number of reasons including:-
Belgium does particularly well on its proximity to seaports (Antwerp) and airports (Brussels), its transport infrastructure and its incentives.
Germany scores well on its proximity to customers and to suppliers, its proximity to rail hubs and its utility infrastructure.
The Netherlands scores particularly well on its proximity to seaports (Rotterdam) and airports (Amsterdam Schiphol), its transport infrastructure, its utility infrastructure, its incentives, its multi-lingualism and general business environment.
Enlargement implications
The CGE&Y report expects that EU enlargement will have significant implications for (the positioning of) distribution centres within the EU region. In particular, a possible shift in the centre of European logistics gravity, away from the west towards the east (see Map 2.).
A full list of possible implications for the logistics industry, following enlargement, as described in the CGE&Y report as follows:-
Worldwide distribution centre functions (and global plants) will be increasingly moving to the EU.
European distribution centre functions will move eastwards from the Netherlands / Belgium towards Germany.
The importance of Austria as an operating base for Eastern Europe will diminish.
Establishment of regional distribution centre functions in Eastern Europe.
Establishment of a large bi-directional East-West flow within the EU.
Increasing use of inland waterway transport between Western and Eastern Europe.
Increasing use of multimodal transport infrastructure along the borders of Germany.
Establishment of rail routes from Asia Pacific through Russia into the eastern EU.
Changes in northern European regional distribution centre locations.
Improved accessibility of the Russian market.
Movement from a one EDC-structure to a two-tiered distribution structure.
Good position of the sea ports in northern Germany.
The introduction of the German and Austrian LKW-Maut will negatively impact the currently strong position of the Benelux region for locating distribution centres.
The new Dutch rail investment project Betuweroute will have mixed consequences for the position of the Netherlands in European supply chains (see Logistics Manager April 2004). Strengthening of Bulgaria and Hungry as countries for distribution centre investments.
Future outlook
Turning to the future the report expects that there will be changes in the following location decision criteria:-
The incentives offered in all (current and future) EU countries will converge because the Union is currently trying to remove all incentive structure, which harm competition between the different EU countries.
Wages and benefits costs. Salary-related costs in the Accession Countries will increase towards average EU levels.
The transport infrastructure in the Accession Countries will improve dramatically in the next five to ten years because of large EU infrastructure improvements projects underway. Also, further investments in transport infrastructure will take place when more and more businesses invest in these countries.
Labour flexibility in the Accession Countries will increase. Several Accession Countries have a communist history where labour flexibility traditionally is very low. Because these countries now have to adhere to EU standards and policies, labour flexibility will increase dramatically.
Real estate costs. As investment popularity of the Accession Countries rises, real estate costs will also increase.
Ease of doing business. Most Accession Countries still lag behind on the current EU countries in terms of the ease of doing business. However, as the Accession Countries adhere to EU standards and policies, and as they learn more and more from the way Western Europe does business, these countries will improve their business climate.
Both these reports will assist towards a better understanding of the New Europe for decision makers, ranging from supply chain management companies, manufacturers, property developers and investors. At this stage in the EU’s development it is vital that more is known about the key factors determining location criteria, identifying the top European countries for investing in DCs, and if there is going to be a possible change in the centre of European logistics gravity. For tomorrow’s logistics managers these reports will be useful for those with an interest in the New Europe.
Frank Worsford works in the transport studies group at the University of Westminster.
* DTZ’s report European Logistics Markets is available from sally.bruer@dtz.com
* CGEY’s report EU Enlargement: European Distribution Centres on the move is available from roy.lender@cgey.nl