In May 2004 an additional 10 countries will join the European Union (EU): Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia, representing dramatic changes to the EU landscape. It is anticipated this will provide stability and prosperity to the EU and extend links between Eastern and Western Europe.
In reality, many of the accession countries are already becoming important hubs for supply chain activities. Manufacturers are embracing the opportunities offered in these markets, rapidly moving production from Western to Eastern Europe due to a number of significant factors (see ‘Key benefits’).
In many cases, successful templates used in Western Europe are being used as a basis for rolling out operations in the accession countries. These templates include freight and distribution practices as well as IT systems. Central and Eastern Europe will continue to rapidly develop due to, inpart, the presence of logistics companies from Western Europe and the US. The Czech Republic has already made progress in becoming an important location for supply chain activities, but will, like the additional new countries, need more investment to develop its full potential.
Value creation for businesses is being driven by many factors including new and more complex consumer demands and shortened product lifecycles. For example, consumer markets now become saturated with goods more quickly than ever before which accelerates product launches. Mobile phones and consumer electronic products are examples of goods that have a relatively short lifespan. Due to consumer-driven demands, retailers do not want excess stock in-store, in distribution centres, or freight stations, they expect logistics companies to consolidate operations wherever possible.
For example, retailers may outsource clothing manufacturing and draw supplies from Turkey, or technology supplies from Central and Eastern Europe.
Companies need to manage integrated networks, in established and emerging geographies, to deliver what is required, when and where it is needed. Many large, global corporations are able to flex their collective muscles to get the most robust and cost-effective supply chain solutions available.
Integration of operations is key
For the logistics service providers, integration of operations is key to providing the single source of services that many companies now seek. The new nations are revising freight transport systems within the new EU which means that companies must closely co-ordinate contract logistics and freight management.
This, coupled with cohesive and robust processes in core areas, such as customs management, should help supply chain companies ease air and sea freight activities and the flow of goods around Europe. As a result, manufacturers and retailers will look to a supply chain services company that can create value in new locations swiftly.
All of these factors above mean that it is important to get entry into a new country right first time. Manufacturers want low production costs to deliver profits within a shortened timescale and will base their operations around suppliers that can provide these benefits, putting pressure on the supply chain to respond and operate rapidly in new countries.
Supply chain service companies that have already made strides into Western Europe and emerging markets can use this knowledge and experience to their advantage to move into new countries, whether it is via a partner or through fully-owned operations or hubs. Whatever the solution, the customer interface still needs to be seamless and efficient. Processes need to be replicated and scaled quickly without loss of performance.
If logistics companies decide to work with a local partner this can represent a lower investment risk. The challenge is to find the right partner, whom you trust and is capable of combining local knowledge and expertise with establishing successful in-country operations forming part of the European network. Once the partnership and the validity of remaining in the chosen market is proven, then it is possible to decide whether to build upon the partnership and establish full operations. The decision may be to replicate and install local hubs, which although requiring more investment and higher risk could provide a company with more control over the business from the outset.
A country-by-country approach without central support is risky whereas a structured approach for central functions, such as budgeting, communications, information strategy (IS), legal and treasury, is vital to success. Functional managers will need support and advice on how to enter new markets and the use of established expertise and best-practice from the business in other locations. Successful business ‘templates’ in core areas will increase manufacturers chances of success.
In-depth awareness and understanding of the local country environment, including centrally accessible knowledge and information about language, practices, laws and taxes mean that manufacturers will have to rely on key individuals who should be focused on delivering to the customer. Different local country environments mean that those moving into these areas will have to be realistic with project planning processes as timescales may be extended due to language and cultural differences.
Omissions from start-up budgets, such as support costs, travel costs and insurance can detract from the operation’s success. In summary, all of these issues need specialist attention and support from dedicated resources so that local staff are not focused on integration issues but on running efficient and profitable operations.
A global perspective
Worldwide distribution centre functions will increasingly move to the EU following the forthcoming EU enlargement. Supply chain service companies will need to think of themselves in both European and global perspectives if they wish to offer their clients the services which customers are demanding across multiple sites. Manufacturers need supply chain companies that can, as much as is possible, replicate tried and tested supply chain operations and adapt rapidly to new EU markets.
It is likely that many of the new countries will continue to grow and develop revenue opportunities over the next few years. EU expansion will be a key driver for this growth and will stimulate economies not only in the accession countries but also other economies, such as Western Russia.
In 2004, the pace of EU change is fast. Most sectors and companies will face one of the biggest opportunities to develop new businesses and operations in those countries. The key is to work to strike a balance between adopting bestpractice and country-specific operations which will enable you to adapt quickly to local customs and characteristics.
Ian Smith is CEO, Europe Middle East and Africa at Exel
Key benefits of manufacturing in Eastern Europe:
- Cost-effective workforce and lower costs;
- Positive government attitudes to foreign investment and incentives;
- Proximity to other affluent marketplaces;
- Harmonisation of legislation including employment and social regulations, customs procedures and border regulations;
- Availability of cheaper credit and subsidies;
- Continuous upgrades to infrastructure (airports, ports, roads) and rapid modernisation.