Those with long enough memories may recall that January 1993 was to see the dawn of a new era in logistics, a deregulated Europe – a Europe without borders. International companies were to restructure their supply chains, to rationalise their nationally orientated manufacturing and distribution operations into a consolidated pan European process with fewer, more focused, points of inventory and a more fluid approach to the cross border movement of product.
A greater reliance on transport would ensue, but on balance the change to a centralised European distribution discipline would pay dividends. Outsourcing logistics activity and implementing comprehensive information technology would enable this new structure to emerge, offering scale, efficiencies and above all, inventory visibility. A bright new future was foreseen for the fledgling logistics service sector and a frantic scramble to secure a pan-European offering sent many on a continent wide shopping spree for local companies – a policy which spelt disaster for a number of over zealous forerunners.
Now, ten years on, what has changed? Did the envisaged demand for pan-European services emerge and has the logistics service sector managed to meet the demands for a wider service offering, both in terms of geographic cover and value added service enhancements? How has the role of the service provider developed? And what do we expect to see for the sector in the future?
In many respects the contract logistics industry has surpassed expectations by creating a highly select group of global players who are able to operate fairly comprehensively across the three key economic regions of the world. However, in Europe, many customers looking for a one-stop-shop still say it’s impossible to find one company that can offer the service cover required across the continent. Although many service providers looked to acquisition for rapid expansion, more prudent 3pls have grown organically by moving with their customers into new markets and by offering on the ground logistics capability where required by the customer.
A slow process
In practice, the move to rationalise manufacturing and warehousing across Europe has been a much slower process than expected. However, according to John Harvey CBE, chairman of international logistics services provider, Tibbett & Britten, ‘The demand for pan European supply chain services has become much more of an issue over the last four years or so, and will become even more significant in the future’. Harvey sees this growth in pan European services moving hand-in-hand with the closure of factories in Western Europe and the migration of manufacturing to areas of low cost labour in Central and Eastern Europe.
This shift to the East in manufacturing will be facilitated by the expansion of the EU; ‘Hungary, Poland and other countries in the region were not part of the political geography back in the early 90’s’, he points out. But for the future, logistical support through the provision of transport and IT, will be essential for those setting up factories in Eastern Europe.
Giving scale to this market progression, Stephen Ashton, Gist’s supply chain solutions director, points out ‘The value of 3pl contracts in European Contract Logistics was worth around $51.4 billion in 2001, this is currently estimated to rise to around $70 billion in 2005. That’s an increase of 35 per cent.’ However, he adds, ‘If you look at new contracts signed up in the UK over the past twelve months with the major players, very few could be called truly pan-European.’
With regards to internationalisation, ‘Customers decide when it happens’, says John Allan, CEO of, global supply chain management solutions company, Exel, ‘it has been slow but it’s steadily happening’. According to Allan, ‘different sectors have moved at different speeds. The electronics industry has moved on a global basis whereas, the automotive sector has moved to create a pan European supply chain structure, most noted in inbound to manufacture’.
‘In consumer products there is a very marked trend to pan European manufacturing. However, the structure of the retail trade with its specific requirements for different markets means supply chains are still organised on a country by country basis for distribution operations.’ When it comes to sourcing, the reach of the retailer is long and, as Allan puts it, ‘The world is their oyster.’
So who have emerged as the big players? Were they the ones we were expecting to see? Of course, evident by their presence on the continent are major service suppliers such as, Exel, Gefco, Kuehne & Nagel, Tibbett & Britten and Hays, but as John Harvey points out ‘ten years ago I would have expected Ryder, Mayne Nickless and Fedex Logistics to be in Europe in a big way.’ But the biggest surprise comes from the rise of Europe’s national post offices – no one expected the postal services to become the major players they have. Ten years ago if you had said that Deutsche Post would become one of the most dominant global supply chain services companies in the world you would have suffered the derision of market watchers.
However, an expansion in demand for cross border business, deregulation and domestic pressures combined to create a set of circumstances that saw the migration of national post offices into global parcels and logistics services. The Dutch post office (named KPN at the time) started the ball rolling with their ground-breaking and well-judged acquisition of integrator TNT in 1996. Then between 1997 and 2000 Deutsche Post went on a startling acquisition binge that secured it either a controlling interest, or a major stake, in such substantial companies as AEI, DHL, Danzas and Nedlloyd. Right now the company is in the process of acquiring the remaining 50 per cent stake in Securicor’s UK parcels distribution business, paying up to $300m to complete the process.
An example of the growth in international business is reflected in the cross-border parcel market between the UK and continental Europe. Demand is growing at about 15 per cent annually, compared with a five per cent growth rate for the UK’s internal market.
Driving demand for more sophisticated and extended supply chain services that stretch the globe is a shift in manufacturing, centring on Asia and, in particular, China. Both Harvey and Allan concur that China is set to have a major impact on international trade by becoming a powerhouse for manufacturing and offering a vast potential market of over 1.3 billion consumers. The trend for sourcing on a global basis is also expected to rise in importance as we move towards the middle of the decade – as Harvey predicts, ‘I expect to see a substantive realignment of sourcing patterns over the next few years.’
As supply chain strategies have developed and become far more sophisticated – facilitated by advances in information technology and in particular the internet – a new battle ground has opened up.
A competitive weapon
Board directors have awoken to the huge potential of the supply chain as a competitive weapon, providing greater customer service with reduced inventory holdings, all possible through the exchange of information. Pushing these strategies have been the large management consultancies who through their access to board level decision makers have been able to influence strategic change and in the bargain offer a capability to implement and run the resulting structure – a service provision coined fourth party logistics (4pl) by Accenture, or Andersen Consulting as it was then.
Fourth party logistics promises to manage the chain without the distracting constraints of assets. Transport and warehousing being bought into the equation as a subset of the operation, provided by 3pls but managed by the 4pl. This has created a dilemma for the traditional contract logistics service providers, should they position themselves as secondary service providers, a market destined to become a commodity, or should they challenge the intellectual capital of the consultants and move into the 4pl space.
Here though assets, such as warehouses, could be construed as a disadvantage.
As large multi-nationals rationalise their service providers and hand over the management of their supply chains to a 4pl – or lead logistics service provider, as most now prefer to call them – the size of these contracts are escalating. Nick Thum, at Bear Stearns cited in his article in Logistics Europe back in February 2001, one of the largest such contracts to date, that of General Motors to CNF, via the Vector SCM joint venture, under which CNF controlled logistics revenues of an estimated $1.2 billion in its first year, rising to around $6 billion in year three. Deals of this size are obviously very alluring for the leading contenders.
The 4pl model may have been attractive to multinationals expanding rapidly during the boom years of the late nineties, but does it still hold the same appeal in these leaner economic times? According to Thum, ‘the model still stands up, in a way even more so.’
‘Recession has not eroded interest from the multinationals, but decisions on outsourcing have been postponed. These are large deals and there is a sense of holding back at the moment due to the uncertain outlook.’
One area set for future development is the rationalisation of the ‘returns’ process. In the US, leading retailers such as Wal-Mart, Sears and The Hudson Bay Company, have made dramatic savings through tackling this neglected corner of the supply chain.
But, returns in the retail sector have been largely ignored on this side of the Atlantic. And yet, ‘Retailers can save between 0.1 and 0.3 per cent by managing returns better – all going to the bottom line’, says John O’Hagen, managing director of newly formed, R-Log, a joint owned company between US reverse logistics specialist Genco and the UK’s Wincanton.
Gearing up for returns
According to O’Hagen, ‘DCs aren’t geared-up to deal with returns. When you get busy it’s the first thing to get ignored’. So, R-Log’s approach is to provide dedicated returns centres and specialised software. ‘We take files from the retailers stores advising us on what’s coming back, then scan in the returns and create a systems “licence plate” – a unique code giving the product, store returned from, reason for return and where it’s going to’.
Sears, a customer of Genco’s, is said to have recouped an impressive $45m in its first year of outsourcing returns. Now it makes savings of $270m. In the past it was taking 8-10 weeks to get product back, now it’s processed within two weeks. These are significant savings which European retailers and manufacturers would do well to consider, although it has to be said, the big mail order companies over here have long invested heavily in their returns operations.
Looking to the near future, the WEEE Directive with its onerous responsibilities for retailers and manufacturers to take responsibility for products at the end of their useful life, will undoubtedly concentrate business minds in the future. Here opportunities abound for the 3pl sector.
So how have things changed? Margins for the service providers have come under considerable pressure, ‘In the early 90s you could walk into someone’s office and say “I can save you £250,000”, however, the level of in-house supply chain expertise is rising making it harder to find ways of adding value,’ says Martin Palmer, business development director of logistics service provider, Amethyst Group. Contract lengths too are set to shorten he believes, ‘I think shorter more flexible contracts will be the way of the future. After all, who knows what challenges they will have to meet in the future? You could even see no contract, just a trading agreement – it’s the service that keeps you in business not the contract.’
Flexibility appears to be Palmer’s focus. ‘Pay as you go, scalability, warehouses with “rubber walls” and shared user facilities is the way ahead’.
And where will we be in 10 years time?
Ten years ago who could have predicted the popularisation of the internet and the dramatic impact it has had on the supply chain. Without it much of what we now accept as common practice would not be possible. Ten years is a long time in supply chain management – let’s wait and see.