- Tier 1 — the United Kingdom — Ireland, Germany — Austria and France (60 to 80 million inhabitants each) — is usually the destination for more than 55 percent of total European volumes (i.e., 17-20 percent each). It is also the primary market for new product introduction and a very sensitive market for localized products (e.g., French- or German-language packaging).
- Tier 2 — Italy, Spain, Portugal and the Benelux countries (Belgium, the Netherlands and Luxemburg) — comes next, grabbing a significant piece of the cake (25 percent in total, or about 8 percent each).
- Tier 3 — Switzerland and the Nordics (Norway, Sweden, Finland and Denmark) — would account for another 10 percent of that European volume (5 percent each). It also brings mild distribution challenges with regard to customs (Switzerland and Norway are not EU members) and access (heavy good vehicle traffic restrictions in Switzerland and no ground access to most of the Nordics).
- Tier 4 — consisting of all remaining EU and non-EU countries of the European continent — accounts for the remaining 10 percent of volume.
If this "average pan-European outbound volume profile" only represents a specific industry in 2005-2006, it no doubt demonstrates how consumption of some products can be concentrated in Western Europe (Tiers 1, 2 and 3 total up to 90 percent of Europe's volumes). For this reason, attention should obviously be paid to distribution costs that are likely to soar together with lead times when locating facilities in Eastern Europe.
A Labor versus Logistics Cost Tradeoff?
At the end of the day, it seems that most European supply chain location decisions are based on a tradeoff between labor costs and inbound/outbound freight costs (some would even include inventory carrying costs in relation to the extra inbound lead time of three to five days and outbound of one to three days from East to West). As the need for in-region configuration increases and more supply chain decision-makers opt for postponement strategies (i.e., increased labor content), the balance often falls in favor of Eastern Europe — and rightly so from a total cost perspective. However, based on observations around the consumer electronics and communication segments, some additional elements are worth considering in relation to these costs drivers beyond the pure cost aspects of the business.
Indeed the question, "Does my business require a supply chain element in Western or Eastern Europe?" might just be misleading and missing the point. As most companies grow and products develop through different stages, with different product characteristics, distributed via different channels, a more appropriate question could be, "What piece of my supply chain should be located in Eastern and/or Western Europe, and when?" Following are a few considerations to help executives in answering that question:
- Product lifecycle (see Fig. 1): Time-to-market and availability are often critical to achieve initial growth in market share. Therefore, a Western location — close to primary, early-adopters and less price-sensitive markets — is the most appropriate choice. As a product becomes more commoditized and volume grows exponentially, the benefits of an Eastern solution might become more apparent.
- Product lines and characteristics: What is right for a particular product range or product line in a company's portfolio might not be right for all others. The higher the value (i.e., purchase power, risk of shrinkage), the shorter the lifecycle (air freight, critical time-to-market), and the lower the configuration requirement (e.g., pure cross-docking of finish goods), the more appropriate a Western location becomes.
- Distributions channels: Different customer types also have different ways to trade and different expectations driving different logistics costs. It is difficult to put a price on the logistics aspect as there is no real basis for comparison. However, it is a fact that the lower the number of units per shipment (e.g., business-to-consumer) and the faster the delivery (as with e-business), the higher the correlation between distance and freight costs.
The Best Solution?
Things are changing — and changing very fast — but as consumption will tend to level, so will living standards and labor rates. The unknown is how quickly the EU will be able to overcome the infrastructure deficit. Far from attempting to suggest any one best way of designing pan-European supply chain solutions, this article is intended to help decision-makers looking to optimize their revenue to build some level of flexibility in alignment with their strategic objectives. Doing so will most likely involve — either in sequence (transitional models) or in parallel (hybrid models) — an East-West collaboration.
About the Author: Xavier Hubert is manager, supply chain solutions for ModusLink Corporation, responsible for developing models and designing solutions that optimize ModusLink's client's supply chain performance in Europe. ModusLink Corporation is a provider of global supply chain management solutions. More information is available at www.moduslink.com.