FUENTES DE INFORMACIÓN

0 50 100 150 200 1999 2004 Market siz e , EUR billion Outsourcing Inhouse 26% 33% Figure 6

Source: Adapted from European Distribution & Logistics, January 2001

The logistics providers are, therefore, doing much more than transport and warehousing management. Indeed, they can carry out series of value-added services for their customers such as customizing, kitting and assembly, cross-docking, repair and testing of products etc and so much more. With the increasing trend of outsourcing from manufacturers, those functions are considered to be very competitive for logistics companies and hence they must have sufficient market coverage, expertise and flexibility to take care of all requirements from their customers. The flexibility can be understood in the sense that whenever the logistics company cannot provide the required service itself then it can go to other quality service providers and put the package in the same way required by their initial customers. It is therefore necessary to have the regional distribution centers where all functions supporting to cargo can be conducted in the most efficient and cost saving way.

The increasing trend of outsourcing from manufacturers has indeed impacted the business and strategy of logistics services providers, as can be seen from the analysis above. Together with the growing concentration through mergers, acquisitions and alliances, it opens a new way of thinking and doing for those companies to escape from the traditional strategy on specific country basis. The logic of this philosophy is especially right in the EU perspective.

2. 2. 3. Consolidation trend in production, logistics and distribution

It is said that the consolidation trend in production, logistics and distribution in Europe is the clearest and most predominant move of the economy in the reaction to the establishment of the EU. Before the EU, many manufacturing companies operated throughout Europe but without the benefits of scale due to complex transport and product regulations. The consequence was that there were too many stocks held in too many warehouses (Cooper, Browne & Peters, 1991).

In fact, legal and regulatory changes in the EU will undoubtedly drive large manufacturers to consolidate their European logistics operations. In Europe, it has become more common for companies to develop just several distribution centers on regional basis, for example, Northern (Nordic region), Eastern, Southern and Western Europe. The fact in Europe today is that there are many companies which historically have had country-based distribution centers and are now focusing on regional-based ones. Certainly, they no longer need to maintain manufacturing and distribution operations in every country in which they sell their products due to the harmonization of product standards across the EU, the elimination of most customs formalities between EU countries and the need for multinational manufacturers to manage inventory regionally or globally via a single information system.

Besides, the consolidation of production, logistics and distribution will facilitate better quality control, create more opportunities for more rapid product innovation due to centralized Research and Development, and above all else, the company will benefit from economies of scale and lower total cost. According to Gooley (1999), for example, an American manufacturer of medical equipment which used to operate 13 warehouses in Europe, but then changed to manage all its inventory, warehousing, and distribution functions in Europe from a single purpose- built, highly automated distribution center in Belgium. The positive result is that in the first two years after the new operation pattern, inventory levels dropped by nearly half, stock-outs were reduced by more than 75% and total distribution cost fell by more than 20%. The case of the Netherlands-based Philips describes this trend clearer. When the company changed its strategy after the formation of the EU, the number of inventory holding sites was reduced dramatically as shown in Figure 7.

CONCENTRATION OF INVENTORY BEFORE & EXPECTATION AFTER 1993 OF PHILIPS

Figure 7

(a) Stock warehouses organized on a national basis

(b) Expected stock warehouses after 1993 – concentration and rationalization

Source: Cooper, J and Browne, M and Peters, M. (1991).

Generally speaking from the theory of logistics and distribution, the consolidation of production at fewer sites will increase transport cost because products have to be carried further to markets. In this case, the transport operation will need to be faster and more reliable to maintain the customer service levels. However, the principle of cost trade-off will be applied here. First of all, due to the fact that the number of depots/distribution centers is reduced, the storage cost will also be lower. Secondly, the consolidation will lead to the saving in inventory cost as the greater consolidation of inventory implies a smaller overall inventory requirement (Cooper, Browne & Peters, 1991), the overall cost of operating the warehouses tends to fall due to economies of scale in warehousing (Lambert, Stock & Ellram, 1998), the administrative costs (order processing, invoicing etc) will tend to decline when inventory is held in fewer places and the capability to apply Information Technology in supporting distribution. Furthermore, saving can be achieved through better consolidation of outbound shipments and better vehicle’s utilization or the transfer of some final assembly tasks to the regional distribution

center to significantly reduce the inventory levels. With the increasing trend of outsourcing from the manufacturing sector analyzed in the previous part, the logistics companies will have more chances to enhance their business by taking the parts contracted out by their customers and for the sake of optimizing their customers’ resources.

As manufacturers have close relationship with logistics services providers, the consolidation trend in the former can also be observed in the latter. In order to satisfy their customers’ requirements, third-party logistics providers today also have to consider possibilities to apply the regional distribution centers strategy instead of the country-specific basis and minimize the total distribution cost.

To conclude due to the trends of concentration through mergers, acquisitions and alliances, outsourcing and consolidation of logistics and distribution the importance of logistics service providers is increasing substantially together with their new strategy of locating distribution centers on regional basis as devised in Figure 8. This should be applied as guidelines when the Nordic region can be considered as a single market and therefore a regional distribution center can be placed there to serve this marketplace.