Finding E-fficiencies to meet customer E-xpectations

Logistics have come a long way since caravans of traders were humping spices and silks from east to west along the traditional trade routes. And the industry has entered a completely new world in the last five years with the advent of e-business, e-commerce, e-fulfilment, e-supply and e-procurement.

The logistics industry is big business. In the US it is worth some $900 billion, about 10% of GDP; while in Europe total expenditure on logistics amounts to about $129 billion, of which 24% is contracted out to third party logistics service companies (3PLs), says Melvyn Peters**, senior lecturer on logistics at the Cranfield School of Management in the UK. He notes a prediction that logistics expenditure in Europe will rise to £155 billion in 2002 with 28% outsourced.

Logistics are defined by the Council of Logistics Management (CLM) in the US as "that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers' requirements." In a nutshell, the CLM describes logistics as "the management of inventory, at rest or in motion." A recent survey* for the Brussels-based European Logistics Association (ELA) has found that the importance of logistics is widely recognised in the global economy, and that 50% of companies are putting logistics first or second in terms of priority.

The European logistics industry has been undergoing major changes. Peters says that the twin drives for Europeanisation and globalisation are running neck and neck, and it is not clear which will prevail. However, the restructuring of the industry has been gathering pace, and the traditionally fragmented make-up is being replaced.

Germany's Deutsche Post, Europe's leading 3PL in terms of revenue, which went on an acquisition spree in 1998-99, is followed in the European league tables by the likes of Stinnes AG, also of Germany; Geodis, of France; NFC (Exel), of the UK; and Panalpina of Switzerland. This is a developing market where the future is uncertain, with the centralisation of logistics replacing decentralisation, as the service becomes an increasingly international one.

Businesses believe that efficiencies in logistics systems will eventually lead to cost savings - 60% of managers in the survey for the ELA expect a reduction in costs. At the same time the current pressure on prices and margins is cited as a developmental problem for the industry.

The recent revolution in technology and the rolling out of e-business have meant that customers gain from speed, flexibility and transparency in the supply, production and delivery processes, says Beth Enslow , Vice-President of the American logistics consultants Descartes Systems Group. Customers are coming to expect delivery in days and weeks rather than months and years, despite some of the fulfilment failures of dotcom logistics. Dell Computer and Wal-mart (and more recently Amazon) have been leading the way in improving delivery in e-commerce transactions.

In terms of internationalisation, European 3PLs have gained a lead on their American competitors, who have concentrated on NAFTA and Europe, says Melvyn Peters. But there are both threats and opportunities for the Europeans in the Far East. While South Eastern Asian companies are behind the US and Europe, they may soon be able mount a challenge because they are investing heavily in IT and infrastructure.

However, there are still considerable barriers to the growth of the logistics business. Apart from the sheer cost of acquiring integrated logistics networks, there are difficulties of real-time information sharing with suppliers and customers, and in connectivity - that is in having software systems where the information can be mutually understood.

A new study in April by a group of Birmingham-based academics warned that many e-commerce initiatives were being driven by hype, which was taking in gullible businesses -- over 66% of whom believed that e-commerce would bring new customers. "The hype should be rejected in favour of reasoned analysis of costs and benefits," declared the study, which was commissioned jointly by the Chartered Institute of Purchasing Supply, the Institute of Logistics and Transport (IOLT), and the Institute of Management.

Professor Andrew Cox, the report's lead author, advised business to take independent advice before getting involved in ambitious and costly schemes. He said that investment in e-business would be naive unless it included supply chains, training and logistical change in organisations. And there is another problem - most small businesses in the UK have budgets of only £50,000 to invest in the whole gamut of e-business

Jim Rowley, a policy executive and researcher at the IOLT (the UK logistics trade association with 22,000 members), said that companies needed to examine their core competencies. If logistics was not one of those competencies they were strongly advised to seek external advice. While the IOLT would not recommend one logistics consultancy against another, they could furnish key questions which a company could ask a potential service provider, and also suggest supplier directories - but the fact that there are 400 pages of companies in the directory for software suppliers alone bears witness to the size and fragmentation of the logistics industry.

Rationalisation of European logistics

There are some signs of rationalisation and consolidation. In August 2000, UPS e-Logistics teamed up with PriceWaterhouseCoopers (PwC), Oracle Corp, and EXE Technologies in the provision of integrated supply chain management services "for the quick and cost-effective launch of e-businesses".

Sanjeev Nagrath, Management Consulting Services partner with PwC, said: "E-businesses around the world face shifting priorities and business needs on an almost daily basis. By bundling these pre-built, highly configurable and scalable services, UPS e-Logistics offers ever-changing e-businesses an innovative end-to-end solution that can accelerate time-to-market with a minimal capital investment up front."

Another such alliance in the rationalisation process is Penske Logistics Europe, formed in 1998 when Penske, the Pennsylvanian automotive supplier, merged with the Dutch Transportgroep van der Graaf. And, in 1998 the German Stinnes Group acquired Schenker AG, which employs 29,000 people in 1200 worldwide locations to generate a turnover of Euro 5.9 billion from its logistics business. Founded in Austria by Gottfried Schenker over 130 years ago, Schenker is building a brand new logistics centre in Hanover for the global automotive industry, to be opened in 2002.

Since 1996, Schenker has been a service provider for Volkswagen's commercial vehicle brand, VWN. The new centre at Hanover, with 36,000 sq ft floor space, has been built in close cooperation with VWN, designed to reduce the density of traffic supply, by means of a 360-metre bridge, and replacing several halls which Schenker currently uses to supply thousands of parts a day to the nearby VWN plant.

Other companies expect to use their expertise in constructing successful logistics models of their own to generate new income streams for themselves. One example is BASF, the German chemicals company. "The logistic environment is in the middle of a very strong change process," says BASF, which last year achieved sales of Euros 35.9 billion from its workforce of 100,000.

"Logistic services are regarded within BASF as a strategic tool to build a strong connection and partnership with our clients. As a result, BASF has implemented a more market-oriented logistic organisation, having its focus on offering added value to our clients." BASF has established a "European Logistics network"; and invites companies to contact them at:

Back in the UK, the Unipart Group, a leading component supplier and logistics provider, has diversified by setting up a fulfilment service called Ufulfil.com in April 2000. Unipart has 2500 delivery points in the UK and says it can provide a collection service within five miles of 97% of the UK population. Its logistics experience has been built up over 15 years in its dealings with companies like Vodafone, Daihatsu, Jaguar and Hewlett-Packard. The director of the division is Paul Brooks who joined Unipart in 1999 after being managing director at Cert Logistics and working at Excel Logistics.

Ufulfil has a contract with the Arrows Formula One team, and Brooks is bullishly forecasting that it will announce new clients in the leisure, construction, rail and exhibition businesses in the next few months. In January 2001 it announced important technology partnerships with IBM (software) and Industri-Matematik (order processing), and Manugistics (network management).

The Ufulfil process has 40 service elements and is designed to be compatible with multi-national supply systems or with groups of smaller businesses, both retailers and suppliers. Ufulfil's system allows it to guarantee one retailer a 60% reduction in damage during shipping between supplier and retailer. The complex tracking means that the chain is managed and monitored at every stage so there is "no need to open the box and check what is in it".

How are the various sectors shaping up?

Logistics in the chemical industry is now pan-European, while the automotive sector is becoming so, according to "MT Logistica", a UK magazine. Industry sectors such as pharmaceuticals and electronics are facing more local restrictions although they are making progress towards harmonised product standards. Jim Rowley believes that "standardised applications are inevitable" because they are enabling.

Economic and political forces can provide further positive factors in developing a pan-European logistics industry. There is broad agreement that the introduction of the Euro is most likely to boost consolidation. And the attitude of governments can have an impact, if they offer tax breaks and other incentives to attract shippers to locate manufacturing and distribution facilities in a particular country. In this respect, the Netherlands, Belgium, France, and Denmark have been especially proactive.

Conclusion

While the European logistics industry has grown and developed out of all recognition in recent years, there is still some way to go before it is truly pan-European. There is work to be done on systems, on partnerships and alliances, and on investment if the European industry is not to fall behind the all-powerful American sector and the rising Asian model.

Revenues for European and American providers remain weighted to their local markets, says Melvyn Peters. "The globalisation of these companies will be a slow process... Europeanisation of third-party logistics remains important, in order to provide a more complete set of services." He concludes that it is "still questionable" whether true pan-European 3PL logistics providers will emerge, "but the building blocks are being put in place".

Logistics web links

• PriceWaterhouseCoopers www.PWCglobal.com
• European Logistics Association www.elalog.org
• Institute of Logistics and Transport www.iolt.org.uk
• Schenker AG www.schenker.com
• Advanced Supply Chain Strategy Systems www.ascet.com

References
** White Paper on "Europe's Industry Consolidates on the Road to pan-European Services", for the Advanced Supply Chain Strategy Systems (ASCET).
*"The next wave of logistics: global supply chain e-fficiency" by Professor Helmut Baumgarten.
+"European logistics: outcome and conclusions"