SCM Map Europe 2014-2015

04/22/2015 at 2:03 pm | Marieke

Slight shift in European networks

There appears to be considerable upheaval in Europe as a result of the political unrest between Russia and Ukraine. “But the world of logistics has not changed radically compared with last year,” says Patrick Haex from Buck Consultants. A number of large factories have closed down in Western Europe while new ones have opened in Central Europe and further east. In terms of distribution network optimisation, the same considerations apply as a few years ago. However, the main growth in freight flows lies on the periphery of Europe and the Middle East is also continuing to develop, both for domestic supply and for distribution to Africa. This is the third time that Supply Chain Movement and Buck Consultants International have produced a Supply Chain Map of Europe.

By Martijn Lofvers

News about the industry in Western Europe is predominantly negative. In The Netherlands, cigarette manufacturer Philip Morris is closing its factory in Bergen op Zoom and AkzoNobel has decided to phase out its production of organic peroxides in Deventer by the end of 2016. In Belgium, the Ford factory in Genk will soon close for good, as will the Heinz manufacturing facility in Turnhout. Opel will cease car production in Bochum, Germany, at the end of this year, and the threat of closure looms for the Peugeot-Citroën factory in the French city of Rennes too. “We can’t believe that this factory hasn’t closed sooner,” states research firm Innovev in Automotive News earlier this year. “Logistically speaking the location of this manufacturing facility, which produces the Peugeot 508 and the Citroën C5, makes little sense.” Overcapacity appears to be the biggest problem in the car industry.

New factories are also being built in Europe, however, including in the car industry. In Poland, Volkswagen is opening a new factory for the Crafter van and Fiat is investing hundreds of millions of euros in its Polish factory for its compact 500 model.

Not all bad news

Toy manufacturer Lego is currently building an enormous, sustainable factory in Hungary, and also has concrete plans for its first production facility in China. Unilever has constructed a new ice-cream factory in Turkey which, in terms of sustainability, serves as an example for all 35 of its production facilities around the world. As proof that it is not all bad news in the Dutch manufacturing sector, assembly activities for Tesla Motors have arrived in Tilburg and Minis are now being produced by VDL in the former Nedcar factory in Born. The opening of Google’s huge data factory in Eemshaven can also be mentioned in the same breath.

“We’re seeing that production in the emerging economies is primarily aimed at supplying the domestic market and neighbouring countries,” states Patrick Haex from Buck Consultants. “There’s a lot of talk of nearshoring from China back to Europe, but no huge volumes are involved. It’s a mere drop in the ocean.” One example of this is Disney’s proposed idea to relocate production of some of its Infinity figures to Turkey to shorten and improve the flexibility of its supply chains. Analysis by the Financial Times reveals that many new jobs were created in Central Europe between 2010 and 2013, particularly in electronics manufacturing. The level of job creation in the automotive industry in this region was less extreme due to new factories or expansions in the UK, Belgium, Spain, Italy, Turkey and above all Russia. The construction of new factories for food and drinks is spread evenly across the whole of Europe, which can be explained by the need to be located close to the sales market.

According to Haex, the decision about the right manufacturing or distribution location revolves around the total ‘landed cost to serve’, i.e. the total specified costs involved in keeping customers happy. Because Buck Consultants is regularly asked where Europe’s centre of gravity for distribution lies, the firm’s consultants analysed the network in two ways. They found that, based on the average distance by road from the population, Stuttgart is the ideal choice for a European distribution centre. When performing the same calculation based on the average distance by road from Europe’s wealth, expressed in terms of Gross National Product, the optimal location is 160 kilometres to the northwest, close to Saarbrücken. In this analysis, which extends to include up to ten European distribution centres, Buck Consultants demonstrates how the number of distribution kilometres rapidly decreases as the number of warehouses increases.

Shifting south and east

“The ideal number of DCs depends heavily on the type of product,” explains Haex. The world-renowned American designer Michael Kors plans to build a large European distribution centre in Venlo, The Netherlands. “Fashion has a much higher relative value than many other products and can therefore support higher logistics costs.” In the past, the optimal centre of gravity for European distribution was in the Benelux region, but Haex now sees this shifting further south and east. This development is also clearly mirrored in the national economies, as illustrated by the fact that Poland has overtaken Belgium in the past couple of years in terms of Gross National Product, and Turkey has surpassed The Netherlands in the same period.

Apart from the distance to consumers, other factors also play a role. In Germany, for instance, it is not possible to directly reclaim VAT as a way of avoiding prefinancing, and France is a country of high wages and very powerful unions. Another key consideration when choosing a location are fiscal tax breaks. In this respect, it is notable that the UK and Finland have reduced their corporate tax rate by several percentage points in order to increase their appeal to businesses; Denmark has done so by half a percentage point.

Haex concedes that the EU’s economic boycott of Russia has definite consequences for the supply chain sector. He has just completed a consultancy project for a US food manufacturer in Russia. “Companies are now having to source more locally in order to ensure that they can continue to produce for the local market.”