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European logistics European

logistics beyond
beyond 2000 2000
Tage Skjoett-Larsen
Department of Operations Management, 377
Copenhagen Business School, Denmark
Keywords Supply-chain management, Supplier relations, Logistics, Green issues, Internet
Abstract European companies are facing new challenges in the next millennium. Seven trends in
international logistics are outlined. These are supply chain management, globalisation of the supply
chain, virtual enterprises, e-business, green logistics, strategic partnerships and new management
principles. The implications for European companies are discussed and illustrated by examples from
advanced companies. Asserts that it is employees and not the systems and processes that will ensure
solutions to the logitstics tasks and provide companies with the necessary competitiveness.
The international competitiveness of European companies will increasingly depend
on their ability to deliver customer-adapted products all over the world quickly and
on time. Such a competitive image places a number of demands on the logistics
system and management's attitude to how important logistics is as a competitive
parameter. In this paper I will give a brief account of the most important challenges
that European companies must take up at the doorstep to the next millennium.
These challenges are summarised in the following trends (PricewaterhouseCoopers,
1998; Holmes, 1995; European Logistics Consultants, 1996):
. supply chain management;
. globalisation of the supply chain;
. strategic partnerships;
. virtual enterprises;
. e-business;
. greening the supply chain; and
. relations management.

Focus on supply chain management

In the 1990s, focus has changed from internal efficiency in the logistics function
to external relations between the parties in the total supply chain. The largest
potential for improvements is not found inside an individual company, but in
the interfaces between legally independent companies in the supply chain. This
development has enhanced the importance of supply chain management (SCM).
SCM entails that the links in the supply chain co-ordinate their planning,
management and organisation based on an assessment of the overall efficiency
and competitiveness of the supply chain (Lambert et al., 1998; Christopher, International Journal of Physical
Distribution & Logistics
1998). Thus, a strategic perspective is applied to the supply chain. SCM co- Management, Vol. 30 No. 5, 2000,
pp. 377-387. # MCB University
operation will normally include the following characteristics: Press, 0960-0035
IJPDLM . joint planning and mutual exchange of information;
30,5 . co-operation based on end users' requirements;
. cross co-ordination on several levels in the participating companies;
. long-term co-operation and trust between the actors;
. fair sharing of risks and benefits; and
378 . common visions and company cultures.
One of the advantages of close, integrated co-operation between the actors in
the supply chain is an increased transparency in the supply chain to the effect
that distorted information from one end of a supply chain to the other can be
eliminated. This reduces the so-called ``bullwhip-effect'' (Lee et al., 1997), where
even small changes in demand downstream may result in large fluctuations
upstream. Through close co-operation in terms of organising, planning and
monitoring, it is possible to remove superfluous stocks, reduce lead-time,
reduce uncertainty, and achieve better capacity utilisation.
Companies that have implemented the SCM concept in Europe are relatively
few. Prominent examples are Cisco, Ikea, Lego, MoDo Paper, 3M Europe and
Unilever. The successful US retail chain Wal-Mart has recently acquired the
British supermarket group ASDA and two German retail chains (Dawley,
1999). Wal-Mart is one of the pioneers within supply chain management in the
USA and it is expected to transfer the SCM concept to leading manufacturers in
the fast moving goods industry in Europe.

Globalisation of the supply chain

As a result of international competition, production processes become
increasingly specialised. The implication is that an increasing part of the value
added is placed outside the company's own production facilities. At the same
time, we see a globalisation of supplier and customer markets where domestic
and local suppliers and customers play a less important role compared to
global suppliers and customers. In recent years, research on logistics trends in
Europe and their consequences for European firms has been conducted
(Holmes, 1995; Schary and Skjoett-Larsen, 1995).
Measures to improve the efficiency of information and transport systems
have played a major role in development. These measures have made it less
expensive, quicker and safer to purchase goods from remote supplier markets
and distribute goods to remote customer markets.
Another factor for this development is the quick technological development
combined with economies of scale in production, which in some component
markets has resulted in a concentration of relatively few global suppliers.
Examples are semi-conductors and screen filters in PCs.
A third factor is the large difference in payroll and production costs between
western Europe, on the one side, and central and eastern Europe, Asia and
South and Central America, on the other side. A growing number of companies
in western Europe are moving their labour-demanding production processes to
new industrial regions or buying an increasing part of the materials they European
require from suppliers in these areas. In this connection, Poland, Hungary and logistics beyond
the Czech Republic are specifically interesting as they are almost at the same 2000
level as western European companies in terms of technology and quality, while
their payroll costs are considerably lower.
Finally, access to a number of markets is facilitated if production has been set
up in the country in question. For example, the NAFTA agreement between 379
Mexico, the USA and Canada entails that goods manufactured in Mexico can be
freely exported to the USA and Canada. Several multinational companies have
set up plants in China, India or Brazil to take advantage of the cheap labour force
and get access to widely expanding markets.
In future, European companies supplying components or systems to
multinational companies will be required to participate in global sourcing by
their customers. This may imply that they set up local production close to the
customers' most important markets. For example, suppliers to the automobile
industry are often met by a demand to set up local JIT-production in relation to
global automobile manufacturers' assembly plants around the world.
Within Europe, the driving forces behind changes in logistics structure and
strategy are the:
. removal of trade and transport barriers between EU countries;
. opening of new markets in Eastern Europe;
. acceptance of a single European currency;
. development of information technology and fast communication systems;
and
. emergence of pan-European logistics service providers, who offer fast,
reliable and cost-efficient distribution in Europe.
These are all well-known trends. Only the last point deserves further
elaboration. Recently, there has been an upsurge in company acquisitions,
mergers and alliances in the contract logistics industry to create one-stop, pan-
European service providers. One example is Deutsche Post, which has acquired
the Swiss company Danzas and the Swedish ASG. Another example is the
Danish logistics provider (DFDS Transport) which has acquired its closest
competitor Dantransport. International customers drive the logistics service
providers when they enter new markets. One example is the UK-based logistics
provider, Exel Logistics, which followed Marks & Spencer into France. Also,
major logistics providers from North America, such as GeoLogistics and Ryder
International, are expanding into Europe, driven by customer demands for pan-
European and global logistics service coverage (Hastings, 1999).

Strategic supplier co-operation

The trend in European industry is towards a reduction in the supplier base and
differentiated supplier co-operation. There are three reasons for this development:
IJPDLM (1) Many companies have changed production strategy from in-house
30,5 production of nearly all components to outsourcing a range of
production processes that are not part of the company's core
competencies.
(2) Several companies have realised that searching, selecting and
evaluating suppliers on an ongoing basis may lead to large transaction
380
costs. Although it is possible to obtain price reductions in the short run
by playing off one supplier against another, such a policy will often
involve additional costs in connection with training, quality problems,
delivery delays, etc. which in the end will exceed the short-term
economies.
(3) The pace of technological development is so rapid that it is more
important to choose suppliers who are at the leading edge of new
technology than suppliers who are competitive in price.
These trends in development imply that purchasing companies in future will
differentiate their strategy in relation to suppliers. In practice there is a
continuum of supplier relationships going from vertical integration to market
transactions. Figure 1 illustrates some possible supplier relationships
depending on the strategic importance of the purchase and the difficulty of
managing the purchase situation.
Based on this classification, we can distinguish between four generic
supplier strategies:

Figure 1.
Portfolio model of
supplier relationships
 (1) strategic partnerships/system suppliers; European
(2) outsourcing of non-critical purchase; logistics beyond
(3) leverage purchasing; and 2000
(4) bottleneck purchasing.
Strategic partnership will normally be realised with suppliers who contribute with
processes, components or systems that are critical to the customer company's
381
production process or constitute an important part of the products' value (Olsen
and Ellram, 1997; Anderson and Katz, 1998). Normally, the partnership will entail
that the supplier is included in the design and construction phase of new products,
has access to sales forecasts, production plans and requirements of materials early
in the process and that there is on-line communication between the parties.
Strategic partnership will normally be limited to the company's key suppliers. The
Danish audio/video manufacturer B&O's co-operation with the plastic
manufacturer Kaiserplast is a good example of strategic partnership. Kaiserplast
has taken over all production of plastic moulded components that are part of
B&O's production. Kaiserplast has invested in special equipment for this
production, and in return it is sole supplier to B&O. Kaiserplast has full access to
B&O's sales forecasts and production plans and is in charge of filling up the
inventory of B&O according to agreed inventory management principles (VMI
concept). In addition, Kaiserplast is invited to participate in B&O's development of
new products from the very idea and design phase.
A special variant are systems suppliers who develop, produce, test and
deliver subsystems for the customer's final assembly of finished products
according to specification of requirements. Normally, the systems supplier is in
charge of selecting and managing component suppliers and of keeping up with
technological development within the systems area (Hines, 1996). Systems
suppliers are especially widespread within the aircraft and automobile
industry, but gradually the concept is spreading to other industries where the
finished product is composed of a large number of components and services,
e.g. power plants, train and ship construction and baggage conveyor systems
in airports.
Outsourcing of non-critical purchase comprises a new business area for
some wholesale companies, dealing, for example, with HVAC articles, tools,
electrical accessories, etc. The object of the concept is to let one supplier take
over the responsibility of purchasing a wide assortment of standard products
used in the customer's production process. It saves the customer from the
trouble of supervising the stocks and keeping track of a large number of
suppliers. The selected supplier is in charge of replenishing the customer's
stocks according to agreed max./min. rules. The advantage for the customer is
primarily a simplification of the purchasing and inventory administration,
while the supplier benefits from economies of scale in purchasing, increased
customer loyalty and better planning and management of resource efforts.
Leverage purchasing is a relevant strategy in a situation where the purchases
are easy to manage but strategically important to the company. In order to reduce
IJPDLM materials costs it is important to leverage volume across product lines and
30,5 suppliers. By reducing the number of suppliers and by centralising purchasing
across various product divisions the volume of purchasing orders can be
increased. The increased buying power will make it easier to establish balanced
relationships with the suppliers.
Bottleneck purchasing encompasses situations where the purchases have a
382 low strategic importance to the company but are difficult to manage. A possible
strategy is to lower the costs of operations by standardising the purchase or to
find alternative suppliers.

Virtually integrated supply chains

Virtual means an imaginary reality. In the literal sense of the word, a virtual
company is a company that only exists in the imagination not in the real world.
Virtual companies are characterised by a network of internal and external
relations that are constantly changing. New relations are added, and existing
ones disappear or change in nature.
In virtual logistics, the physical flow of materials and the information flow
are treated independent of each other. Ownership and control of resources are
handled electronically through Internet/extranet applications and not by direct
physical presence and control (Clarke, 1998; Hoek, 1998). Consequently, the
design of the logistics information network is independent of the physical
logistics systems. Tasks can be placed where they are most appropriate,
independent of time and place. For example, a large range of programming
tasks is today placed in India where the labour costs are low and the
competence high. Thus, a Danish firm in the electronic industry is planning to
move basic software assignments from Denmark to the Baltic States and
concentrate its internal resources on more advanced software development.
Other examples of virtual logistics are administrative functions such as
order administration, invoicing and transfer of payments, which are
increasingly outsourced to call centres. The customer will be unaware that it is
an international call centre, answering the telephone and not the supplier's own
switchboard. Concurrently with centralising the stock holding to one or a few
distribution centres, administrative functions are often transferred from the
decentralised sales and marketing organisations to central administrative
centres. Multinational companies such as Compaq, IBM and Atlas Copco have
all transferred their sales administration to European administration centres.
The virtual organisation often focuses on the solution to concrete tasks and
projects. When the task has been solved or the project is finished, the
organisation is dissolved and new organisations are formed with new
combinations of partnerships. The virtual company combines flexibility and
dynamic development with steady and continuous network relations. A well-
known example of a virtual company is Dell Computers (Magretta, 1998) which
in a very short time has managed to become the world's next largest supplier of
PC equipment with global sales that exceed US$12 billion. All sales transactions
are carried out via telephone or Internet, assembly is carried out on plants around
the world and distribution is made directly to the customers without any use of
traditional distribution channels. The competitive parameters are tailor-made European
products (consisting of standard components), short delivery time in Europe logistics beyond
(within seven days from receipt of order) and competitive prices. The average
stock time in Dell is approximately ten days, whereas the traditional PC-
2000
manufacturers operate with approximately 70 days as average stock time. As a
result, Dell is very flexible if prices change on the market, as happened during the
recent crisis in the Far East, or new products are introduced. 383
Other examples of virtual companies are Richard Branson's Virgin and the
Austrian soft drink company Red Bull.
Although the virtual company in some areas goes against the tendency to
establish long and close relations with external partners, the virtual company and
the partnership model are not necessarily incompatible. The difference is first and
foremost that the virtual organisation is designed to solve a certain task, e.g.
develop a new type of aircraft, equipment for sorting packages or a computer
system. Therefore, the virtual organisation will connect to and disconnect from
network partners depending on the specific tasks. The partnership model is more
appropriate in business relationships where continuous improvements and
organisational learning over longer time periods are important to increase the
efficiency of the supply chain. Therefore, partnerships should be used in situations
where competencies are created in the relationships between the partners, while
virtual networks should be established in situations where the focus company is
drawing on existing, complementary competencies in other firms.
The driving forces behind virtual organisations are primarily global
competition, global specialisation, growing outsourcing, reduced lead times,
customisation, IT-development and integrated transport systems. The virtual
company has become especially popular within technologically advanced and
dynamic businesses such as computer hardware and software, office machines
and the audio industry. However, virtual companies are also gaining ground
within the fashion industry, sports goods, toys, the entertainment industry,
communication equipment and the transport industry.

E-business
In future, the Internet will influence logistics systems in various ways. First,
the Internet will be applied as a fast and efficient means of communication
between companies in the overall value chain. Customer orders, order
confirmation, transport booking, invoicing, etc. will increasingly take place via
EDI/Internet. The same applies to planning information such as sales forecasts,
production plans, up-to-date sales figures, stock levels, etc. to which strategic
partners will often have on-line access.
Second, in future many companies will use the Internet to market and sell their
products directly to customers, so-called electronic commerce. Electronic
commerce has already gained a foothold within areas such as books, periodicals,
textiles, pharmaceuticals, computer equipment and spare parts, but in future it
will no doubt spread to other product groups. In 1998 the computer industry,
with Intel, Cisco, Dell and IBM as the dominating actors, covered approximately
one-third of the entire American market for electronic commerce.
IJPDLM E-commerce makes new demands on the company's logistics system. In some
30,5 cases it calls for completely new distribution concepts. Streamline, an American
grocery supplier, has developed an on-line shopping system based on refilling the
consumer's refrigerator directly from a distribution centre. The weekly ``shopping
list'' is filled and delivered directly to a ``Streamline box'' placed in the customer's
garage or cellar. This allows the supplier to plan purchasing and distribution
384 according to the customers' purchasing patterns, which in turn reduces his need
for stocks (Dagher, 1998). Other examples of ``home shopping'' are based on
existing distribution channels, e.g. supermarkets that receive the customer's
purchasing order electronically, pick the order directly from the shelves and deliver
the goods to the customer at an agreed time. This type of Internet commerce is
especially suited to disabled people or very busy consumers who are willing to pay
a little extra in order to avoid the trouble of shopping. But in principle, it only
involves a transfer of processes from the consumer to the retailer. The US-based
retail chain Peapod is operating this service in the San Francisco and Chicago area.
Also in Switzerland, IBM and Migros have started a joint project with Internet-
sales for IBM employees. Generally, there seem to be problems in expanding
Internet-commerce for end-users in Europe compared to the USA. One reason
could be that mail-order business is not fully accepted in Europe, and mail-order
sales based on catalogues is particularly likely to be transferred to the Internet.
On the business-to-business market, electronic purchasing is growing within
MRO items (maintenance, repair, operations) and indirect purchasing. Indirect
purchasing includes office supplies, furniture, IT equipment and travelling and
insurance services. Often, purchasing within MRO and indirect items implies
large transaction costs, as it is not systematised to the same degree as
purchasing of materials and components for production. The number of
purchasing orders is high, and they are normally distributed between many
suppliers. It is a prerequisite for electronic purchasing that the purchasing
processes are designed and co-ordinated in relation to the company's ERP
system. The established ERP suppliers such as SAP, Baan and Peoplesoft are
in the process of adapting their applications to indirect purchasing, but also
new actors such as Commerce One and Ariba are offering business-to-business
solutions on the electronic market. The big barrier to the establishment of an
electronic marketplace for non-production related purchasing is the lack of a
dominant standard. As long as the software producers do not agree on a
common standard there is a risk of choosing the wrong platform.

Greening the supply chain

In the years ahead, the environment will increasingly come into focus. A range
of companies is already preparing environmental accounts as an appendix to
their annual reports. Prominent examples are Novo Nordic, Unilever and Volvo.
A number of companies are becoming certified based on environmental
standards such as ISO 14000 and BS 7750. Having an environmental profile is
becoming increasingly important in marketing.
Many companies have started to carry out life cycle analyses of their products
and processes in order to reduce adverse environmental impact on the total
supply chain. Therefore, it becomes important that suppliers can document the European
supply sources of materials and components in addition to the environmental logistics beyond
impact of the production and distribution of the products. Environmental
requirements are also influencing the choice of supplier and the ongoing supplier
2000
evaluation. Today, only a few companies require environmental certification
from their suppliers, but in future many customers will expect that suppliers are
environmentally certified or are seriously planning to become so (Min and Galle, 385
1997; Valton et al., 1998).
In the near future, the packaging area will be faced with stricter requirements
for repossession and recycling. In 1994, the EU made a directive on Packaging
and Packaging Waste (Webb, 1997), which is presently being implemented in
national law in EU countries. The new packaging directive will compel many
companies to reconsider their type of packaging and form of transport in order to
minimise their packaging expenditures.
The transport area will also be faced with changes in the future. Several
countries, e.g. Germany, Switzerland and Austria, are planning to introduce
restrictions for transit traffic. Switzerland has announced a total stop for transit
truck traffic over a ten-year period, while Austria has introduced a system of
eco-points allocation that rewards the most environmentally friendly transport
companies in transit traffic through Austria. In Germany, there is a growing
focus on traffic congestion on the freeway and in the vicinity of large cities. It is
expected that more duties and restrictions will be imposed on truck transport
on the motorways just as there will be more restrictions on truck traffic in large
urban areas. City logistics is an area of growing interest for both researchers
and municipal authorities. City logistics often implies that goods transport to
the inner city is consolidated in a distribution terminal outside the city and
thereafter distributed by one logistics provider to downtown shopping areas.
The city of Bremen is a prominent example of this development.
Transport customers are also beginning to require that transport companies
can document that they use environmentally friendly trucks and that the
capacity utilisation of the transport material is high. It is difficult to see realistic
alternatives to the truck traffic in Europe, but concurrently with the growing
traffic congestion and the increase in green taxes and restrictions on truck
traffic, inter-modal transport forms such as car-railway and car-railway-ship
may have a comeback.
Reverse logistics is a concept that is applied in processes connected with
recycling, reusing and reducing the amount of materials used (Carter and Ellram,
1998). Within some product groups the recycling systems have been
systematised. This applies to cars, chemicals, computers, printers, batteries,
white goods, packaging, etc. Within other areas the development is just starting.
Reverse logistics will be an important issue in future, both for the companies
that are going to organise the recycling systems and for the companies that have
to pay for the disposal of run-down or waste products. Reverse logistics start in
the product development phase, where it is important to consider which
materials to use in production in order to minimise consumption of materials and
the costs of a later separation and recycling of components.
IJPDLM In future, ``greening'' will become an important competitive parameter in
30,5 supply chain management. ``Greening'' will comprise all links from the
manufacturer of raw materials to the end user and include products, processes,
packaging, transport and disposal.
Due to environmental considerations, some of the tendencies described
above may change character and direction. For example, demands for a
386 reduction in CO2 may limit globalisation and lead to more local production and
distribution. As a result of increased transport duties and traffic congestion in
Europe, regional distribution centres may again prove advantageous.

New management forms

The trends in development outlined above will also have an impact on the
organisation and strategic importance of the logistics function. Where the
logistics manager's tasks previously have focused on internal co-ordination and
management, they will in future deal increasingly with relation management in
connection with external co-operators, regardless of whether they are suppliers,
third-party operators or customers. Important tasks will be to negotiate
partnership agreements, maintain and develop co-operative relations with
external partners and develop inter-organisational information systems.
In future, companies will be organised more in relation to cross-business
processes rather than according to traditional function areas. Cross-company
teams of employees within purchasing, production, product development,
logistics and sales/marketing will be set up to ensure an efficient co-ordination
and management of the processes. In addition, inter-organisational teams with
employees from key suppliers will be formed to ensure a ``frictionless''
transition between the links in the total supply chain. The role of the logistics
co-ordinator will change from being a ``fire extinguisher'' who solves daily
logistics problems to a project manager for cross-company teams of internal
and external employees.
In the end, it is the employees and not the systems and processes that will
ensure solutions to the logistics tasks and provide the company with the
necessary competitiveness. Therefore, it is crucial not to underestimate the human
and cultural aspects in the implementation of projects of change in the company.
Experience shows that most resources in projects of change should be used to
change the attitude of employees and for supplementary training. Critical success
factors are support from top management, employee participation, and frequent
and open communication about changes and the results achieved.

Conclusion
This paper has outlined a number of trends in the development within the
logistics area. Some trends will show their full impact in the coming years,
while others will take longer to manifest themselves. Within the next five years,
I expect that globalisation, strategic partnerships and e-commerce will
dominate theory and practice within the logistics area. Within the next five to
ten years, virtual enterprises, ``green supply chains'' and process-oriented
management will increasingly dominate the agenda. It goes without saying European
that the most proactive companies will start to prepare themselves today for logistics beyond
tomorrow's challenges. ``First mover advantages'' also apply to logistics.
2000
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