Copyright 2003, Traffic World, Inc.
Companies may be tempted to shift their distribution networks east when the European Union takes on 10 new members, but one new report says companies should closely analyze their overall supply-chain costs before they make the move.
The report, "Compass Eastwards," hardly comes from an independent party. It was done by consultants Buck International in cooperation with the Holland International Development Council, a Dutch agency that promotes the logistics industry in the Netherlands.
The Netherlands has a lot to lose if the EU''s push eastward shifts the geographic balance of logistics. The country is a major logistics staging area, with provincial towns such as Eindhoven and Tilburg hosting major distribution centers. Dutch labor costs, too, may look terribly high when held up against those of countries such as Slovakia.
Buck International''s Marcel Stuve says companies should look beyond labor costs, however, to consider whether savings may be offset by higher costs of inventory as more safety stock is carried to make up for poor transportation services.
Labor cost is important, says Stuve, but the study says it makes up only 4 percent to 21 percent of the total cost of the supply chain, depending on the configuration used. More decisive in most cases are inventory carrying costs and transit times, the report said, depending on the product''s value density, or dollars generated per kilo.
Next to cost as a deciding factor are supply-chain responsiveness and reliability. Taking these factors into account alters the pros and cons of the logistics configuration.
For instance, the HIDC report says a company that manufactures in China and has a Western European distribution center may save 17 percent over a company that produces and distributes out of Central Europe.
The poorest choice of all, the report concluded, is putting manufacturing, assembly and distribution in Western Europe. "Manufacturing in Europe is almost not sustainable," said Stuve. There are exceptions he said, such as Dell Computers'' assembly site in Ireland. But the unique characteristics of the Dell model make it vital that its operations be close to its markets, he said.