What do ice cream, french fries, and fax machines have in common? Not much, unless you happen to be in Tilloy-les-Mofflaines, France. There, you'll find all those products and more housed in the same distribution center.
That DC itself is fast becoming a sort of United Nations of distribution: The ice cream is owned by Haagen-Dazs (a company based in the United States), the french fries are a product of McCain Foods (Canada), and the fax machines are from Brother International (Japan). While it might seem odd for all these products to be occupying the same facility, there's a simple enough explanation: Their makers have all contracted with the same third-party logistics service provider (3PL)—France's FM Logistic—to handle their distribution in Europe.
These three companies are hardly alone in their decision to take the 3PL route. Plenty of foreign manufacturers have done the same, for reasons ranging from costs to the opportunity to avail themselves of the provider's local expertise. As a result, business for 3PLs in Europe has boomed in the last few years. And it shows no signs of slowing. Executives of European 3PL operations who responded to a recent survey by Boston's Northeastern University projected growth of about 15 percent for this year.
Despite what you might expect, this growth is not just being driven by large companies with an established customer base on the continent. "The majority of companies that use 3PL services are not multinationals, but rather, companies looking to get their feet wet in Europe. It is a good way for small companies to get there without having to invest in an asset base," says Jeffrey Rodriguez, senior logistics manager for Craters & Freighters, a nonasset-based logistics service provider.
The 3PL advantage
As for why they turn to 3PLs for distribution on foreign soil, manufacturers cite a number of reasons. But one that appears on nearly every list is knowledge of local markets. Language and cultural differences among European nations often make it tricky for newcomers to navigate the marketplace. The creation of the European Union (EU) has made things easier, but moving products from Germany into France is still not the same as delivering goods from Kansas to Nebraska.
That's where the seasoned 3PL comes in. "It's a matter of core competency," explains John Langley, professor of supply chain management at Georgia Tech. "A 3PL's core competency is that they help companies mitigate their risk with someone who has on-the-ground knowledge of each country and region."
Not only do 3PLs know local markets, but most already have the necessary infrastructure in place, with facilities in prime distribution locations. That's a major consideration in Europe, where land is at a premium. In Europe, prime distribution locations include the Netherlands, Belgium, northern France, and northern Germany—all points from which shipments can easily reach the continent's largest cities within one to two days. These locations also offer the advantage of proximity to ocean ports, such as Rotterdam, Amsterdam, Antwerp, and Dunkirk, and to the superb network of canals, rails, and roads in this part of Europe.
FM Logistic's Tilloy-les-Mofflaines facility is one such example. Located in northern France, the site is within easy reach of the ports of Dunkirk and Antwerp.
Another is Menlo Worldwide Logistics' facility in Rotterdam, the Netherlands. Menlo Worldwide, a global third-party service provider, operates the dedicated facility for one of its clients, NCR, which manufactures items like cash registers, ATMs, self-service checkout stations, and point-of-sale workstations. At the Rotterdam site, Menlo aggregates products manufactured worldwide for shipment to NCR's clients. "The NCR customer is typically a retail chain," explains Michael Chandler, vice president of fulfillment operations for NCR. "The customer does not care where it comes from as long as it shows up as a complete order and not just separate components coming from all over the world." From Rotterdam, he adds, the company can reach most of Western Europe within 24 hours.
At present, 3PLs are pushing their frontiers eastward, expanding their presence in Eastern Europe, where the greatest market opportunities are believed to lie. "There has been a big push eastward by 3PLs," says Robert Lieb, professor of supply chain management at Northeastern University and the author of the university's 3PL study. "Eastern Europe and Russia are targeted as growth areas.
Many 3PLs are establishing operations in Hungary, Poland, Estonia, and other countries such as new European Union members." FM Logistic, for example, is establishing new facilities in Russia.
Getting a toehold
For many companies, another major attraction of using a 3PL is that it allows them to enter new markets with only a minimal capital investment. Essentially, the 3PL can serve as a stepping stone until such time as the company decides to construct its own DC. "It gives them the ability to scale up and minimize the risk until they have the volumes needed to justify building a facility of their own," says Lieb.
But it's not only the newcomers that are using 3PLs to limit the amount of capital they must invest. Companies that have an established presence in Europe are doing it as well. Campbell Soup is a case in point. Up until about a decade ago, it used its own warehouses and fleets to handle distribution on that continent. But as the company's business grew, it opted for a change in strategy. "We started to outsource about 10 years ago," recalls Hans Ernest, the company's vice president of supply chain for Europe. "If you look at our scale of operations, it is significantly smaller in Europe than it is in the United States. We have so much diversity of products, so we try to reduce our costs and invested capital by pushing our logistics activities outside."
Third parties also offer flexibility—an important consideration for a growing company. "Most companies that expand into Europe may not know what their volumes will look like two to three years out," notes Langley. "A 3PL can help companies match capacity to customer needs."
That holds true in the short term as well. For many shippers, a major advantage of using a third party is the 3PL's ability to accommodate peaks in demand. For example, in addition to the dedicated facility in Rotterdam, NCR can take advantage of shared flex space in other Menlo facilities when the need arises.
Beyond that flexibility, using a 3PL may allow the shipper to benefit from economies of scale. Third-party logistics service providers often can find complementary products among their clients' wares that can be stored, processed, and shipped together for maximum efficiency. McCain Foods and Haagen-Dazs, for example, share many of the same customers in Europe. As a result, FM Logistic can pick McCain's frozen food items and Haagen-Dazs's ice cream products and ship them together, allowing the companies to share costs.
Those economies of scale aren't limited to picking and handling. They also come into play with transportation. FM Logistic, for example, is currently developing plans to bring products from several of its food clients together so that they can be pooled and shipped as full truckloads.
On top of that, 3PLs often can leverage their volumes to get better transportation rates. That's been the experience of NCR, which uses Menlo to manage its transportation. Although Menlo often uses its own fleet to provide transportation, the 3PL also contracts out some of its business to other trucking lines. "They have a deep reach into the transportation network, as they represent multiple clients," says Chandler. "That allows them to bring in greater volumes and negotiate better rates with transportation providers."
Not just for distribution anymore
As the Menlo example indicates, 3PLs do more than merely store goods and fulfill orders these days. Many also handle transportation and related services like customs clearance for their clients.
More and more 3PLs are also offering "value-added" services at their DCs. For example, FM Logistic configures the Brother copiers, computer printers, and other office machines stored at its facility in Tilloy-les-Mofflaines to meet the needs of local markets. As anyone who has traveled in Europe knows, there's little standardization among the various countries' electrical systems—for instance, electrical plugs in France have a different prong arrangement from those used in England. To address these variations, FM Logistic workers wire the proper plugs onto the machines and add instruction booklets in the appropriate language before they ship the cartons to the end users.
In fact, Menlo's ability to perform value-added services is what led NCR Corp. to use the 3PL for its European distribution. Menlo's Rotterdam facility provides NCR with light manufacturing capabilities, which range from changing switch settings within a component to the kitting of all of the components—cash registers, scanners, and so forth— needed for a retail store. In these cases, all of the IT-related products needed for a retail operation are brought together, assembled as needed, and then shipped as a unit. "It involves bolting all of the pieces together, mounting the drawer in the cash register, and mounting the scanners— everything from the 700-pound self checkout to a handheld scanner that weighs just a few ounces," says Chandler.
For all the advantages of using a 3PL for distribution overseas, the decision isn't always a slam dunk. The advantages must be weighed against the main disadvantage of outsourcing: loss of control over your distribution.
"On one end [when you use a 3PL], you share the risk; on the other, you increase the risk," reflects Campbell's Ernest. That is, companies that contract with a 3PL reduce their risks by minimizing the amount of capital they have to invest, but they also increase their risks by ceding control of their distribution to an outside party.
Third parties are well aware of shippers' fears about loss of control. To reassure clients on that count, many 3PLs make it a point to provide comprehensive information about the transactions they perform on behalf of their customers.
New visibility technologies have made that a snap. "Third-party service providers are very IT-oriented," notes Rodriguez of Craters & Freighters. "Inventory status and booking reports can often be accessed online 24/7. There really is no discernable difference now working with someone in Germany or Chicago."
Kuehne + Nagel, a worldwide 3PL based in Germany, provides its customers with continuous updates on its transactions. The 3PL uses a tracking and tracing system to keep clients in the loop, says Ernst Cuppens, the company's director of contract logistics in Belgium. "With our main customers, we have direct EDI [electronic data interchange], which informs the customer every 15 minutes about the status of their orders."
Similarly, Menlo determines what information customers want to see and then generates regular reports providing the desired information. "The client can define what KPIs [key performance indicators] are to be used to measure under the contract, such as shipping on time, order accuracy, etc.," says Gert Askes, Menlo's managing director for European operations. "Real-time information can be provided, but it is costly. Usually clients can simply go to a Web site where information is updated throughout the day. Many clients only need a daily snapshot. If you get a daily report, you have control."
When it comes to choosing a 3PL to handle their distribution in Europe, many shippers go with what they know. Oftentimes, shippers that are already working with a third party in North America simply opt to use the same one in Europe, says Robert Lieb, professor of supply chain management at Boston's Northeastern University.
Take office machine specialist NCR, for example. NCR uses Menlo Worldwide Logistics for its distribution needs both in the United States and in Europe. That has a couple of advantages from NCR's standpoint. First, it's able to build upon an established relationship rather than start over with an unknown entity. Second, by expanding its relationship with Menlo, it gains economies of scale and added leverage when it comes to renegotiating contracts.
But that option isn't always available to companies expanding their operations overseas. Some, for example, cannot find a single provider in Europe that can fulfill all of their needs.
Campbell Soup is one such company. Campbell Soup has built up its business in Europe mostly through acquisitions, and it continues to maintain the local brands in each country. Because its products vary widely from market to market, Campbell Soup typically uses a separate 3PL for warehousing in each country it serves. It also uses a number of transportation service providers across the continent.
Hans Ernest, Campbell Soup's vice president of supply chain for Europe, would like to find one carrier that can meet all of his company's transportation needs continentwide. But at the moment, most carriers do not offer the coverage required. Yet that could change someday soon, he says. There's a shift under way in the European third-party marketplace, with traditional warehousing companies getting into the transportation business and transportation companies providing distribution services. Companies like Campbell Soup may have to be patient, he says, but it's probably just a matter of time before they'll likely get what they're seeking.
For companies that find themselves in need of a new third party, Ernest has some advice on what to look for in a service provider:
"First, look for experience," he says. "Ask yourself: 'How strategic are they and what are their capabilities? What other services are they developing, and how do they plan to expand their operations in Europe?'"
John Langley, professor of supply chain management at Georgia Tech, agrees that service is—and should be—a priority for shippers when choosing a 3PL. But he adds that there's one other consideration that invariably emerges when shippers go to make their choice: price. "Price and service will always be at the top of the list," he says. "That's no different in Europe than elsewhere."
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