The Eurozone crisis continues to ripple through the world’s economies, but what are the supply chain management implications of Europe’s financial difficulties?
Companies that do business in Europe have already experienced the fallout of the crisis. But even if you are not active in the region it is wise to be aware of its impact on global supply chains.
Here are some on-the-ground observations.
Market consolidation. Europe’s freight transportation system is much more fragmented that its counterpart in the North America (for more on this see Divided by a Common Language). Companies are heavily reliant on local players, and there are fewer major carriers than there are in the North America. This fragmentation coupled with the financial crisis is driving market consolidation as many carriers face going out of business and the number of mergers and acquisitions increases.
Instability is the norm. Market conditions remain unstable. Many forwarders are experiencing fluctuations in demand for their services. There is overcapacity in some markets and equipment shortages in others. In the recent past periods of excess capacity have been followed by capacity shortages. These imbalances arose because carriers exited the market, and even a relatively modest increase in demand created capacity shortages.
Currently, demand is weak, and many carriers that redeployed equipment last spring in the hope that the economic tide would turn are now struggling to find loads.
Regulations are a factor. Supply chain managers still have to contend with new regulations. There are, for example, plans to introduce a tax on greenhouse gas emissions from trucks and shipping lines are adapting to low-sulfur fuel requirements.
Regulatory changes like these have a direct impact on supply chains, as companies strive to re-route cargo to avoid the extra costs involved. For instance, a report published by the Institute of Shipping Economics and Logistics in Bremen, Germany, analyzed the potential impact in the Baltic Sea and North Sea of regulations designed to reduce sulfur oxide emissions from ships. The report estimates that for container and RO-RO shipping, 2.7 million trailers could shift to road transportation in 2015 as a result of the fuel regulations. Of these units, around 600,000 will shift directly to land routes or to routes with shorter ferry legs, according to the Institute. Time will tell whether these predictions come to fruition.
Growing interest in TMS. More companies in Europe appear to be using the latest transportation management systems (TMS) – including software-as-a-service and Control Tower® solutions – to improve the efficiency of logistics networks and lower costs. This type of technology tends to be more prevalent in the US, but this is changing as companies in Europe respond to the increasing pressure on margins and the need to set a base line for raising the efficiency bar.
Minimizing inventory. Reducing inventory levels is another supply chain strategy that is attracting attention. Given the cash flow challenges that companies in Europe face, there is an urgent need to minimize the amount of money tied up in inventory.
Another trend seen in Europe is the shifting of global outsourcing operations from traditional Far East countries to locations in Eastern Europe, Turkey and Middle East.
An increasing number of companies are focused on getting their products to the market on a short lead-time to accommodate shifting consumer buying patterns, seasonality, and holidays. South East Asia labor and transportation costs are going up, and the region is becoming less attractive for contract manufacturing compared to countries bordering the EU. Communication and cultural alignment between employers and employees who are geographically close to each other also benefit from this shift.
The above factors combined with proximity to the consumer offer new advantages to organizations that look for opportunities to grow in this challenging market.
A higher profile for risk management. Similarly, risk management seems to be gaining ground in the supply chain domain. Take for example currency-related risks. Companies have to consider the possibility of a collapse in the local currency in countries such as Greece when negotiating freight contracts. Other day-to-day risks that have to be mitigated include dealing with variations in payment terms across the region and a general lack of credit.
Of course the situation in Europe is ever-changing, and it is impossible to know for sure where the financial crisis will take the region over the next few years. But one thing is certain: these problems have permanently changed the way European companies perceive logistics networks as a component of bottom line performance.