European supply chain managers can learn from their U.S. colleagues in a number of areas. JIT replenishment to automotive assembly plants, intermodal transportation, and use of Internet applications come immediately to mind. But when it comes to the distribution of an increasingly diverse mix of products from factory to channel and end user, U.S. managers should look to the European experience—especially as they consider the future design of their supply chains.

Because of the wide variety of product-channel combinations, distribution chains in Europe are more complex than those found in the United States. Despite the changes enacted by the Single Market legislation in 1993, Europeans still must contend with differences created by 15—and soon to be 20—national identities. Products can be influenced by residual national technical specifications, widely differing customer preferences, and diverse packaging and labeling requirements. Furthermore, the distribution channels within each country are at various stages of development so that delivery service expectations (and payment terms!) vary widely.

This relative complexity is exemplified by the number of items in comparable product lines in the two geographies. A multinational maker of personal computers, for example, reports that its European product line contains twice the number of SKUs as in the United States. That higher number is driven by diversity in user manuals, power supplies, and keyboards as well as system configurations and software. When locally sourced items like carrying cases are added in, the divergence becomes even wider. This broader product line then flows through a more differentiated channel structure. The PC maker delivers 95 percent of its sales volume to 700 ship-to points in Europe, compared to only about 100 key addresses in the United States.

Greater product-channel complexity helps explain why the focus in Europe has been on optimizing along the chain. In the United States, by contrast, the emphasis continues to be on gaining economies-of-scale and cost reduction within individual chain elements—for example, by creating larger distribution centers or consolidating transportation loads. In part, this difference in emphasis is explained by the greater importance of transportation costs in the United States because of the longer distances involved. In addition, the relative product line complexity in Europe increases the importance of inventories in the total cost picture. And inventory optimization can only be achieved by coordination of all parties along the chain.

The drive in Europe to optimize along the supply chain has led to three interrelated developments that have implications extending far beyond the European Community.

1. "Indistribution" centers. More than 1,000 of these facilities now exist in Europe. "Indistribution" centers not only provide warehousing and logistics-related services (deconsolidation, repackaging, and price labeling, for example), but also carry out industrial activities such as final assembly, performance testing, disassembly and recycling, and repair. These are performed for products ranging from the simple (for example, bicycles) to the complex (computing and imaging equipment). The leading-edge indistribution centers also provide information services beyond the usual track-and-trace applications. Commonly provided IT services support order processing, invoice collection, the help desk, and product demonstration. Notably, these indistribution services all incorporate postponement techniques that adapt the product to a specific geography, channel, or customer. This helps industrial manufacturers cope with the added complexity of efficiently serving the whole European market.
2. Outsourcing. Only a few years ago, major multinationals in Europe were outsourcing roughly a quarter of their logistics activities to indistribution centers. A recent survey, however, revealed that these major companies now outsource about two-thirds of these activities. Furthermore, it's becoming increasingly common to find all transportation and logistics activities being outsourced to a single logistics service provider. This trend toward single-source outsourcing began more than 10 years ago in the grocery supply chain in the United Kingdom. It has since spread to the distribution of industrial goods, where the center of activity for continental Europe is in the Benelux countries. This increase in single-source outsourcing gives the logistics service providers a greater opportunity to optimize along the chain. Single sourcing is more prevalent in Europe than in the United States, where customers are more likely to outsource warehousing and transportation separately, placing more emphasis on cost reduction within those functional areas.
3. Integrated software packages. A third phenomenon, appearing first in Europe, has been the introduction of integrated suites of packaged software for mission-critical manufacturing and distribution activities. Pioneered in the German market by SAP A.G., they give supply chain decision makers more consistent, accurate, and timely information than the old fragmented legacy systems. The design of these systems for application to hybrid supply chains with multiple "customer order decoupling points" was introduced by Baan N.V., a Dutch software maker. In all likelihood, Europe-based companies like SAP and Baan will be in the forefront of developing applications that enable entire industry chains—manufacturers, channels, customers, and logistics service providers—to work cooperatively in providing high-quality service to individual market segments at minimum overall chain cost.

The inexorable trend toward greater supply chain complexity worldwide makes the European experience relevant for distribution professionals everywhere—particularly in the United States. In growth markets, the rapid introduction of new technologies and applications fuels this global trend. The number of new personal computer model introductions, to cite one example, has tripled in the last decade. Yet even in mature markets such as lamps and electrical distribution equipment, the long-term movement toward greater variety continues. New technologies such as electronic lighting, power electronics, and fiberoptic communication lead to new product introductions; at the same time, older products stay in the line to maintain the legacy infrastructure.

A recent study by the Technical University of Eindhoven of the electrical distribution equipment chain projected a future of multiple, distinct distribution chains for specific product-customer segments. These multiple chains will replace the current "one-approach-fits-all" thinking, the study said. Low-cost commodities, such as receptacles, may be replenished to site; other equipment will be stocked or cross-docked at distributors; and semi-customized items will be shipped direct. Importantly, all of these activities will be sequenced for the convenience and efficiency of installation on site.

Of course, manufacturers periodically reduce product variety and achieve savings by discontinuing low-volume products, thereby reducing inventory investment and complexity costs within their factories. In addition, some products can be redesigned for made-to-order production to simplify inventory management. But these efforts should not be confused with the longer-term trend toward increasing product line and channel complexity, which will only accelerate in the coming decade. A new force for greater product variety is the growing concentration of power downstream in the chain. The pressure from end users for more customized products increasingly will force manufacturers to even greater diversity in their product lines.

To sum up, for reasons of history and culture, supply chain managers in Europe face an exceptional challenge of providing high delivery service levels despite the complexity encountered in a diverse mix of product types, channel evolution, and local regulations. In coping with this challenge, European managers, assisted by their logistics service and system providers, have pioneered innovative forms of indistribution centers, single-source outsourcing, and tightly integrated information systems to optimize the supply chain.

Meanwhile, some observers see that same kind of complexity coming to the United States. A recent article appearing in the International Herald Tribune by Michael Clough, a senior fellow at the Council of Foreign Relations, may prove prophetic: "Based on existing economic and demographic trends, it is possible to imagine 20 or more core regions (in the United States)...each region will be determined by the nature of its population, the political orientation of its dominant elites and the extent and location of its global connections." Could the European experience be a harbinger for the United States?