Executive Briefings

A Dutch Solution to the Distribution Challenge in the EU

Despite increased congestion, higher costs and more demanding consumers throughout the EU, the logistics-savvy Netherlands again has proved that it is the right choice for global companies looking for a European base of distribution operations.

The European Union, with its 450 million inhabitants and its prospects for greater population expansion and prosperity, is a market every multinational company must prize. But serving this expanding market has become an increasingly complex supply chain challenge. The cost and availability of land, labor, energy and transportation, as well as with growing problems with congestion and environmental regulations make facility site location a make-or-break decision for supply chain success.

"Five or 10 years ago, 80 percent of the European distribution centers (EDCs) were in the Netherlands," says Roy Lenders, a vice president with the Capgemini consulting firm in Utrecht. "Today Belgium is even with the Netherlands in attracting new EDCs and Germany is coming on strong. Even Ireland is gaining attention because of tax benefits, even though it is not a logistically convenient place to locate Europe distribution operations."

Thus, many European countries are aggressively seeking foreign investment in distribution facilities, so the Dutch government is again bringing the full force of its efforts on attracting logistics investment. These efforts are paying off. According to the Netherlands Foreign Investment Agency, about 45 percent of all new EDCs are locating in Holland.

"Holland intends to maintain its top place in Europe for foreign investment in logistics, which accounts for nearly 10 percent of our entire GDP," says Jochum Haakma, managing director for NFIA in The Hague. Corporate income taxes have been lowered from 35 percent to 25.5 percent. Customs duties and value-added taxes are handled administratively, meaning that companies can pay them periodically, not with every transaction as with many EU countries. The government also supports an agency called the Holland International Distribution Council (HIDC) made up of 500-third party logistics providers (3PLs), forwarders and carriers to help foreign companies find the right logistics service partners in Holland.

Part of Holland's success is simply due to its location near the center of the "economic banana," which is a crescent of Europe that stretches from southern England, over the Benelux countries and down the Rhine Valley through Switzerland to the Mediterranean coast. This region accounts for 12 percent of the EU's entire GDP and makes Holland an ideal distribution hub for serving this high-income consumer market, especially with Europe's largest port, Rotterdam, at its center.

Why Holland Is Number One In European Distribution
"For 400 years, the Dutch have been the leaders in meeting the needs of European consumers with our transportation and distribution expertise," says Jochum Haakma, managing director of the Netherlands Foreign Investment Agency. "We must be doing something right."

The facts back up Haakma's claims about Holland's dominance in European transportation and distribution. Holland has 51 percent of all European distribution centers (EDCs) compared with Belgium at 18 percent and Germany with 11 percent. In all, Holland has a total of 9,000 DCs, 2,000 of which are centralized EDCs. Logistics accounts for 4.4 percent of the country's GDP and 12.5 percent of its capital spending.

U.S. companies in particular have found Holland the place to be in Europe. More than 1,650 U.S. companies have distribution operations, headquarters offices or major service facilities in Holland, and 50 to 60 new U.S. facilities add to the list each year.

Transportation is also one of Holland's greatest strengths. The ports of Rotterdam and Amsterdam together have 44 percent of all the seaborne tonnage coming and going from the EU. Rotterdam alone has 36 percent. Amsterdam's Schiphol Airport is the third-largest cargo airport in the EU with 16 percent of all traffic. Holland has the largest portion of all inland waterway traffic in Europe and controls 85 percent of Rhine barge traffic. One third of all the truckers in the EU are Dutch.

Europe's labor laws are highly protective of workers, sometimes to the detriment of employers. Holland has among the fairest laws, which make for a stable workforce. Holland has the least number of days lost to strikes in Europe. Also, the majority of workers in the logistics sector, which make up 9 percent of the country's total workforce, speak English.


The Congestion Challenge
There is more to Holland's success than its favorable geographic location. All of the western EU shares one huge challenge: congestion. Highways across Europe are hopelessly clogged during much of the day. Even Europe's well-developed rail system has serious freight bottlenecks because passenger trains have priority over freight. Most airports have hit their daytime capacity and have severely limited night flights when freight must travel. While congestion is a common problem in the EU, Holland has taken the lead in dealing with many of the freight transportation and distribution issues.

The Port of Rotterdam plays a strategic role for nearly every company distributing through Holland. It is by far the largest port in Europe with 36 percent of all of Europe's seaborne freight flowing through it. To maintain its ability to handle the burgeoning container traffic from Asia, the port is expanding the Maasvlakte container terminal at the western-most tip of the port into the North Sea. The expansion not only doubles the current 1 million-TEU capacity at this ECT-run terminal, but it will also make it faster and easier for the next generation of 10,000-plus-TEU vessels to discharge their cargoes.

But receiving containers at the port is just the beginning. The challenge is to move the freight through the 40-kilometer-long port on to EDCs and throughout the entire EU without becoming bogged down in highway and rail congestion.

Holland has been the leader in using barges to move containers to distribution centers in the south and east of Holland as well as to points all along the Rhine and Danube Rivers. The operations have been so efficient that containers can move all the way to Basel, Switzerland in four days and as far as Eastern Europe within a week.

Shuttle service has been established between Rotterdam and growing distribution parks within Holland. For example, a daily container train links the port with Venlo, Holland's fastest-growing distribution location, along the German border in the southeast corner of the country. The greatest leap forward in combating congestion will come in early 2007 with the opening of a freight-only rail line called the Betuwe Route. This multibillion-euro project will allow containers to move directly from the Maasvlakte container terminals at the western end of the Port of Rotterdam to the German border and then further into Europe. The160-kilometer dedicated freight line can handle 10 trains an hour in each direction. Expected volume at the start-up will be about a 150 trains a day.

New Distribution Structures
The classic pan-European distribution network model that served thousands of companies through the 1990s was to centralize inventories of standard goods at a single EDC somewhere in the Benelux area and ship by truck to customers throughout the EU. But much has changed in the last few years to force companies to revise their distribution strategies.

The EU has expanded to 25 countries, which has increased its size and population by 50 percent. The combination of greater distance and less-developed infrastructure in Eastern Europe increases transportation time and cost. At the same time, increased highway and rail congestion have increased transit times and made them less reliable. The vast majority of consumer products now come from Asia through a supply chain that takes many weeks, requiring more inventory,

According to Joseph Vermunt, professor of distribution logistics at the University of Tilburg in Holland, there is a "tsunami of transportation costs" to move goods from Asia to every point in Europe. The cost to move a container from Asia to any major European port may be as low as 800 euros, but when all the inland transportation and handling is added, the cost of door-to-door shipping to any point in Europe rises to 2,200 euros.

While cost and time pressures have increased, so have the expectation of consumers all across the EU, which he points out is made up of 1,200 distinct geographic and demographic mini-regions.

"The EU has essentially become borderless for moving freight, but it is by no means homogeneous," he says.

Consumers expect more customization of products and they want them faster. To meet the varying needs of the EU's diverse population while keeping inventories under control, supply chains require more value-added content at the distribution center.

"The focus of distribution networks has turned to agility," says Vermunt. "Products not only must be customized, but they have very short life cycles. Companies must have the ability to respond rapidly based on quickly changing demand. For example, Spanish retailer Zara changes its entire product line in a matter of days. Such volatile demand requires hybrid networks, not the static ones many companies have."

ELCs, Not EDCs
While there is no longer a single European distribution model that works for every company, the need for adding value to products at the end of the supply chain is turning most European distribution centers into European logistics centers (ELCs). Product assembly, customization, packaging, labeling and other postponement activities are increasingly accomplished at an ELC, both to lower inventory requirements and to meet a broader range of consumer needs. The ELCs also serve as cross-dock facilities to increase the speed of imported goods from Asia through port areas into the European heartland.

"The need for speed and agility is why ELC site location must now be based on intermodal transportation," says Vermunt. "The location analysis must consider which port can serve the most hinterland, or the most points in Europe competitively."

According to Vermunt, Rotterdam is the most competitive port, reaching 19 percent of these mini-regions by truck. When barge movement of containers over the Rhine and Danube Rivers is included, Rotterdam's hinterland reaches all the way to Eastern Europe and it is competitive to 34 percent of the mini-regions. When the Betuwe Route container train service links Rotterdam with the continental rail system, the port's ability to competitively serve Europe's 1,200 mini-regions will be expanded even more.

"The focus of distribution networks is agility. Companies must be able to respond rapidly to quickly changing demand."
- Joseph Vermunt of the University of Tilburg

While Holland is a very small country, it has a remarkable variety of options for locating distribution facilities based on a company's strategies and requirements. The Port of Rotterdam is so large that it has four "clusters" of distribution centers within its own borders. The region around Schiphol Airport, which abuts the city of Amsterdam, has 13 business parks ranging in size from 15 to 300 hectares. Even then, there is a shortage of DC space near Schiphol. This area is the European headquarters for many high-tech, automotive and aerospace companies such as Mitsubishi, Bausch & Lomb, Boeing and Yamaha. Intel, GE Energy, Corning, Sun Micro all have their EDCs here.

For such high-tech companies, their supply chains are dependent on plentiful and reliable airfreight service. Schiphol, which is Europe's third-largest cargo airport, handles 1.5million tons of cargo per year and is growing twice the rate of Holland's GDP. Half of the growth is from China traffic alone. Nearly 85 percent of the cargo moves are to and from the Far East and North America. There are direct flights to nearly every major airport in the world with 30 direct daily flights to the U.S. alone.

"All airports in Europe have a capacity problem, and we are no exception," says Enno Osunga, senior vice president of cargo for Amsterdam Airport Schiphol. "Freighter aircraft are become increasingly important to move as much freight as possible with limited airport capacity."

Full freighter cargo now handles 50 percent of the total freight going through Schiphol, and the percent will grow to 70 in the next few years. For cargo capacity at Schiphol to grow fast enough to meet demand, carriers are going to have to make major investments in new aircraft. New, extremely strict noise standards take hold in 2010. Carriers will have to replace older 747-200s with 747-400s, which is a huge expense.

"That conversion will buy seven years," says Osunga. "We still have to figure out how to increase our night flights because that is when air cargo wants to move. Every airport in Europe has the same challenge."

A key element to that growth is Air France-KLM, which merged two and a half years ago to become the world's largest airline. Air France-KLM is the leading carrier at Schiphol. The combined airline has 500 aircraft serving 400 destinations. It provides 150 weekly all-cargo flights. The airline already flies the most efficient and regulatory-compliant freighter available today, the 747-400 ERF. Air France also has 747-200 freighters and KLM has 747 Combis, which it uses on its routes to the U.S.

"Cargo is 15 percent of our revenue and remains a top priority of the combined company, which is doing extremely well," says Mattijs ten Brink, vice president of cargo operations for Air France-KLM Cargo, adding that cargo operating income in 2006 increased 18.6 percent over 2005.

From a DC standpoint, there is almost too much success at Schiphol and its airfreight operations.

"We are limiting DCs to those businesses that are truly airfreight-oriented," say Paul van der Brink, marketing manager for the Schiphol Area Development Company. He adds that a new logistics park is being developed adjacent to Schiphol along the A4 highway and will open in 2011. To avoid as much congestion as possible, the new park will have multi-modal access to include rail, a dedicated highway and barge service to Rotterdam.

To justify being in either of these areas, however, requires a distribution strategy heavily dependent on ocean or air operations. Logistics space around Schiphol can cost as much as 90 euros per meter a year. Most new EDCs are being located much farther inland in areas that are far less expensive, but that are well connected to the ports of Rotterdam and Amsterdam and Schiphol Airport by rail and barge service, as well as by truck.

In fact, efforts to attract more logistics investment to Holland have been spearheaded by the more rural cities and provinces, especially in the South very close to both Germany and Belgium. According to Capgemini's Lenders, who has done an extensive study of logistics "hotspots" in Holland and all of the EU, the top five distribution areas in Holland are all in the southeast quadrant of the country:

1. Venlo
2. West Brabant (Breda, Moerdijk, Roosendaal)

3. Den Bosche-Tilburg

4. Eindhoven-Helmond

5. Arnhem-Nijmegen

Two-Tiered Networks
The EU expansion to the East now requires most companies to have a two-tiered DC network. One tier is the EDC, usually in Holland or Belgium area, which supports any number of satellite or regional DCs. Typically, a network of RDCs would include sites in the UK, the Nordic countries, in Spain or Portugal and at least one in Eastern Europe.

Ron Roest, general manager of logistics with HIDC, agrees. HIDC's most recent network analysis shows that a consumer goods company needing to serve the entire EU on a 24-hour order cycle time, would require five or six RDCs plus a central EDC in Holland where most value-added functions would be performed.

"Value-added logistics are an important function for most EDCs, especially for labor-intensive industries such as retail and automotive," says Lenders. "But labor is only a small part of the supply chain costs, so that is not enough to justify moving DCs to the East where labor is often cheaper. Eastern Europe still has infrastructure problems, and the consumers are not there. The real estate costs in Poland are higher than in the Netherlands."

Given the constantly changing distribution requirements for serving Europe, many companies need flexibility in where their DCs are located, so they can move their operations as needed. This need for flexibility makes real estate companies like ProLogis a popular option. ProLogis Europe, headquartered at Schiphol Airport, owns 70 million square feet of distribution space in 29 markets in 13 EU countries. More than 5.3 million square feet are in five locations throughout Holland. Leases typically run five to seven years, and more location flexibility can be built in if necessary.

According to Robin van Weiler, ProLogis's managing director in Europe, there are several rules that have guided his companies location strategies, and which any company locating in Europe should consider:

• Build or lease DCs in prime business park locations near transportation facilities. The type of transportation and distribution required will determine whether to be near a port, airport, rail or barge line. Multimodal service is best.

• Build standardized facilities that any subsequent company can use as a DC or light manufacturing facility. Avoid custom buildings. Have clear span ceiling heights of at least 36 feet with in-rack sprinklers and room for as many dock doors as possible that are easily accessible to trucks.

• Do not be seduced by incentives such as temporary tax breaks or labor subsidies. "At some point the tax breaks expire or lose value," says van Weiler. "Then the company not only has to deal with the higher operating costs, but it is stuck with a distribution facility that no one wants."

The need for flexibility in Europe is also driving about 70 percent of companies to depend on third-party logistics companies to manage their distribution. With 3PLs, companies are usually only locked into a location for the length of the contract with the logistics provider. Every 3PL with a global reach has a presence in Holland, including Menlo Logistics, UPS Supply Chain Solutions and DHL, as well as European-centric 3PLs such as Geodis Logistics, Frans Maas, Furness Logistics and VCK Logistics. HIDC alone has 150 3PLs as members who are eager to provide distribution services to companies.

In fact, 3PLs are ProLogis's largest customer base. For example, DHL Logistics leases 12 ProLogis DCs throughout the EU. It is about to move from a DC near the Maasvlakte container terminal at the Port of Rotterdam to a 325,000-square-foot DC in Tilburg in the south of Holland that is served by container barges.

"Rotterdam is a great location for large volume outbound ocean shipping and fast inbound receiving, but 80 to 90 percent of our business is relatively small shipments within the EU," says Ad van Beurden DHL Logistics' technology business unit director. "With our new DC, we will have a campus strategy where multiple users in the high-tech and retail sectors will share the facility. Overhead is very costly in Europe, so sharing facilities and labor is the most direct way to reduce costs."

Besides basic order fulfillment, DHL will have the capability to provide value-added services.

"Postponement has become a key customer need because of short lead times and lean inventory," he says, adding that DHL operates both dedicated one-customer facilities and multi-customer facilities. "The trend is clearly toward multiple customers in one building or in a campus environment."

As for the Netherlands as a distribution location, DHL Logistics has more locations there than it does in its home country of Germany. He says Holland offers operational advantages not found elsewhere in the EU.

"Even Customs officials are extremely helpful," says van Beurden. "They will link their systems directly to a company's IT system to streamline customs processes. All levels of the Dutch government understand logistics and need to provide customers with high levels of service."

Logistics Blossoms In Holland
Nothing is more Dutch than the 11million-square-foot Aalsmeer Flower Auction, which is the world's largest flower marketplace. Each morning starting at 5:30 a.m., 5,400 growers sell 20 million flowers to 1,050 buyers in a carefully orchestrated auction process. Millions of flowers and plants arrive from all over the world in the late afternoon and evening, and by late the next morning they are all gone and on their way by truck, air and even ocean container to customers in Europe, Asia and North America.

Aalsmeer is near Schiphol, so 95 percent of the foreign flowers come through the airport and much of the product also leaves the same way. There is a shift to ocean. The auction is about 12 kilometers from Schiphol airport, but the congestion makes this short trip take 30 to 40 minutes. A direct underground connection was considered but was too expensive. Competition is Flora Holland.

"We are in the logistics business," says CEO Timo Huges, who spent most of his career with 3PL Frans Maas. "It just so happens that our product is flowers."

Huges, in fact, sees the future of the flower auction more as a 4PL helping buyers and sellers manage their logistics function than merely serving as a marketplace.

The buyers are essentially in logistics as well. Paul Holex buys flowers at the Aalsmeer auction and ships them to wholesalers in North America and Japan. One third of his business is to the U.S. Rather than use Schiphol, he ships via American Airlines out of the U.K. so he builds pallets of 210,000 stems that are containerized at Heathrow for shipment to customers in the U.S. The existing air capacity and price is limited and expensive, so he is beginning to ship via ocean container. Plants are put in stasis by lowering the temperature to just above freezing and placed in the container at his facility adjacent to the auction site. He will move 30 containers next year to see how this system works.

"There is far less handling of the stems and better temperature control with ocean containers," he says. "Airfreight may be faster, but too much handling and poor cooling facilities in the U.S. can damage the flowers."

With a net margin of about 1.4 percent shipping by air, lower shipping costs and reducing damage can make a big profit difference.

The European Union, with its 450 million inhabitants and its prospects for greater population expansion and prosperity, is a market every multinational company must prize. But serving this expanding market has become an increasingly complex supply chain challenge. The cost and availability of land, labor, energy and transportation, as well as with growing problems with congestion and environmental regulations make facility site location a make-or-break decision for supply chain success.

"Five or 10 years ago, 80 percent of the European distribution centers (EDCs) were in the Netherlands," says Roy Lenders, a vice president with the Capgemini consulting firm in Utrecht. "Today Belgium is even with the Netherlands in attracting new EDCs and Germany is coming on strong. Even Ireland is gaining attention because of tax benefits, even though it is not a logistically convenient place to locate Europe distribution operations."

Thus, many European countries are aggressively seeking foreign investment in distribution facilities, so the Dutch government is again bringing the full force of its efforts on attracting logistics investment. These efforts are paying off. According to the Netherlands Foreign Investment Agency, about 45 percent of all new EDCs are locating in Holland.

"Holland intends to maintain its top place in Europe for foreign investment in logistics, which accounts for nearly 10 percent of our entire GDP," says Jochum Haakma, managing director for NFIA in The Hague. Corporate income taxes have been lowered from 35 percent to 25.5 percent. Customs duties and value-added taxes are handled administratively, meaning that companies can pay them periodically, not with every transaction as with many EU countries. The government also supports an agency called the Holland International Distribution Council (HIDC) made up of 500-third party logistics providers (3PLs), forwarders and carriers to help foreign companies find the right logistics service partners in Holland.

Part of Holland's success is simply due to its location near the center of the "economic banana," which is a crescent of Europe that stretches from southern England, over the Benelux countries and down the Rhine Valley through Switzerland to the Mediterranean coast. This region accounts for 12 percent of the EU's entire GDP and makes Holland an ideal distribution hub for serving this high-income consumer market, especially with Europe's largest port, Rotterdam, at its center.

Why Holland Is Number One In European Distribution
"For 400 years, the Dutch have been the leaders in meeting the needs of European consumers with our transportation and distribution expertise," says Jochum Haakma, managing director of the Netherlands Foreign Investment Agency. "We must be doing something right."

The facts back up Haakma's claims about Holland's dominance in European transportation and distribution. Holland has 51 percent of all European distribution centers (EDCs) compared with Belgium at 18 percent and Germany with 11 percent. In all, Holland has a total of 9,000 DCs, 2,000 of which are centralized EDCs. Logistics accounts for 4.4 percent of the country's GDP and 12.5 percent of its capital spending.

U.S. companies in particular have found Holland the place to be in Europe. More than 1,650 U.S. companies have distribution operations, headquarters offices or major service facilities in Holland, and 50 to 60 new U.S. facilities add to the list each year.

Transportation is also one of Holland's greatest strengths. The ports of Rotterdam and Amsterdam together have 44 percent of all the seaborne tonnage coming and going from the EU. Rotterdam alone has 36 percent. Amsterdam's Schiphol Airport is the third-largest cargo airport in the EU with 16 percent of all traffic. Holland has the largest portion of all inland waterway traffic in Europe and controls 85 percent of Rhine barge traffic. One third of all the truckers in the EU are Dutch.

Europe's labor laws are highly protective of workers, sometimes to the detriment of employers. Holland has among the fairest laws, which make for a stable workforce. Holland has the least number of days lost to strikes in Europe. Also, the majority of workers in the logistics sector, which make up 9 percent of the country's total workforce, speak English.


The Congestion Challenge
There is more to Holland's success than its favorable geographic location. All of the western EU shares one huge challenge: congestion. Highways across Europe are hopelessly clogged during much of the day. Even Europe's well-developed rail system has serious freight bottlenecks because passenger trains have priority over freight. Most airports have hit their daytime capacity and have severely limited night flights when freight must travel. While congestion is a common problem in the EU, Holland has taken the lead in dealing with many of the freight transportation and distribution issues.

The Port of Rotterdam plays a strategic role for nearly every company distributing through Holland. It is by far the largest port in Europe with 36 percent of all of Europe's seaborne freight flowing through it. To maintain its ability to handle the burgeoning container traffic from Asia, the port is expanding the Maasvlakte container terminal at the western-most tip of the port into the North Sea. The expansion not only doubles the current 1 million-TEU capacity at this ECT-run terminal, but it will also make it faster and easier for the next generation of 10,000-plus-TEU vessels to discharge their cargoes.

But receiving containers at the port is just the beginning. The challenge is to move the freight through the 40-kilometer-long port on to EDCs and throughout the entire EU without becoming bogged down in highway and rail congestion.

Holland has been the leader in using barges to move containers to distribution centers in the south and east of Holland as well as to points all along the Rhine and Danube Rivers. The operations have been so efficient that containers can move all the way to Basel, Switzerland in four days and as far as Eastern Europe within a week.

Shuttle service has been established between Rotterdam and growing distribution parks within Holland. For example, a daily container train links the port with Venlo, Holland's fastest-growing distribution location, along the German border in the southeast corner of the country. The greatest leap forward in combating congestion will come in early 2007 with the opening of a freight-only rail line called the Betuwe Route. This multibillion-euro project will allow containers to move directly from the Maasvlakte container terminals at the western end of the Port of Rotterdam to the German border and then further into Europe. The160-kilometer dedicated freight line can handle 10 trains an hour in each direction. Expected volume at the start-up will be about a 150 trains a day.

New Distribution Structures
The classic pan-European distribution network model that served thousands of companies through the 1990s was to centralize inventories of standard goods at a single EDC somewhere in the Benelux area and ship by truck to customers throughout the EU. But much has changed in the last few years to force companies to revise their distribution strategies.

The EU has expanded to 25 countries, which has increased its size and population by 50 percent. The combination of greater distance and less-developed infrastructure in Eastern Europe increases transportation time and cost. At the same time, increased highway and rail congestion have increased transit times and made them less reliable. The vast majority of consumer products now come from Asia through a supply chain that takes many weeks, requiring more inventory,

According to Joseph Vermunt, professor of distribution logistics at the University of Tilburg in Holland, there is a "tsunami of transportation costs" to move goods from Asia to every point in Europe. The cost to move a container from Asia to any major European port may be as low as 800 euros, but when all the inland transportation and handling is added, the cost of door-to-door shipping to any point in Europe rises to 2,200 euros.

While cost and time pressures have increased, so have the expectation of consumers all across the EU, which he points out is made up of 1,200 distinct geographic and demographic mini-regions.

"The EU has essentially become borderless for moving freight, but it is by no means homogeneous," he says.

Consumers expect more customization of products and they want them faster. To meet the varying needs of the EU's diverse population while keeping inventories under control, supply chains require more value-added content at the distribution center.

"The focus of distribution networks has turned to agility," says Vermunt. "Products not only must be customized, but they have very short life cycles. Companies must have the ability to respond rapidly based on quickly changing demand. For example, Spanish retailer Zara changes its entire product line in a matter of days. Such volatile demand requires hybrid networks, not the static ones many companies have."

ELCs, Not EDCs
While there is no longer a single European distribution model that works for every company, the need for adding value to products at the end of the supply chain is turning most European distribution centers into European logistics centers (ELCs). Product assembly, customization, packaging, labeling and other postponement activities are increasingly accomplished at an ELC, both to lower inventory requirements and to meet a broader range of consumer needs. The ELCs also serve as cross-dock facilities to increase the speed of imported goods from Asia through port areas into the European heartland.

"The need for speed and agility is why ELC site location must now be based on intermodal transportation," says Vermunt. "The location analysis must consider which port can serve the most hinterland, or the most points in Europe competitively."

According to Vermunt, Rotterdam is the most competitive port, reaching 19 percent of these mini-regions by truck. When barge movement of containers over the Rhine and Danube Rivers is included, Rotterdam's hinterland reaches all the way to Eastern Europe and it is competitive to 34 percent of the mini-regions. When the Betuwe Route container train service links Rotterdam with the continental rail system, the port's ability to competitively serve Europe's 1,200 mini-regions will be expanded even more.

"The focus of distribution networks is agility. Companies must be able to respond rapidly to quickly changing demand."
- Joseph Vermunt of the University of Tilburg

While Holland is a very small country, it has a remarkable variety of options for locating distribution facilities based on a company's strategies and requirements. The Port of Rotterdam is so large that it has four "clusters" of distribution centers within its own borders. The region around Schiphol Airport, which abuts the city of Amsterdam, has 13 business parks ranging in size from 15 to 300 hectares. Even then, there is a shortage of DC space near Schiphol. This area is the European headquarters for many high-tech, automotive and aerospace companies such as Mitsubishi, Bausch & Lomb, Boeing and Yamaha. Intel, GE Energy, Corning, Sun Micro all have their EDCs here.

For such high-tech companies, their supply chains are dependent on plentiful and reliable airfreight service. Schiphol, which is Europe's third-largest cargo airport, handles 1.5million tons of cargo per year and is growing twice the rate of Holland's GDP. Half of the growth is from China traffic alone. Nearly 85 percent of the cargo moves are to and from the Far East and North America. There are direct flights to nearly every major airport in the world with 30 direct daily flights to the U.S. alone.

"All airports in Europe have a capacity problem, and we are no exception," says Enno Osunga, senior vice president of cargo for Amsterdam Airport Schiphol. "Freighter aircraft are become increasingly important to move as much freight as possible with limited airport capacity."

Full freighter cargo now handles 50 percent of the total freight going through Schiphol, and the percent will grow to 70 in the next few years. For cargo capacity at Schiphol to grow fast enough to meet demand, carriers are going to have to make major investments in new aircraft. New, extremely strict noise standards take hold in 2010. Carriers will have to replace older 747-200s with 747-400s, which is a huge expense.

"That conversion will buy seven years," says Osunga. "We still have to figure out how to increase our night flights because that is when air cargo wants to move. Every airport in Europe has the same challenge."

A key element to that growth is Air France-KLM, which merged two and a half years ago to become the world's largest airline. Air France-KLM is the leading carrier at Schiphol. The combined airline has 500 aircraft serving 400 destinations. It provides 150 weekly all-cargo flights. The airline already flies the most efficient and regulatory-compliant freighter available today, the 747-400 ERF. Air France also has 747-200 freighters and KLM has 747 Combis, which it uses on its routes to the U.S.

"Cargo is 15 percent of our revenue and remains a top priority of the combined company, which is doing extremely well," says Mattijs ten Brink, vice president of cargo operations for Air France-KLM Cargo, adding that cargo operating income in 2006 increased 18.6 percent over 2005.

From a DC standpoint, there is almost too much success at Schiphol and its airfreight operations.

"We are limiting DCs to those businesses that are truly airfreight-oriented," say Paul van der Brink, marketing manager for the Schiphol Area Development Company. He adds that a new logistics park is being developed adjacent to Schiphol along the A4 highway and will open in 2011. To avoid as much congestion as possible, the new park will have multi-modal access to include rail, a dedicated highway and barge service to Rotterdam.

To justify being in either of these areas, however, requires a distribution strategy heavily dependent on ocean or air operations. Logistics space around Schiphol can cost as much as 90 euros per meter a year. Most new EDCs are being located much farther inland in areas that are far less expensive, but that are well connected to the ports of Rotterdam and Amsterdam and Schiphol Airport by rail and barge service, as well as by truck.

In fact, efforts to attract more logistics investment to Holland have been spearheaded by the more rural cities and provinces, especially in the South very close to both Germany and Belgium. According to Capgemini's Lenders, who has done an extensive study of logistics "hotspots" in Holland and all of the EU, the top five distribution areas in Holland are all in the southeast quadrant of the country:

1. Venlo
2. West Brabant (Breda, Moerdijk, Roosendaal)

3. Den Bosche-Tilburg

4. Eindhoven-Helmond

5. Arnhem-Nijmegen

Two-Tiered Networks
The EU expansion to the East now requires most companies to have a two-tiered DC network. One tier is the EDC, usually in Holland or Belgium area, which supports any number of satellite or regional DCs. Typically, a network of RDCs would include sites in the UK, the Nordic countries, in Spain or Portugal and at least one in Eastern Europe.

Ron Roest, general manager of logistics with HIDC, agrees. HIDC's most recent network analysis shows that a consumer goods company needing to serve the entire EU on a 24-hour order cycle time, would require five or six RDCs plus a central EDC in Holland where most value-added functions would be performed.

"Value-added logistics are an important function for most EDCs, especially for labor-intensive industries such as retail and automotive," says Lenders. "But labor is only a small part of the supply chain costs, so that is not enough to justify moving DCs to the East where labor is often cheaper. Eastern Europe still has infrastructure problems, and the consumers are not there. The real estate costs in Poland are higher than in the Netherlands."

Given the constantly changing distribution requirements for serving Europe, many companies need flexibility in where their DCs are located, so they can move their operations as needed. This need for flexibility makes real estate companies like ProLogis a popular option. ProLogis Europe, headquartered at Schiphol Airport, owns 70 million square feet of distribution space in 29 markets in 13 EU countries. More than 5.3 million square feet are in five locations throughout Holland. Leases typically run five to seven years, and more location flexibility can be built in if necessary.

According to Robin van Weiler, ProLogis's managing director in Europe, there are several rules that have guided his companies location strategies, and which any company locating in Europe should consider:

• Build or lease DCs in prime business park locations near transportation facilities. The type of transportation and distribution required will determine whether to be near a port, airport, rail or barge line. Multimodal service is best.

• Build standardized facilities that any subsequent company can use as a DC or light manufacturing facility. Avoid custom buildings. Have clear span ceiling heights of at least 36 feet with in-rack sprinklers and room for as many dock doors as possible that are easily accessible to trucks.

• Do not be seduced by incentives such as temporary tax breaks or labor subsidies. "At some point the tax breaks expire or lose value," says van Weiler. "Then the company not only has to deal with the higher operating costs, but it is stuck with a distribution facility that no one wants."

The need for flexibility in Europe is also driving about 70 percent of companies to depend on third-party logistics companies to manage their distribution. With 3PLs, companies are usually only locked into a location for the length of the contract with the logistics provider. Every 3PL with a global reach has a presence in Holland, including Menlo Logistics, UPS Supply Chain Solutions and DHL, as well as European-centric 3PLs such as Geodis Logistics, Frans Maas, Furness Logistics and VCK Logistics. HIDC alone has 150 3PLs as members who are eager to provide distribution services to companies.

In fact, 3PLs are ProLogis's largest customer base. For example, DHL Logistics leases 12 ProLogis DCs throughout the EU. It is about to move from a DC near the Maasvlakte container terminal at the Port of Rotterdam to a 325,000-square-foot DC in Tilburg in the south of Holland that is served by container barges.

"Rotterdam is a great location for large volume outbound ocean shipping and fast inbound receiving, but 80 to 90 percent of our business is relatively small shipments within the EU," says Ad van Beurden DHL Logistics' technology business unit director. "With our new DC, we will have a campus strategy where multiple users in the high-tech and retail sectors will share the facility. Overhead is very costly in Europe, so sharing facilities and labor is the most direct way to reduce costs."

Besides basic order fulfillment, DHL will have the capability to provide value-added services.

"Postponement has become a key customer need because of short lead times and lean inventory," he says, adding that DHL operates both dedicated one-customer facilities and multi-customer facilities. "The trend is clearly toward multiple customers in one building or in a campus environment."

As for the Netherlands as a distribution location, DHL Logistics has more locations there than it does in its home country of Germany. He says Holland offers operational advantages not found elsewhere in the EU.

"Even Customs officials are extremely helpful," says van Beurden. "They will link their systems directly to a company's IT system to streamline customs processes. All levels of the Dutch government understand logistics and need to provide customers with high levels of service."

Logistics Blossoms In Holland
Nothing is more Dutch than the 11million-square-foot Aalsmeer Flower Auction, which is the world's largest flower marketplace. Each morning starting at 5:30 a.m., 5,400 growers sell 20 million flowers to 1,050 buyers in a carefully orchestrated auction process. Millions of flowers and plants arrive from all over the world in the late afternoon and evening, and by late the next morning they are all gone and on their way by truck, air and even ocean container to customers in Europe, Asia and North America.

Aalsmeer is near Schiphol, so 95 percent of the foreign flowers come through the airport and much of the product also leaves the same way. There is a shift to ocean. The auction is about 12 kilometers from Schiphol airport, but the congestion makes this short trip take 30 to 40 minutes. A direct underground connection was considered but was too expensive. Competition is Flora Holland.

"We are in the logistics business," says CEO Timo Huges, who spent most of his career with 3PL Frans Maas. "It just so happens that our product is flowers."

Huges, in fact, sees the future of the flower auction more as a 4PL helping buyers and sellers manage their logistics function than merely serving as a marketplace.

The buyers are essentially in logistics as well. Paul Holex buys flowers at the Aalsmeer auction and ships them to wholesalers in North America and Japan. One third of his business is to the U.S. Rather than use Schiphol, he ships via American Airlines out of the U.K. so he builds pallets of 210,000 stems that are containerized at Heathrow for shipment to customers in the U.S. The existing air capacity and price is limited and expensive, so he is beginning to ship via ocean container. Plants are put in stasis by lowering the temperature to just above freezing and placed in the container at his facility adjacent to the auction site. He will move 30 containers next year to see how this system works.

"There is far less handling of the stems and better temperature control with ocean containers," he says. "Airfreight may be faster, but too much handling and poor cooling facilities in the U.S. can damage the flowers."

With a net margin of about 1.4 percent shipping by air, lower shipping costs and reducing damage can make a big profit difference.