If you are already selling in Europe, or you are considering exporting to Europe, at some point you need to consider having your own Distribution Center/Warehouse based there. There are pros and cons to making this move and it is really important to be aware of the benefits and pitfalls. The wrong decision can cost you $millions. The right decision can jump start your export sales in a big way.
For the purposes of this article the question of whether the Distribution Center you are considering is owned by you or whether you are using external fulfillment is not addressed. Once the decision to have a warehouse in Europe is made (for all the right reasons) we strongly recommend you spend some time deciding on whether to utilize a third party fulfillment company or whether to have complete ownership of your Distribution Center. Third party advice can help you here.
So what are some of the positives of having a Distribution Center in Europe? Here are some of the biggest benefits that you should be looking for:
· Lead times for your customers will be significantly reduced. This will make them happier because they can operate a more efficient supply chain.
· You will have greater flexibility over the quantity you can supply your customers. Without a European Distribution Center, in order to make shipping economic the customer is often pressured to buy more product than they want or need (container loads for example). Local availability in your warehouse enables smaller more frequent orders to be placed and fulfilled and may well bring you more customers who previously were not prepared or able to buy large quantities at a time.
· By consolidating the order needs of many countries you should be able to produce longer run orders (hence more economic) and ship efficiently with lower “freight in” costs
· You can expect your “freight out to customer” prices to be lower. It is usually easier to negotiate contract pricing with a fixed address warehouse than it is to negotiate periodic deliveries from a port to the customer.
· You will have more flexibility to handle returns and servicing. Your Distribution Center can be used as a service centre. Customers can send returns back to you more easily. All these activities bring you closer to your customer, and should help build business.
· Expect easier localization and customization. The EU consists of a collection of countries that are grouped together through common trading goals, and in some cases a common currency. The EU government makes product /company related regulations that can become law in the member countries. Where a new regulation is adopted by all countries, this can make life easier. Unfortunately there are still many country specific regulations, some of which may affect your product in a way that could make it unsaleable. Having your own Distribution Center can allow you to make necessary modifications and changes to your products to comply with local requirements.
· Just as in the US, larger Euro customers are becoming more demanding. EDI, special packaging, special labeling are all part of the cost of doing business. Having your own Distribution Center enables you to get to grips with this and to handle the requirements locally.
· A Distribution Center can be your stepping stone to European domination! Sometimes setting up a subsidiary in Europe with HQ, sales offices etc., is too big a first step. A Distribution Center can help move you towards this goal without risking everything.
So it would seem that the benefits of having a European Distribution Center are many. However there are things that also need to be considered before you press the button:
· Deciding where to put your Distribution Center is not easy. 500 million people in 27 countries are your target market, but you will need to decide where to locate. Remember if your Distribution Center is in, say Holland, you must take into account that you will still have to ship to places as far apart at Denmark and Spain. Take advice on where to locate.
· Like it or not you will incur another layer of costs. Expect to have administration costs in the US associated with support of the Distribution Center plus of course the administration costs actually at the Distribution Center. This can be quite considerable especially if you plan to handle A/R from the Distribution Center as well.
· There is a flip side to giving your customers the convenience and flexibility to order from you locally. Expect them to order more frequently but with smaller quantities. Your Distribution Center becomes the customer’s warehouse and you will be faced with more complex supply chain issues. Forecasting becomes crucial to make sure that you do load up with too much inventory. Your pricing model also needs to be adjusted to take into account your extra costs of holding inventory.
· Shipping goods from one European country to many European countries is fairly straightforward, but language issues need to be considered. More frequent orders will mean more customer calls and customer emails requesting information, giving instructions, disputing issues and more. These communications will be happening in many different languages (although most companies do conduct or have the capability to conduct business in English). You therefore need to consider how much local language knowledge and capability you need for your particular product. Generally the less complex the product the less language capability you need. However a more complex product with high back end service requirements is likely to need a substantial local language capability at your Distribution Center.
· Once you make the decision to move to open a Distribution Center you will have to clarify your intentions to any Distribution Partners you already have in Europe. Perhaps they already stock your product in their country. How will this affect them? Will they see it as you trying to “cut them out”?
· Labor laws in Europe are very different to the USA. Generally expect employees to have much greater rights than in the USA. Hiring is easy, firing can very difficult and expensive, so proceed with caution and do not overstaff your Distribution Center
Having your own Distribution Center in Europe can be a huge benefit to your business but proceed with care. It can be a great first step towards your domination of Europe. But if done for the wrong reasons or done without planning, advice and thought it can be one of your most costly mistakes.