New Distribution Central

The European Union's enlargement is drawing new
interest in Central Europe from manufacturers
and their transportation carriers

Alan Field

n the old days, ordering a piece of heavy equipment in Europe was a fairly straightforward process. A sales rep in Italy might contact a Western European manufacturer who shipped it directly from a home-country plant, and monitor whether the product got to the buyer on time. The entire process took place within the familiar confines of, at most, the 15 member-states of the European Union.

It's not that simple any more. Supply chains for manufacturing and delivering high-value products are undergoing a major transformation, made possible by the rising productivity and sophistication of the Czech Republic, Hungary and Slovakia.

Take IBM. When a bank manager in Italy or France decides to purchase a costly computer box for storing huge amounts of financial data, the manager contacts an IBM sales representative, who contacts IBM's fulfillment center in Bratislava, Slovakia. The IBM division in Bratislava then places the order with IBM's manufacturing center in Vac, Hungary.

The clunky (1.2 tons), costly box (up to $1 million in value) is delivered from Hungary by road, rail or air to its destination anywhere around the world - all in less than two days.

How much trust is IBM placing in Central Europe? Consider that IBM's Hungarian plant is the only place in the world where IBM manufactures that kind of high-value, heavy box.

Only about 40 percent of the plant's shipments wind up in Europe. Another 40 percent are shipped by air to the Americas, and another 20 percent by air to the Asia-Pacific region. A thousand workers assemble more than 6,000 of the boxes each year.

IBM is one of several global companies building cross-border Central European supply chains aimed at larger and broader markets.

Since the most recent enlargement of the European Union in 2004 and, with the addition of Romania and Bulgaria in 2007, the expansion of air and expedited services has picked up momentum, pushed by the move by manufacturers into Central Europe.

Nokia, said by some experts to be the world's largest air cargo shipper, signaled the shift this year when it opened a plant in Romania to produce mobile phones for the Middle East and Africa. The opening coincides with Nokia's plans to shut down a plant in Bochum, Germany. That announcement prompted protests in Germany, but the larger shift in manufacturing and in transportation seems clear.

Global companies such as brewer SAB Miller, Unilever and Nestle manufacture in the Czech Republic, Hungary and Slovakia, with an eye toward Europe as a whole, said Radim Hradilek, a consultant specializing in Central and Eastern Europe for IBM Global Business Services. Homegrown companies usually lack the funding to expand well beyond their borders. "There are not too many local companies distributing effectively to Western Europe," Hradilek said.

In Bratislava, Slovakia, more than 2,000 IBM employees place orders and make sure those boxes are delivered from Hungary to customers. In Bratislava, well-educated young workers are eager to work for multinational corporations, even for salaries well below western European levels. IBM employs 22 different nationalities in Bratislava.

In all, these staff members speak 24 languages, said Eva Megova, managing director of the IBM center in Bratislava. Their average age is only 27, and that includes management. IBM was one of the first multinationals to open a high-tech service center in Central Europe, Megova said. "When we began in 2000, there was no other company doing this," she said. "As a pioneer, we were able to get the mixture of skills we need."

Over the years, the Bratislava facility has moved up the chain from lower-value support tasks to more complex managerial responsibilities. "At the beginning, we started with more simple jobs, but now we are doing more and more sophisticated jobs. This enables IBM people in western Europe to focus on their jobs, and not on support services," Megova said. "We do that for them."

As for Hungary, there are sound reasons for choosing that country for manufacturing high-value boxes.

Arno Hebgen, director of operations at IBM Integrated Supply Chain, said that even during the communist era, Hungary invested heavily in educating its work force in the basic skills for managing manufacturing, transportation and logistics. The network of local suppliers also helps. Hebgen said his plant cuts costs by buying the sheet metal for its boxes from a nearby supplier.

Dramatic upgrades in infrastructure have transformed once-remote towns into locations well-suited for serving Western European markets. Vac has a population of only 33,000 but is only a few miles north of Budapest, Hungary's capital. Workers who live in Budapest can reach Vac by train in a half-hour. The road networks from Budapest have been expanded to handle two lanes in each direction, and the flight to Frankfurt, the air hub of Germany, is only 80 minutes from Budapest.

"Vac is convenient for the employees, and it is cheaper than the capital," said Peter Mohacsi, managing director of manufacturing at IBM Data Storage Solutions.

It hardly matters that the Czech Republic, Hungary and Slovakia are no longer among the least expensive places to do business. "They are not cheap, but they are still cheaper than western Europe," Hradilek said. Labor costs in the Czech Republic, Slovakia and Hungary are still only about 60 to 80 percent of labor costs in Germany, and it is much easier to hire and fire workers in these countries than it is in Germany.

Costs in Romania, Bulgaria and Poland are even lower, except in Warsaw, the Polish capital. However, the other countries generally lack the infrastructure and educational standards to compete with the Czech Republic, Hungary and Slovakia as locations for higher-value manufacturing and services.

Another key factor is the enormous upgrade in Internet infrastructure, making it easier to feed corporate supply-chain data into data networks in the West. The governments of the Czech Republic, Hungary and Slovakia have made huge investments in optical cables, enabling even small companies and consumers to access the Web in broadband.

"Almost everyone can use the Web very effectively," Hradilek said. This transformation has been less challenging for IBM employees in the region to manage data over the corporate-wide enterprise resource platform supplied from SAP but modified by IBM for its own needs. (In the other countries of the region, broadband Web access is widely available only in larger cities.)

As elsewhere around the world, IBM's goal is to provide visibility into the entire supply chain for all of its partners and customers, Hebgen said. "You need to know where the parts are, and calculate the time you need for assembling them" and deliver them, he said.

Not that everything is perfect. A major irritant, Hradilek said, is that even middle-level bureaucrats are kicked out of office whenever new governments take control in Hungary, Slovakia and Poland (but not in the Czech Republic). Once it becomes clear that an election is going to take place, government procurement orders come to a halt until after the election when new bureaucrats take control and place orders. Until the political dust settles, life can be frustrating in the new democracies of Central Europe.