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					      Advanced Logistics Services
          in the Baltic States
               (AD LOG)


              Final Report for
                  Tedim
             December 19, 2002

Performed by The Turku School of Economics and
            Business Administration

        Researcher, M.Sc. Tapio Naula
         Professor, Ph.D. Lauri Ojala

                  lauri.ojala@tukkk.fi
                 tapio.naula@tukkk.fi
2
The publisher                                                     Date of publication
TEDIM                                                             December 19, 2002
Authors (from body, name, chairman and secretary of the body)
Tapio Naula and Lauri Ojala / Turku School of Economics and Business Administration
Assigned by
TEDIM International Coordinating Committee (ICC)
Name of the publication
Advanced Logistics Services in the Baltic States (Ad Log)
Type of the publication
Working paper
Abstract of the publication
The study analyses advanced logistics users' solutions in the Baltic States. The data was collected from 15
internationally operating firms that have gone through several stages in developing their logistics solutions from market
entrance to the anticipated EU time. The firms tend to move from country based management towards multinational
integration by connecting the Baltic markets to their European supply chains. A clear trend of centralizing materials
flow and logistics organization can also be identified. Bulk transports and transit traffic were excluded from the study.
The main transport mode used by case firms is road transport.


The level of transport and telecommunications infrastructure was no longer seen as a hinder by the 15 case firms. Today
they focus on adopting efficient logistics solutions through reliable and high-quality logistics services. The regulatory
environment of the Baltic States is still perceived somewhat hindering logistics activities in Latvia and Lithuania but not
in Estonia. The hindering factors are related to trade and transport documentation practices, some of which are
considered as barriers to outsource certain logistics functions. The anticipated EU time was seen as particularly easy by
the case firms. This view may not be shared by domestic firms in the Baltic States since the EU membership will - at
least initially - increase regulation and bureaucracy for them.


During the past decade the logistics environment in the Baltic States has improved remarkably. Today, many of the key
areas for further improvement of logistics environment often lie beyond the immediate sphere of influence for policy
makers. Active involvement of industry-level organizations is therefore suggested as the tool to address the remaining
challenges:
·   Removing barriers from outsourcing logistics activities
·   Promoting logistics efficiency especially in domestic transportation
·   Periodically carrying out a logistics survey monitoring the efficiency in firms' logistics activities
Keywords
Logistics services, the Baltic States, EU enlargement, transition economies
Serial name                                                       ISBN nro
TEDIM publications
Pages, total                   Language                           Price                        Confidence status
                               English                                                         Public
Distributed by                                                    Published by
                                                                  TEDIM
CONTENTS

1     INTRODUCTION..................................................................................................................7
      1.1 Interest groups and relevance of the study ...................................................................8
      1.2 Objectives of the study .................................................................................................8

2     METHODOLOGY AND ANALYTICAL FRAMEWORK ...............................................10
      2.1 Delimitations of the study...........................................................................................10
      2.2 Participating case companies......................................................................................11
      2.3 Data collection............................................................................................................12
      2.4 Analytical framework of the study .............................................................................12
          2.4.1    The applied model of materials flow ...........................................................14
          2.4.2    The applied model of logistics organization ................................................15

3     SELECTED ISSUES AFFECTING ADVANCED LOGISTICS........................................17
      3.1 About logistics buyers and suppliers ..........................................................................17
      3.2 Recent trends in Baltic third party logistics ...............................................................19
      3.3 Logistics friendliness..................................................................................................22
      3.4 Foreign direct investments .........................................................................................26

4     STUDY FINDINGS.............................................................................................................28
      4.1 Sample companies' business stages in the Baltic markets..........................................28
      4.2 Materials flow.............................................................................................................29
          4.2.1    The physical distribution concepts implemented by the case companies ....29
          4.2.2    Distribution of volumes by regions..............................................................32
          4.2.3    Evaluation of transport and telecommunication infrastructure ....................34
      4.3 Information flow.........................................................................................................35
          4.3.1    IT systems ....................................................................................................35
          4.3.2    Detected complications in documentation ...................................................36
          4.3.3    Evaluation of regulatory environment .........................................................37
      4.4 Logistics Organization................................................................................................38
      4.5 Distribution channel ...................................................................................................39
          4.5.1    Volume business, consumables....................................................................40
          4.5.2    Volume business, electronics .......................................................................40
          4.5.3    The suppliers of institutional end users........................................................41
          4.5.4    The logistics developers ...............................................................................41
          4.5.5    The retailers..................................................................................................41
          4.5.6    Conclusions ..................................................................................................42
      4.6 Provision of logistics services ....................................................................................43

5     CONCLUSIONS..................................................................................................................45

REFERENCES............................................................................................................................50

ATTACHMENTS


                                                                                                                                           4
List of Figures

Figure 1.       European trends in logistics....................................................................................................................................7
Figure 2.       The three options of logistics configuration and the focused area of the study.......................................................9
Figure 3.       The key area of focus in the study .........................................................................................................................10
Figure 4.       The analytical framework of Ad Log .....................................................................................................................13
Figure 5.       Ad Log taxonomy of different types of materials flow ...........................................................................................14
Figure 6.       Ad Log taxonomy of different types of logistics organization ...............................................................................16
Figure 7.       Structure of third party logistics relations.............................................................................................................20
Figure 8.       Baltic 3PL providers relative sales orientation to four main business areas in 2002...........................................20
Figure 9.       The structural change in demand for different load types in international transportation ...................................21
Figure 10. Transition in customer relationships .....................................................................................................................22
Figure 11. The ranking of countries in logistics friendliness against their Corruption Perception Index in 2000.................24
Figure 12. The ranking of countries in logistics friendliness against GDP/capita in 1999 ....................................................25
Figure 13. Timing of the case companies business stages in each country.............................................................................28
Figure 14. The number and transfer of different physical distribution patterns .....................................................................30
Figure 15. Distribution of case companies' cargo volumes (kg / cbm) in the five biggest regions in Estonia ........................32
Figure 16. Distribution of case companies' cargo volumes (kg / cbm) in the five biggest regions in Latvia ..........................33
Figure 17. Distribution of case companies' cargo volumes (kg / cbm) in the five biggest regions in Lithuania.....................33
Figure 18. Case companies' evaluation of the transport and telecommunications infrastructure ..........................................34
Figure 19. Case companies' evaluation of the regulatory environment ..................................................................................37
Figure 20. The number and transfer of different arrangements in logistics organization ......................................................38
Figure 21. Case companies' evaluation of logistics providers ................................................................................................44
Figure 22. The case firms reconsider logistics management options in favor for multinational integration..........................46
Figure 23. Potential negative consequences caused by a high cargo volumes concentration in capital areas ......................47
Figure 24. The four layers of freight transport and the main concerns during the stages of market presence.......................49




List of Tables

Table 1:        The participating case companies .........................................................................................................................11
Table 2:        Number of carnet TIR issued by International Road Transport Union in 1995 – 2000 ........................................18
Table 3:        Ranking of Regions from Lowest to Highest: Total Obstacles Among 22 World Regions ....................................23
Table 4:        Obstacles to doing business; The Baltic States compared to selected CIS regions...............................................23
Table 5:        UNCTAD indicators of foreign direct investments in the Baltic States.................................................................27
Table 6:        Logistics information systems in use by case companies ......................................................................................35
Table 7:        Case companies' bought logistics services presently and in the anticipated EU time...........................................43




                                                                                                                                                                               5
List of Attachments

Attachment 1:         Estonia at a glance...............................................................................................................................53
Attachment 2:         Latvia at a glance.................................................................................................................................55
Attachment 3:         Lithuania at a glance............................................................................................................................57
Attachment 4:         Number of exporters and importers by value exported and imported in 2000 .....................................59
Attachment 5:         Distribution of different types of customs declarations in 1998-2000..................................................60
Attachment 6:         Case companies' business stages of presence in the Baltic States markets ..........................................61
Attachment 7:         Distribution from Baltic regional warehouse: in non-EU versus in EU environment .........................62
Attachment 8:         Sales orientation of 15 large Baltic logistics providers into Baltic regional warehousing services ...62
Attachment 9:         Case companies' materials flow structure during different business stages ........................................63
Attachment 10:        Case companies' regional distribution of cargo volumes in Estonia ...................................................64
Attachment 11:        Case companies' regional distribution of cargo volumes in Latvia .....................................................65
Attachment 12:        Case companies' regional distribution of cargo volumes in Lithuania ................................................66
Attachment 13:        Case companies' logistics organization structure during different business stages.............................67
Attachment 14:        Structure of case companies' distribution channel...............................................................................68
Attachment 15:        The questionnaire.................................................................................................................................69




Annotations

UNCTAD            United Nations Conference on Trade and Development
3PL               Third party logistics
FTL               Full trailer load
FCL               Full container load
Groupage          Consolidated cargo
LTL               Less than trailer load
LCL               Less than container load
IRU               International Road Transport Union
UNECE             United Nations Economic Commission for Europe
ERAA              Association of Estonian International Road Carries
LINAVA            Lithuanian National Road Carriers Association
TIR               Transports Internationaux Routiers
FIATA             International Federation of Freight Forwarders
EFFA              Estonian Freight Forwarders' Association
LAFF              Latvian Association of Freight Forwarders
LINEKA            Lithuanian National Freight Forwarders Association
NSF               Nordic Association of Freight Forwarders
NSAB              General Conditions of the Nordic Association of Freight Forwarders



                                                                                                                                                                        6
1   INTRODUCTION

Studies and reports about Estonia, Latvia and Lithuania typically focus on the economic
and social development of these countries. Successful and timely execution of stabilization,
privatization and liberalization have commonly been considered as the orthodox way to
guide a transition economy into a market environment. The economic impact of these
factors has been very positive. The main indicators for each country are included in the
attached “Country at a glance” tables in Attachments 1 - 3.

The Baltic States have rapidly turned from state-controlled societies into market-driven,
open economies, where intensive management of place and time is essential to reach
success for most companies. Deregulation and privatization have greatly liberalized the
business environment. Distribution channels are still going through development in all
three countries.

Logistics providers’ services are today widely available (Ojala and Queiroz 2001, 95),
which creates more possibilities for efficient logistics strategy implementation.

The shift from traditional service activities to third party logistics and supply chain
management is a universal trend, however more advanced in developed economies – such
as in the EU. The trend is similar in transition economies – only following a certain time
lag as Figure 1. suggests.



                        Stages of logistics development of markets

          Haulage,                   Warehousing,
                                                                      Supply chain
        forwarding,                   distribution,
                                                                        logistics
          shipping                value-added logistics



                          CEE                               EU
                          (current stage)                         (current stage)



Figure 1.      European trends in logistics
(Source: IRU 2001, 4)




                                                                                          7
1.1 Interest groups and relevance of the study

A large number of manufacturing and trading firms need a deeper understanding of
dynamics of Baltic States logistics environment when considering entering the Baltic
States markets or enlarging operations there. The study provides important comparative
information for the purpose.

Second, the study provides useful information for logistics providers in identifying the
needs to adjust the provided services to meet the requirements of logistics market in the EU
environment.

Third, the study will provide a relevant and up-to-date analysis to support public policy
making in this field. This analysis, which is based on the empirical findings among private
sector operators using advanced logistics services, comprises two main areas:

(i)    identification of key areas, obstacles and opportunities (incl. public-private
       partnerships) where efforts should be further invested, and

(ii)   identification of areas where public sector efforts already seem adequate or are
       perceived as misguided.

This study also assists Tedim to produce a blueprint for further actions in this field.



1.2 Objectives of the study

It is expected that many manufacturing and trading firms have gone through certain paths
of strategic choices in distribution to Baltic States until today. Various operating models
have presumably included different measures in order to achieve desired market accession,
cost efficiency and customer service level. Strategic decisions on the degree of
internationalization and involvement of logistic providers are essential. Some companies
are known to prefer total control of the distribution channel through owned subsidiaries,
whereas others choose to hand over market/logistic control to local Baltic partners or
customers.

The purpose of this study is first to describe how firms in manufacturing and trade are
currently reconfiguring their logistics strategies in preparing for the future environment of
the Baltic States as members in the European Union. The study also attempts to explain
explains the factors behind the strategic decisions.




                                                                                           8
The used logistics configurations can roughly be divided into three options (Figure 2).

·   country based management
·   cross border teaming and
·   multinational integration

In the country based management option, direct export and local sales stocks are the ways
to reach the customer. This means that inventory is kept in each country, often by a
middleman or the firm itself. Each Baltic State is individually managed.

In the cross border teaming option, faster border crossing and simplified customs
procedures were the main enabling factors to distribute from one Baltic regional stock in
the mid 1990’. Customs borders however make this option very complicated and expensive
to operate and this option is therefore presently less preferred.


Option 1: Country based management                           Option 3: Multinational integration
    • Direct export/import                                     • Stocks are minimized or
    • Fragmented sales channels                                   eliminated
    • Country based stocks                EE                   • Lean and steady flow of
    • Little Baltic regional co-                                 goods, information and
      operation                                                  payments
    • No synergies from              LV         LT             • Potential cost savings
      consolidating                                            • Requires efforts in system
                                                                 design
                                                               • Strong involvement of
Option 2: Cross border teaming                                   capable logistics provider in
                                                                 key role
    • Often Baltic regional stock         EE
    • Synergies from main
      haulage and warehousing
    • Complicated and expensive                                           SCM
                                     LV         LT
      process structure because
                                                                          LV
      of many customs borders
                                                                     EE         LT



Figure 2.       The three options of logistics configuration and the focused area
                of the study

Very few firms have accomplished the multinational integration option. In this option the
Baltic supply chain is tightly integrated with outside logistics systems. Stocks are largely
replaced by “cross-docking” arrangements. The creation of the common EU customs zone
– and the major cost saving potential related to it – will be strong motivators for leading
companies to reconfigure the logistic systems into this direction.




                                                                                                 9
2      METHODOLOGY AND ANALYTICAL FRAMEWORK

2.1 Delimitations of the study

Ad Log analyzes advanced international cross border distribution solutions to the Baltic
States. The reason for the distribution-oriented approach is that import operations include a
large variety of related logistics activities, which also can be generalized to export and
domestic trade.

Inbound transportation and other logistics services are known to be more developed than
outbound services due to the structure of the foreign trade of the Baltic States. A typical
export shipment is a full truckload of raw materials or semi-produced products, whereas
import trade is dominated by consolidated "groupage"1 shipments (Naula 2002, 84). Small
groupage shipments are demanding for logistics providers because terminal hubs and
domestic distribution systems are needed to produce the service. This is why import
distribution covers a wide spectrum of logistics services, which fits Ad Log objectives.

Figure 3. shows a transport system as a four-layer model, where logistics concepts are the
highest level in the hierarchy. This is the key area of focus in the study. Transport and
telecommunication infrastructure, transport flow and the materials flow are however
important enabling factors for the firms' logistics concept. These levels are therefore also
briefly covered in order to identify possible causes of hinder to implementing efficient
logistics concepts.
                                     Logistics                     EE


                                     concepts                LV         LT
                                                                                   S CM


                        Focused in                                            EE
                                                                                   LV
                                                                                          LT


                        Ad Log
                                                                   EE



                                                              LV         LT




                                             Advanced logistics
                                             services market


                                     Material flow




                                              Transport market


                                     Transport flow




                                                 Traffic market



                                     Infrastructure




Figure 3.          The key area of focus in the study
(Adapted from Ojala 1996 and Wandel et al. 1992)

1   Shipments less than 2500 kg are usually consolidated in groupage loads

                                                                                               10
 Different transport forms are not in focus in this study. However, the study covers only
 logistics services that are connected to unitized cargo types. Transit cargo, bulk products
 and pipeline transportation are excluded. The used analytical approach basically covers rail
 and air transportation but the selected case firms rarely use these transport modes. Liner
 shipping is often used in connection with road based or containerized transports.



 2.2 Participating case companies

 15 large international corporations were selected as the informants in this study. Firms of
 this type and size are known to have the ability and the knowledge to quickly adopt
 efficient logistics arrangements allowed by the business environment. These state-of-the-
 art solutions are meant to serve as a ground for benchmarking for a wider base of logistics
 buyers.

 Table 1 presents the 15 participating firms, their industries and the main product groups in
 the Baltic States markets. Seven companies operate mainly on consumer markets. Five out
 of these have established mainly wholesales operations in the Baltic States and two firms
 operate in retailing. Five companies had both consumers and industrial customers and two
 companies had mainly institutional customers.


 Table 1: The participating case companies

              Company               Industry                       The main product groups
                                                                   Large home appliences: washing machines, cold appliences, kitchen
              Electrolux            Consumer durables
                                                                   machines
              GNT Baltic Holding    Wholesale                      Computers and components, computer software, computer accessories
                                    Consumer durables, electric
              Hilti                                                Power tools, construction tools
                                    equipment
              Hydro Texaco          Automotive                     Lubricants (packaged)
   (1)
"Volume
              Philips               Consumer durables              Consumer electronics
business"
              Procter & Gamble      Fast moving consumer goods     Home and personal care products, Food and Beverages
                                    Consumer durables, electric
              Robert Bosch                                         Power tools, thermo technology, automotive equipment, Car multimedia
                                    equipment
              Samsung Electronics   Consumer durables              Consumer electronics, Computer parts, Mobile phones

              Unilever Baltic       Fast moving consumer goods     Home and personal care products

              York International    Electric equipment             Heating, ventilation, air-conditioning products
                                                                   Modular substations, MV technology, Automation projects, Low voltage
              ABB                   Electric equipment
   (2)                                                             products, Automation components, Electrical machines, Building systems
"Projects"                          Consumer durables, electric    Fixed and mobile telecommmunication systems, Power distribution
              Siemens
                                    equipment, office automation   equipment, Medical equipment, Mobile phones
              ICA Baltic Ab         Retailing                      Fast moving consumer goods
   (3)
"Retailers"
              Kesko Food            Retailing                      Fast moving consumer goods
   (4)
 "Spare       Volvo Parts           Automotive                     Spare parts for trucks and busses
  parts"




                                                                                                                                          11
The case companies can also be divided into four groups according to typical industry
specific requirements for logistics:

(1) Ten companies could be seen operating a "volume business", which includes relatively
    steady logistics flows of large amounts of products.

(2) The two case companies producing and selling mainly electronic equipment to
    institutional buyers deliver mainly large projects that usually include separate logistics
    arrangements.

(3) Selling products directly to consumers sets special logistics requirements for the
    logistics systems of the two retail firms included in the sample group.

(4) In spare parts logistics the focus is typically on fast deliveries to customers and high
    availability of the products. The case firm in automotive industry represents this view
    in the study.



2.3 Data collection

Personal interviews were used as the data collection method. The interviews, 1 – 1.5 h
each, were conducted at the companies’ premises in October and November 2002 using a
detailed 18-page semi-structured interview guideline, which was sent to the respondents in
advance. The questionnaire is presented in Attachment 15.

In most cases (11 out of 15) one respondent was interviewed at one appointment. In four
cases two interviews were carried out involving two or three respondents. Totally 21
persons were interviewed. The respondents represent senior management level.



2.4 Analytical framework of the study

Ad Log forms an understanding of logistics buyers strategies in relation to the business
environment by focusing on the most important components of logistics planning:
materials flow, information flow, logistics organization and distribution channel - during
four stages of business presence in the Baltic markets.

The underlying factors for reconfiguring logistics systems are further examined by
focusing on the logistics business environment: the availability of logistics providers'
services, the regulatory environment and the transport and telecommunications
infrastructure. The analytical framework is illustrated in Figure 4.


                                                                                           12
                                Entrance Establish       Present      EU-time
                                            market                  (anticipated)

                                            position


1. Materials flow
                                            Logistics providers

2. Information flow
                                         Regulatory environment
                                                                                      firm
                                                                                      cases
3. Logistics organization
                                              Infrastructure
4. Distribution channel


Figure 4.      The analytical framework of Ad Log

The market penetration typically starts by exporting products from a domestic location -
following by various forms of supporting arrangements such as operating with authorized
sales agents. In this study the time perspective starts from establishing firm's own market
presence. Four business stages are separated:

(1) The entrance stage indicates the period when a firm establishes own subsidiaries in
    some of the Baltic States.
(2) The next stage followed when the firm begins to establish a certain market position.
(3) The present stage involves the period that included no major changes in implemented
    concepts until now.
(4) The final stage, the EU time represents the future, starting when the Baltic States join
    the European Union.

The respondents from 15 sample companies were asked to estimate the timing of each
business stage in years by reflecting to significant changes in the Baltic business operations
during their market presence.

The overall interest area of Ad Log is relatively broad. Simplified models are used to
exhibit the relevant information. The following Sections present the used models for
materials flow and logistics organization.




                                                                                           13
2.4.1 The applied model of materials flow

Centralized distribution is commonly recognized as a potential tool in making logistics
more cost efficient (Coyle, Bardi & Langley 1996, 277 and Abrahamsson & Brege 1995,
35). Figure 5. presents four simplified patterns of materials flow, used in the study to
measure the level of centralization in case firms' distribution systems.

Distribution by exporting individual shipments (type I) represents the very basic type of a
kind. The material flow consists of individual shipments of any size. Products are
transported from a factory or a distribution centre to a destination terminal, where
shipments smaller than 2,5002 kg are usually unloaded into a customs terminal. Shipments
are typically consigned to separate receivers and also customs cleared in the final
consignees' name. After the customs clearance the shipment may be collected and
delivered.

The type I distribution is a commonly used cross border distribution pattern and it is
workable in most logistics systems. It does not necessarily require shippers to have any
organization in the destination country. It may be relatively inexpensive to operate if the
number of shipments is small. Order - delivery times may however be rather long because
all the customer orders are processed and delivered on export basis. A large number of
logistics providers offer standardized services related to type I.

            I   Factory /    Terminal   Customer         II    Factory /
                                                               Central
                                                                               Baltic
                                                                               Regional
                                                                                          Terminal Customer

                Central                                        W/H             W/H
                W/H                                                                          EE
                               EE


                                                                               LV
                 W/H           LV                                 W/H
                                                                               W/H


         Country border        LT
                                                                                             LT
                                                                Country borders



         III    Factory /     Country   Customer
                                                           IV      Factory /
                                                                   Central
                                                                                Customs Customer
                                                                                clearance
                Central       W/H                                  W/H          & cargo
                W/H           EE                                                segregation
                              W/H

                              LV
                 W/H
                              W/H
                                                                     W/H

          Country border      LT
                              W/H                             Country border

Figure 5.           Ad Log taxonomy of different types of materials flow

2   "groupage" shipments: less than truck load (LTL) or less than container load (LCL)

                                                                                                              14
In type II, products are first transported into Baltic regional warehouse located in one of
the three countries. Customer orders are released from the warehouse and delivered further
as international shipments. This type of a system involves a large number of customs
clearances and it is therefore complicated and expensive to operate. It may be however a
competitive alternative for establishing warehousing operations in each country.

Type III involves distribution from country specific warehouses. The pattern may be
expensive but it provides an option for companies that need to deliver the goods to their
customers in very short notice. Products for several customers are usually imported as one
shipment that is consigned to the shipper's organization or to an agent in the Baltic States.

In distribution by using cross docking concepts (type IV) warehousing is minimized.
Companies operating such pattern usually have relative large and steady product flows.
Often, only full unit loads3 are transported. Smaller shipments than 2500 kg are not routed
via customs terminals as is the case in pattern I, but cargo is segregated right after the
customs clearance and delivered to customers without any major delay caused by physical
handling of the goods.

Pure forms of the presented four patterns are unlikely to be identified in the real life. The
patterns may be found slightly different - or mixed. The primary purpose of the
simplifications is to highlight the key paths in the case companies working models in cross
border distribution during different stages of business presence in the Baltic markets.



2.4.2 The applied model of logistics organization

Centralization is a key factor to be measured in logistics organization (Norrman 1997, 98).
The simplified patterns applied in the study are presented in Figure 6. The patterns are
closely linked with the more strategic type options discussed in Figure 2. The case firms
are presumed to reconfigure their logistics organizations into more centralized forms.

A firm's business activities are divided into four functions: marketing, physical
distribution, administration and sales. The key point in the structure of the logistics
organization is how the management of these functions is organized for the Baltic States
markets. The respondents were explained the contents of each function and asked where
the key decisions of each activity are made.




3   Typically full truck loads (FTL) or full container loads (FCL)

                                                                                          15
A.          Marketing
                                                           B.         Marketing
                                                                                                 Baltic States
                                                                                                 region
       Physical distribution
                                                                Physical distribution
         Administration                     Sales
                                            subsidiaries          Administration                      Sales
              Sales
                                EE                                     Sales                          subsidiaries
                                  LV                                                     EE
                                    LT                                                     LV
                                                                                                LT




C.          Marketing
                                      Baltic States
                                      region
                                                           D.          Marketing
                                                                                                     Baltic States
                                                                                                     region

       Physical Distribution          Distribution               Physical Distribution               Distribution
          Administration              Centre                        Administration                   Centre


        Administration                                                   Sales
                                                                                         EE
             Sales                         Sales                                              LV       Sales
                               EE          subsidiaries                                                subsidiaries
                                                                                                LT
                                 LV
                                      LT




 Figure 6.           Ad Log taxonomy of different types of logistics organization
 (Adapted from Norrman 1997, 98)

 In pattern A. all functions are locally present. This is the pure type of country based
 management and assumed to be implemented especially in the market entrance stage. This
 decentralized pattern may however not be the most cost efficient option.

 In pattern B., marketing function is centralized. The decisions may be made in a Baltic
 head office or on a higher level. In pattern C. both marketing and physical distribution are
 centralized. Part of the administration is still carried out locally. In pattern D. only
 operational sales organization is present in each of the Baltic States and all other functions
 are centralized.




                                                                                                                      16
3   SELECTED ISSUES AFFECTING ADVANCED LOGISTICS

3.1 About logistics buyers and suppliers

There are twice as many importers than exporters in each of the Baltic States (Attachment
4). A vast majority of the importers are relatively small measured in value of the traded
goods: 71 % of Estonian, 78 % of Latvian and 72 % of Lithuanian importers’ yearly value
of the imported goods in 2000 was less than 100,000 USD. In all three countries these
importers accounted for less than 4 % of the total value of the national imports (Statistics
Lithuania 2001, 74-75).

Estonia and Lithuania are similar in regards to large exporters and importers dealing with
values greater than 50 million USD. In both countries this group consists of less than 5
companies. Latvia has 17 importers in this group accounting for 37 % of total imports
compared to 22 % in Estonia and in Lithuania, respectively.

Another way of profiling the foreign trade related logistics market is to examine customs
data. Attachment 5 illustrates the development of distribution of export and import customs
declarations of different types in 1999 - 2000. In Estonia, the clearances from and to
customs bonded warehouses show a declining trend, while the portion of clearances
relating to inward processing in Estonia is increasing (Statistics Lithuania 2000, 52 and
Statistics Lithuania 2001, 53).

In Latvia customs warehouse clearances have a significantly higher share, which is partly
explained by different customs legislation. Also the share of export clearances from
bonded warehouses is clearly higher than in Estonia and Lithuania. This may reflect a
higher degree of Latvian companies specializing in cross border distribution from regional
warehouses located in Latvia. In 2000 the number of customs bonded warehouses was the
highest in Latvia (151) compared to Estonia (140) and Lithuania (87) (Ojala and Queiroz
2001, 99).

Costs of basic transportation services in EU candidate countries are considerably lower
than in the European Union countries. The average costs of a CEE haulier are
approximately 60 % of those of an EU haulier. Baltic hauliers’ cost advantage is smaller;
on the Estonian, Latvia and Lithuanian hauliers total costs are 72 % of those of EU
hauliers’ on average. Latvian and Lithuanian operators seem to loose the comparison to
Central European colleagues because of higher overhead costs (IRU 2001, 6).

In 1999 there were 81,000 lorries and road tractors registered in Estonia, 90,000 in Latvia
and 97,000 in Lithuania (Central Statistical Bureau of Latvia 2000, 88). According to



                                                                                         17
International Road Union 25 % of the Estonian and Latvian road transportation fleet is to
be renewed (IRU 2000, 5-7).

The road carriers are organized under national member organizations of International Road
Transport Union. Estonian International Road Carriers (ERAA) was founded in 1991 and
in 2000 it had 414 members. Latvian Association of International Road Carriers (Latvijas
Auto) was founded in 1990 and has presently 900 members. Lithuanian National Road
Carriers' Association (LINAVA) was established in 1991 has today 1,900 members.

The Baltic member associations of IRU operate as guarantee organizations of the
international TIR Convention and issue permits and TIR carnets to companies that have
international road transport licenses. Table 2 presents the development of issued TIR
carnet’s by IRU to the national organizations in 1995 - 2000. Lithuania has clearly the
highest figures of the other Baltic States - higher even than Russia in the late 1990’. The
usage of TIR does not directly reflect countries’ orientation to international road
transportation because logistics providers have presently also other, often less costly ways
to organize cross-border transiting at their disposal, such as using general customs
guarantees.


Table 2: Number of carnet TIR issued by International Road Transport
         Union in 1995 – 2000
Source: UNECE (http://www.unece.org/trans/new_tir/div/carnets.htm)

Countries                        1995      1996      1997      1998      1999      2000
Estonia                        32 000    41 000    63 000    77 000    61 500    79 600
Latvia                         45 100    71 400   106 200   111 300    88 500   127 500
Lithuania                      62 000   105 700   177 000   195 000   178 000   247 000
Finland                         9 200    28 200    65 500    36 500    20 700    17 000
Russian Federation            110 000   145 000   191 500   218 000   174 350   236 800


Freight forwarders and third party logistics providers are also organized within national
associations that are all members of International Federation of Freight Forwarders
Association (FIATA). Estonian Freight Forwarders Association (EFFA) holds currently 51
member companies. Latvian Association of Freight Forwarders (LAFF) was founded in
1994, and has 85 members. In Lithuania, there are 2 national organizations – both members
of FIATA: (1) Freight Forwarders Association is located in Klaipeda and has 6 members.
(2) Lithuanian National Freight Forwarders Association (LINEKA) operates in Vilnius and
has 48 members.

The Nordic Association of Freight Forwarders (NSF) promotes the freight forwarding
business and encourages collegial relations between the associations’ members in the
Nordic countries. One of the key work areas has been to develop common general


                                                                                          18
conditions for logistic service operations that define the roles and the responsibilities of a
logistics buyer and supplier. The association aims to spread the General Conditions of the
Nordic Association of Freight Forwarders (NSAB) also outside the Nordic countries for
larger European coverage.

The freight forwarders’ associations in the Baltic States have mostly adopted the NSAB
2000 conditions by constructing the national general conditions in accordance to it.
Lithuanian National Freight Forwarders Association (LINEKA) makes an exception to
this; the model for the conditions currently in force has been taken from German practice.



3.2 Recent trends in Baltic third party logistics

This Section presents the key results of a study concluded involving 5 logistics providers
in each Baltic State: Estonia, Latvia and Lithuania (Naula 2002). The 15 interviews, 1.5 – 2
h each, were conducted at the companies’ premises in January and February 2002 using a
fairly detailed 20-page semi-structured interview guideline. The companies were selected
among the largest operators in the three markets.

Third party logistics providers offer an important link between the layers building the
service concepts on existing transport flow or infrastructure by offering more refined
service solutions to logistics buyers (Figures 3. and 7.). The key question for third party
logistics providers is to be able to provide their customers with services that add more
value to their customers' business than the customers would be able to achieve themselves.

The value can be created from four different sources: (1) by achieving operational
efficiency, (2) by sharing resources between customers, (3) by outsourcing logistics
production to 2nd and 3rd tier operators and (4) by using conceptual logistics skills
(Berglund et al. 1999, 65). The arguments summarize well the value creation processes of
logistics providers. The value added, however, should also cover profitable business
operation of the logistics provider. The value added should therefore additionally be seen
as something that the buyer and seller must share. Figure 7. Presents the structure of
relations in third party logistics.




                                                                                           19
                         The two primary              Third-party               Second tier
                              participants            organizations             suppliers

                                “Shippers”            “Providers”

                                 Part 1
                                   e.g
                                Producer
                                                                                 Supplier
                                   or
                                Supplier
                                                          Part 3
                                                      Service provider           Supplier
                                 Part 2
                                    e.g
                                Industrial                                       Supplier
                                 customer


                    Organizations part of a       Organizations that        Service suppliers to part 3
                        Supply chain              do not take title         without direct relation
                                                                             to part 1& 2


                                       First tier                      Second tier
                                       Relationship                    Relationship



Figure 7.          Structure of third party logistics relations
(Source: Berglund 2000, 14)

The data from the 15 interviewed logistics providers show that international
transportation is clearly the most important sales contributor for the major third
party logistics providers in the Baltic States (Figure 8). Partly, this reflects the
openness of the Baltic economies (Korhonen 2001,6). The largest TPL providers are
also largely owned by foreign capital especially in Estonia and Latvia (Ojala and
Queiroz 2001, 95) which also likely explains the high orientation to international
services.
          100 %
           90 %
           80 %
           70 %
           60 %

           50 %
           40 %

           30 %
           20 %
           10 %
            0%
                    EE     EE     EE      LT    LV      LT    LV      LV   LV      LT    EE   LT   EE     LT   LV
   Country rank:     1      2      3       1     1       2     2       3    4       3     4    4    5      5    5
   Sample rank:      1      2      3       4     5       6     7       8    9      10    11   12   13     14   15

                  International transportation                        Domestic transportion
                  Warehousing                                         Support services

Figure 8.          Baltic 3PL providers relative sales orientation to four main
                   business areas in 2002
(Source Naula and Taurins 2002, 7)


                                                                                                                    20
Figure 9. summarizes the emerging picture of the detected development in the
transportation sub-market: a general swift in shipment size in favor of groupage
transportation. The buyers in the market are giving more attention to logistic costs related
to capital tied-up in goods and to warehousing. This trend was considered favorable for
service providers because consolidating small shipments into large transportation units is a
potential source of value creation.

Further, the improvements in geographical service coverage, higher frequencies and
service quality were commonly considered to attract the logistics buyers to use services for
shipments under 3 tons in weight. The groupage transportation was also found to substitute
the air cargo services. This is limited to geographical areas where fast and frequent
groupage services can be arranged.

                Structural change           Shipment    Possibilities to
                transport load demand       size        add value


                      Full unit loads (-)                   low




            Partial unit loads (-)          > 3000 kg      average




                     Groupage cargo (+)     < 3000 kg       high




                         Air cargo (-)                     average



Figure 9.      The structural change in demand for different load types in
               international transportation
(Source: Naula 2002, 111)

Standard services seem to dominate logistics providers’ business accounting for 80 % of all
sample companies’ customer relationships. Short-term standard services are expected
proportionally to decrease - and long term standard services to increase in the nearest
future (Figure 10). The remaining shares of tailor made services (20 %), both short and
long term – are also foreseen to increase.




                                                                                         21
                                      4 companies

                                                                              9 companies

                              Tailored
                              services


                              Standard
                              services
                                                                              8 companies
                                            Customer         Customer
                                            relationship     relationship
                                            short            long



Figure 10. Transition in customer relationships4
(Source: Naula 2002, 119)

The majority of the interviewed logistics providers expressed a wish to move more into
long term and tailored customer relationships. Better long-term profitability was mentioned
as the most common reason. A tailored service concept was seen as a way to tie the
customer to the logistics provider. Key account management (a dedicated contact person
and a tailored customer service profile), IT-solutions connecting the customer and the
logistics provider and the sales and technical support from agent/partner network were seen
as important tools to create “logistics partnership”. The demand for this type of services
was generally expected to increase.



3.3 Logistics friendliness

Facilitation of logistics arrangements is an issue of high priority both at regional, national
and international level. Generally speaking, logistics friendliness or logistics friendly
regions can be measured in a number of ways.

An extensive recent study was done by Brunetti et al. (2001) with 3,685 questionnaire
responses, which takes into consideration six Categories of Obstacles. These are (i)
Regulations; (ii) Trade and exchange rate policies; (iii) Inflation and financing; (iv) Public
revenue and expenditure policies; (v) Uncertainty; and (vi) Corruption and crime. The
overall scores of the six groups of obstacles for the 22 World regions identified in the study
are shown in Table 3.




4   6 out of the 15 interviewed logistics providers expected a change in more than one direction

                                                                                                   22
Table 3: Ranking of Regions from Lowest to Highest: Total Obstacles
         Among 22 World Regions
              (1 = lowest obstacle rank; 22 = highest rank; the rating is the compound score of the six
              categories, Source: Brunetti et al. 2001)

Rank       Region                            Countries in Region                               Rating

1      Northeastern Europe        Ireland and United Kingdom                                   41.9
2      Central Western Europe     Austria, France, Germany, and Switzerland                    42.6
3      North America              Canada and United States                                     46.4
4      Southern Europe            Italy, Portugal, and Spain                                   50.1
5      Middle East and N Africa Jordan, Morocco, and West Bank and Gaza Strip                  50.2
6      Baltic Republics           Estonia, Latvia, and Lithuania                               51.0
7      Asia                       Fiji, India, and Malaysia                                    52.3
8      Caucasus                   Armenia, Azerbaijan, and Georgia                             52.6
9      Western South America      Bolivia, Paraguay, and Peru                                  53.0
10     Visegrad                   Czech Republic, Hungary, Poland, Slovak Republic             53.4
11     Western Central Africa     Côte d'Ivoire, Ghana, and Togo                               53.6
12     Middle-Income Africa       South Africa and Mauritius                                   54.7
13     Western Africa             Guinea, Guinea-Bissau, and Senegal                           55.3
14     Black Sea and Balkan       Albania, Bulgaria, FYR Macedonia, and Turkey                 56.2
15     Eastern Africa             Kenya, Tanzania, Uganda, and Zambia                          56.3
16     Western and Central Africa Benin, Mali, and Nigeria                                     56.3
17     Central Africa             Cameroon, Chad, and Congo                                    56.6
18     Central America            Costa Rica, Jamaica, and Mexico                              57.1
19     Central Asia               Kazakhstan, Kyrgyz Republic, and Uzbekistan                  57.4
20     Southern Africa            Madagascar, Malawi, Mozambique, and Zimbabwe                 57.5
21     Slavic Republics           Belarus, Moldova, Russia, and Ukraine                        58.3
22     NW South America           Colombia, Ecuador, and Venezuela                             61.5




Table 4. compares the ranking positions of the Baltic States with the regions of Caucasus,
Central Asia and CIS in respect of the five obstacle types.


Table 4: Obstacles to doing business; The Baltic States compared to selected
         CIS regions
                                  (1 = lowest; 22 = highest obstacle rating)
                    Source: A. Brunetti , G. Kisunko, A. Weder, IMF Discussion Paper 33
       The Region’s ranking out of 22 world regions in           The       The          The           Russia,
                                                                Baltic   Caucasus     Central         Ukraine,
                    Brunetti et. al. 2001                       States    Region       Asian          Belarus
                                                                                      Region            and
                                                                                                      Moldova
 Total obstacles                                                   6         8            19            21
 Labor, price and environmental regulations and regulations
                                                                   1         2            3              5
 for starting a business
 Inflation and Financing related obstacles                         12        5            16            14
 Trade and exchange rate related obstacles                         5        11            20            21
 Public Revenue and Expenditure Policies Related                   7        11            20            18
 Uncertainty Related Obstacles (Policy instability, costs)         13       16            21            22
 Crime Related Obstacles                                           9        11            14            18




                                                                                                             23
Trade and transport operations invariably involve numerous partners both in the public and
the private sector, such as various logistics service providers, banking and insurance
agents. In addition, the trading partners (buyers and sellers or consignors and consignees)
evaluate the practicalities often on a case-by-case basis.

Especially countries in transition face an imminent need to facilitate trade and transport
through public and private sector initiatives. Public administration both at national and
regional levels set in motion projects to facilitate trade and transport. Business
communities have also been keen to develop the operating environment in these areas (See
e.g. Ojala and Queiroz 2001).

A survey conducted by Ojala in 1999/2000 among international freight forwarders
illustrates how “easy” or “difficult” individual countries are perceived to be from a
logistical point of view (Ojala and Queiroz 2001, 45). The concept of “Logistics
friendliness” was adopted following its introduction by Murphy and Daley (1999). The
survey was initially made as part of a larger study on the transport sector of the Baltic
States to highlight the development these countries have made in their transport and
logistics activities.

      100%
                     "Logistics more friendly"
       90%
                     Correlation coefficient = 0.784
       80%
                                                         Estonia
                             Lithuania
       70%
                             Latvia
       60%
                                                                                EU countries
       50%

       40%
                   Typical former Soviet
       30%         Republics

       20%

       10%
                                                                    Least corrupt
        0%
             0.0      1.0     2.0     3.0   4.0    5.0    6.0      7.0    8.0       9.0    10.0




Figure 11. The ranking of countries in logistics friendliness against their
           Corruption Perception Index in 2000
                   (Source: Ojala and Queiroz 2001, 45)




                                                                                                  24
According to Murphy and Daley, logistical friendliness (unfriendliness) refers to the ease
(difficulty) of arranging international freight operations to/from a particular country. The
“friendliness” and “unfriendliness” should be seen as two different concepts (constructs)
rather than opposite ends of the same continuum.

The survey was conducted in November-December 2000 by approaching 60 different
freight forwarders through e-mail. Among other questions, each respondent was asked to
rate a set of pre-determined countries as to what extent he/she perceived the named country
as logistically “friendly” or “unfriendly”.

The countries included in the e-mail questionnaire were based on the 90 countries included
in the Corruption Perception Index (CPI) collected by Transparency International and
Goettingen University (see: http://www.gwdg.de/~uwvw/). Countries with the lowest level
of perceived corruption were assigned 10, whereas countries with highest level of
perceived corruption were assigned 1. For each country included in the CPI, the Gross
Domestic Product (GDP) per capita figure for 1999 was collected using World Bank
statistics.
     100%
              "Logistics more friendly"
      90%
               Correlation coefficient = 0.845
      80%
                                                   Estonia
      70%                                                               EU countries
                             Lithuania

      60%
                              Latvia

      50%

      40%

      30%

      20%
                                                                  GDP/capita in 1999
      10%                                                         in USD (log. scale)
                           Typical form er Soviet Republics
       0%
        100                  1,000                            10,000                   100,000


Figure 12. The ranking of countries in logistics friendliness against
           GDP/capita in 1999
               (Source: Ojala and Queiroz 2001, 46)

The combined indicator for logistical friendliness in the survey is the percentage of the
responses, which stated that a given country was either logistically “friendly” or
“unfriendly”. Hence, the percentage for Lithuania (71 percent) indicates that five
respondents out of seven viewed Lithuania as a “logistically friendly” country, whereas
two did not.


                                                                                                 25
The results show a striking correlation between on the one hand the logistics friendliness
and the CPI, and on the other, the GDP per capita. This is a strong indication that the less
perceived corruption there is in a country, the easier it is to trade and arrange the logistical
practicalities with that country (Figure 11). Similarly, the higher the level of GDP per
capita, the same occurs (Figure 12). This is no surprise as such, but the relatively strong
correlation between the logistical friendliness and CPI (0.845); and GNP/capita (0. 784,
respectively) is noteworthy.

The results also show that the Baltic States are perceived as fairly easy countries in a
logistical sense. Compared against the CPI ranking and GDP/capita data, the three
countries show exceptionally good performance, and they have received substantially
higher marks than other former Soviet Republics. On the other hand, the Baltic States lag
behind the typical EU countries.



3.4 Foreign direct investments

The level of Foreign Direct Investment (FDI) indicates the economic potential that a
certain country possesses, but it also reflects the confidence that outside investors – mainly
firms – have in a country’s political and social stability. The development of the FDI stock
in the Baltic States demonstrates vividly the economic potential within these countries.

The FDI stock has grown rapidly in all Baltic States. For example in Estonia the inward
FDI stock in the end of 2001 was 19 % higher compared to previous year. In Lithuania the
respective growth was 14 % and in Latvia 6 % (UNCTAD, 2002). Transport sector has
been among the first industries to receive FDI, followed by manufacturing and
telecommunications.

The Baltic States show different orientations in respect of the origin of the foreign direct
investments. 89 % of the inflow to Estonia came from the EU countries in 2000. The
respective share was 70 % in Latvia and 45 % in Lithuania. The average figure for the 10
EU candidate countries was 79 % (Eurostat, 2002).

Table 5 presents the accumulated inward and outward FDI stocks of Estonia, Latvia and
Lithuania in the end of 2001. The inward performance index indicates the country's share
of global direct investments - in relation to the country's global share of the GDP. This
indicator eliminates the effect of the size of the economy and it is therefore useful for
comparisons between different countries. The inward potential index demonstrates the
countries' general potentiality as FDI receivers measured by eight different economic and
social variables.



                                                                                             26
Table 5: UNCTAD indicators of foreign direct investments in the Baltic
         States
                                  Inward FDI          Outward FDI  Inward FDI Inward FDI                                Inward FDI     Inward FDI
                                  stock 2001           stock 2001 Performance Performance                                 Potential Potential Index
                                      mUS$                 mUS$        Rank 1)     Index 2)                                Rank 1)                4)
     Estonia *                          3155                  429          16          2.3                                      37            0.391
     Latvia **                          2216                  248          32          1.6                                      65            0.289
     Lithuania ***                      2665                   48          33          1.5                                      59            0.304
     1) Ranked by thePerformance or Potential Index for 1998-2000 among countries in the UNCTAD database
     2) The Inward FDI Performance Index is the ratio of a country's share in global FDI flows to its share in global GDP, average of 1998-2000
     3) The Inward FDI Potential Index is an unweighted average of the scores of eight normalized economic and social variables, average of 1998-2000
     For details, see Chapter II in World Investment Report 2002, UNCTAD


     Source: UNCTAD : World Investement Report 2002
     * http://r0.unctad.org/wir/pdfs/wir02_fs.ee.en.pdf
     ** http://r0.unctad.org/wir/pdfs/wir02_fs.lv.en.pdf
     *** http://r0.unctad.org/wir/pdfs/wir02_fs.lt.en.pdf


Through growing FDI the firms and industries in the receiving country also usually receive
new technological and management know-how which is difficult or impossible to gain in
other ways. Furthermore, because FDI tends to accumulate into profitable industries,
industries or firms with a high level of FDI tend to be more profitable than peer firms or
industries with less FDI.

The relevance of the FDI discussion for Ad Log is that the firms intreviewed for the study
are exactly the kind of firms that have made direct investments in the Baltic States. Given
the continued growth of FDI in the Baltic States, the applicability of Ad Log findings will
increase in the future.




                                                                                                                                                        27
4    STUDY FINDINGS

4.1 Sample companies' business stages in the Baltic markets

The 15 Ad Log case firms had entered the Baltic markets between 1991 - 1999. The timing
of different business stages are summarized in Figure 13. and presented detailed in
Attachment 6.

                                       Establishing
                          Market                                      Anticipated
                                         market          Present
                         entrance                                      EU time
                                         position


              1990           3               -               -              -
              1991           3               -               -              -
              1992           9               -               -              -
              1993           7               7               -              -
              1994           1               2               1              -
              1995           8               -               3              -
              1996           8              12               1              -
              1997           1               8               5              -
              1998           -               7               2              -
              1999           3               4              12              -
              2000           -               2               6              -
              2001           1               2               2              -
              2002           -               -              12              -
              2003           -               -               -              -
              2004           -               -               -             30
              2005           -               -               -              6
              2006           -               -               -              5
              2007           -               -               -              3


Figure 13. Timing of the case companies business stages in each country5

Seven firms established operations in all three Baltic States the same year in each country.
These companies are mostly multinational firms that seem to follow a common entry
strategy for the three Baltic States. These firms also entered the market earlier than the
others in the sample.

Five companies out of the 15 chose to enter Estonian market first. For three companies this
may have been a natural strategy as their areal management for the Baltic States is
operating in Finland. Another reason for choosing Estonia as the first platform for the
Baltic markets may be found in Estonian logistics related business environment, which
developed positively relatively quickly. Two companies entered the markets first in
Lithuania and just one first in Latvia.


5 The figures show the number of total country arrangements. Each of the 15 case companies have basically
three (EE, LV, LT) arrangements.

                                                                                                      28
Business operations of the case firm did not always develop in the sequence of market
entry in the three countries. The differences in this respect seem to have become smaller
when the development in business environment gained speed in the late 1990's.

The sample companies went through relatively long periods before achieving the present
type of Baltic business operations: from five to six years on average.

The Baltic States are commonly anticipated to join the European Union in 2004 (out of 15
respondents 12 for Estonia, 10 for Latvia and 9 for Lithuania). The timing of joining is
relevant because the EU membership is linked with companies very positive expectations
of the logistics environment presented in later Sections in this report.

At the time when the interviews were carried out, there was no confirmed information
about the year when the Baltic States are anticipated to join in the European Union. By the
time of finalizing this report it became rather certain that it will be in May 2004.

The used approach to study sample companies' timing of different business stages in the
Baltic markets (entrance, establishing market position, and present) allowed highly
subjective responses that likely reflect both respondents' own evaluations of how
successfully business operations have been managed - and - criticism of the business
environment of the three countries more broadly. For this reason the data on individual
firm needs to be treated with caution.



4.2 Materials flow

4.2.1 The physical distribution concepts implemented by the case companies

This section discusses how the 15 sample companies have implemented and will
implement their logistics strategies in respect of physical distribution.

The centralized distribution concept seems especially relevant and usable in relatively
small markets such as in the Baltic States. The trade-off decisions between logistics costs
and customer service are however affected by customs borders and all the required
procedures related to international transportation. During the present non-EU time
companies operating in the Baltic States cannot therefore extent the degree of
centralization to the levels widely reached by companies in European Union today.

The case results indicate relatively active reconfiguring the materials flow. 13 firms have
used two or more distribution patterns in regards to centralization. The most active case



                                                                                        29
firm had used four different patterns in this respect. Changes were commonly made for all
the three countries simultaneously. The detailed results are presented in Attachment 9.

Figure 14. summarizes the physical distribution patterns implemented by the case firms.
Certain trends can be derived in respect of business stages of market presence. In the early
phase of market entrance companies preferred patterns I and III when organizing their
export to the Baltic States markets. Especially pattern I seemed to be a suitable pattern for
market entry, but much less used in later business stages. None of the case companies
expected to practice traditional export to the Baltic States in the anticipated EU time.

                                                                                                              Establishing
                                                                                                  Market                                 Anticipated
                                                                                                                market      Present
                                                                                                 entrance                                 EU time
                                                                                                                position
                                                                                               » 19 94-19 96 » 1996-1999 » 19 99-20 02   » 20 04 -

                        IV
                                            Fa ctory /   C usto ms C ustomer
                                            Central      clearan ce

Distribution by using
                                            W /H         & cargo
                                                         segreg ation



cross-docking
                                              W /H
                                                                                                    3             3           15            21
concepts
                                  Country border



                        III
                                    Fa ctory /            C oun try      C usto mer
                                    Central               W /H

Distribution from                   W /H                   EE
                                                           W /H


country specific                     W /H
                                                           LV
                                                           W /H
                                                                                                   18            19           20            11
warehouses               C ountry border                   LT
                                                           W /H



                        II
                             Fa ct or y /        B alt ic          T e rm in al C us to m er

Ditribution from             C entr al
                             W /H
                                                 R egio nal
                                                 W /H
                                                                        EE

regional warehouse
located in one Baltic
                                 W /H
                                                  LV
                                                  W /H                                              6            12            3             9
State                         C ou ntry borders
                                                                        LT




Distribution by          I         Fa ctor y /
                                   Cent ral
                                   W /H
                                                         T e rmi n al

                                                              EE
                                                                          C us to me r



exporting individual
shipments to Baltic
                                    W /H                    LV                                     20            10            6             0
States                   Cou ntry borde r                   LT




Figure 14. The number and transfer of different physical distribution
           patterns

Every stage includes each sample firm's 3 distribution arrangements (1 for Estonia, 1 for
Latvia and 1 for Lithuania).6 The boldness of the arrows indicates the change from a
pattern to another.

Distribution from country specific warehouses was the second most used concept in market
entrance. Having established a legal entity in each country a firm may import larger
amount of products into stock as one shipment. This makes the option easier to operate and



6With certan exceptions: if the sample firm did not have business operations established in some of the
Baltic State or if the information was not available. The detailed data is presented in Attachment 9 .

                                                                                                                                                     30
customer delivery times are short as the products may be sold to free circulation without
any delay in customs clearance.

When establishing market position, some of the case companies moved slightly more into
warehousing - on Baltic regional and country level. Relatively few changes were made
between the first two business stages as Figure 14. indicates. Reasons for this are related to
market requirements, companies' own still quite low sales volumes and thirdly to the
logistics environment that was in many cases an obstacle to build a desired materials flow
system.

Presently case companies prefer physical distribution using cross docking concepts. The
case companies seem to have implemented physical distribution pattern changes very
actively towards the present business stage. 24 country arrangements out of the total
number of 45 (15 case companies times three (EE, LV and LT) were changed at this point.
From the previous business stage there seems to be a transfer from Baltic regional and
country specific warehousing.

After establishing market position it is understandable that the attention is turned from
increasing market presence into minimizing logistics costs. It is noticeable that as many as
15 cross docking arrangements (five case companies) have been implemented already in
non-EU environment, which still involves dealing with number of issues related to customs
borders. In some cases the arrangements included a complex plan of procedures, which
required a third party logistics providers' active involvement and commitment in the flow
of information.

Figure 14. also indicates that from the Baltic regional warehousing became less preferred
pattern towards the present stage. A major reason for this can be found in the high
complexity of distribution from Baltic regional warehousing: Attachment 7 presents this
pattern as a process comparing the complexity and the process length in non-EU and EU
environment. The complexity results from the large number of customs clearances
involved. In the EU environment the number of different steps in the process will drop
from 15 to eight, which is as a substantial change.

Logistics buyers may also have difficulties in finding a competent logistics provider that is
able to participate in implementing distribution from a warehouse located in one Baltic
State. Only one out of 15 large third party logistics providers clearly specialized in this
type of business in the Baltic States (Attachment 8).

Baltic regional warehousing also has many advantages. The service concept provides one
common logistic solution for the whole area of the Baltic States. Consolidated main-haul
cargo volumes cut international freight costs and enable more stable cargo flows.


                                                                                           31
Economies of scale, better availability of goods in the storage and lower total inventory
level (capital costs) are other benefits. These were the motives for 2 electronics companies
that considered to have Baltic common stock in the anticipated EU time.

4.2.2 Distribution of volumes by regions

Cargo volumes seem to distribute very unevenly between the regions especially in Latvia
and Estonia, where the capital areas clearly have a dominating position in the case firms'
materials flow. Harju region around the capital Tallinn is the most important cargo
destination in Estonia for all the case companies (71 % on average). Tartu (10 %) and
Pärnu (8 %) are the next biggest regions (Figure 15).



                                                Harju
                                                                     Ida Viru
                                                        Lääne-Viru




                                            Pärnu
                                                             Tartu

                                80 - 90 %
                  Estonia       70 - 80 %
                                60 - 70 %
                                50 - 60 %
                  Average       40 - 50 %
                  percentages   30 - 40 %
                  of volumes    20 - 30 %
                                10 - 20 %
                                5 - 10 %
                                0.5 - 5 %
                                < 0.5 %




Figure 15. Distribution of case companies' cargo volumes (kg / cbm) in the
           five biggest regions in Estonia

Riga's dominance in Latvia is striking: on average 80 % of the case companies' Latvian
volumes are destined here. The next most important regions Daugavpils and Ventspils both
hold a tiny share of 3 % on average. Compared to the situation in Estonia the concentration
of Latvian volumes seems more drastic also due to a more remote location of the other
shaded areas outside Riga region (Figure 16).




                                                                                         32
                                          80 - 90 %
                   Latvia                 70 - 80 %
                                          60 - 70 %
                                          50 - 60 %
                   Average                40 - 50 %
                   percentages            30 - 40 %
                   of volumes             20 - 30 %
                                          10 - 20 %
                                          5 - 10 %
                                                                  Valmieras
                                                                  Valmieras
                                          0.5 - 5 %
                                          < 0.5 %

                 Ventspils
                 Ventspils




                                                Rigas
                                                Rigas




                   Liepajas
                   Liepajas



                                                                  Daugavpils
                                                                  Daugavpils




Figure 16. Distribution of case companies' cargo volumes (kg / cbm) in the
           five biggest regions in Latvia

Lithuanian volumes are distributed more evenly, which reflects the purchasing power of
Vilnius, Klaipeda and Kaunas. Their volumes average 49 %, 23 % and 18%, respectively
(Figure 17).

The high concentration found in our sample is well in line with statistics of regional GDP
and the distribution of foreign direct investments in the Baltic States.




                                               Siauliai           Panevezio



                Klaipedos




                                                          Kauno



                              80 - 90 %                                 Vilniaus
              Lithuania       70 - 80 %
                              60 - 70 %
              Average         50 - 60 %
              percentages     40 - 50 %
              of volumes      30 - 40 %
                              20 - 30 %
                              10 - 20 %
                              5 - 10 %
                              0.5 - 5 %
                              < 0.5 %



Figure 17. Distribution of case companies' cargo volumes (kg / cbm) in the
           five biggest regions in Lithuania


                                                                                       33
The high concentration may lead to inefficiencies in domestic distribution. The case
companies have typically outsourced domestic transportation to logistics service providers.
These consolidate several consignments in one transportation unit. Especially in Estonia
and Latvia the volumes destined outside the capitals Riga and Tallinn may not be sufficient
to offer affordable and frequent distribution services.

Lack of competitive domestic distribution services was commonly mentioned as "the
critical issue" when evaluating the performance of logistics providers. A case firm stated
that that "none of the service providers offer truly Baltic States wide distribution". Mainly
the complaints concerned too high domestic distribution costs and unreliable services.



4.2.3 Evaluation of transport and telecommunication infrastructure

The transport and telecommunications infrastructure is not any longer a major concern for
the case companies. Road networks, seaports and border crossing points were mostly
considered as no major hinder for materials flow. A significant positive development in
recent years was reported in this respect. The overall ratings given by the respondents are
presented in Figure 18. The high level of expectations in the EU time is not necessarily
associated with the anticipated EU membership. It can rather be seen as a natural
improvement of overall infrastructure.
                              Does the transport and telecommunications
                           infrastructure of the Baltic States hinder efficient
                                materials flow of your company's goods ?


                            Market        Establishing            Present          Anticipated
                           entrance          market                                 EU time
                                            position
                          » 1994-1996     » 1996-1999        » 1999-2002            » 2004 -
                   1.00




                   2.00




                   3.00




                   4.00




                   5.00
                                      1 = No hinder … 5 = Strong hinder

                                          Estonia        Latvia        Lithuania




Figure 18. Case companies' evaluation                                              of          the   transport   and
           telecommunications infrastructure


                                                                                                                  34
4.3 Information flow


4.3.1 IT systems

Computer aided logistics information systems were widely in use by the case companies.
EDI or online connections were fairly widely established with suppliers and customers but
with logistics providers just in three cases (Table 6). Lack of computerized links with
logistics providers was in many cases seen as a problem and considered to be fixed in the
future

The retailing firms provided an example how difficult it is to build EDI or online
connections with small and numerous local suppliers that lack the technological readiness
for it.

An electronics firm possesses expertise in information and inventory management enough
to sell these services to other companies - mainly to ones selling products in the Internet.
The service included handling incoming and outgoing shipments, storage and Web access
for customers' customers. The case is a good example of a new type of a logistics provider.


Table 6: Logistics information systems in use by case companies
                                                EDI or online     EDI or online     EDI or online
                                                connection with   connection with   connection with
                      Information system in use suppliers         customers         logistics providers
Unilever Baltic       SAP                                X                 -                  -
Philips Latvia        SAP 3                               -               X                   X
Procter & Gamble      SAP 3                              X                 -                  -
GNT Baltic Holding    Scala, Ecommerce (own)             X                X                   -
York International    Scala stock                         -                -                  -
Samsung Electronics   SAP 3                              X                X                   -
Hydro Texaco          Scala                              X                 -                  -
ABB                   Scala                              X                X                   -
ICA Baltic            Vivaldi                             -                -                  -
Siemens               Scala                              X                X                   -
Kesko food            SAP R3                              -                -                  -
Electrolux            JDE One world                      X                 -                  -
Volvo Parts           (own) AS 400                       X                X                   X
Hilti                 Manu Logistics (own)               X                 -                  -
Robert Bosch          SAP Purchase, Scala                X                 -                  X


Logistics information flow often included the usage of more traditional means of
communication such as making orders by telephone, sending commercial invoices by
telefax or as email attachment. Four case companies had developed a system which allows
customers to make online orders directly to regional distribution centers outside the Baltic
States - passing the case firm's local organization.



                                                                                                          35
4.3.2 Detected complications in documentation

Overall there were few problems relating to trade and transport documentation. The
notable exception is the Latvian "Delivery Note / Invoice", which was perceived as a
hinder by Eight case companies (Box 1.).

    Box 1. "Delivery Note / Invoice" or "Precu Pavadzime Rekins" (PPR) - is a document, which carries
    two roles as an official commercial invoice and transport inland waybill in Latvia. The standard and
    numbered forms are in use for all domestic transactions of products in free circulation, excluding
    international shipments.   Different form types are 15 in number. The used type depends on the
    commodity. The original, signed and stampped document must follow the products during
    transportation and be signed by consignees. The signed piece is to be returned to seller's accounting.
    Latvian State Revenue Service controls proper handling of the document to ensure lawful VAT
    payments to the Government. The document must be stored 5 years of which 1 year at the location of
    the goods. The owner or director of the legal entity may only sign the document. This right may be
    transferred to another person by a written authorization. The person who signs is responsible for
    possible descrepencies or failure to return the document.
    Source: Latvian State Revenue Service, http://www.vid.lv/likumi/MK_noteikumi_268.htm



The case companies have developed different ways to deal with Delivery Note / Invoice.
The return of the signed document to the selling firm is very important and therefore it can
be handed over to a trustable party. When selling firm's warehouse and accounting
activities are at the same premises; the documents are just attached to the cargo when
shipping out. The task is more difficult if a firm used logistics providers warehousing
services located elsewhere. One case firm had arranged a possibility to print out the
document contents onto a ready-signed and stamped Delivery Note / Invoice. Another one
had agreed with a logistics provider to have first the documents picked up from the selling
office - and again delivered the signed documents back separately.

Although dealing with the Latvian Delivery Note / Invoice seemed to be more a source of
inconvenience rather than obstacle for business, the problem should be addressed. The
described regulations hinder logistics buyers from moving into direction of the most
developed and cost effective models of physical distribution7. Undoubtedly, additional
arrangements and extra work caused will increase also logistics providers' costs and price
level of rended services.



7 See Figure 5: Physical distribution using cross docking concepts. Earlier it was discussed that the Delivery
Note / Invoice does not concern international shipments. However, in this case the international shipment
becomes domestic when the imported and customs cleared shipment is broken into several domestic
deliveries. The Delivery Note / invoice is therefore applicable. The case is the same in distribution of goods
from a country specific warehouse in Latvia.

                                                                                                             36
4.3.3 Evaluation of regulatory environment

Figure 19. presents the case companies' evaluation of the regulatory environment relating
to materials flow in Estonia, Latvia and Lithuania during the four stages of market present.
The respondent stated only a slight improvement from market entrance to present days for
Latvia and Lithuania. The Estonian regulatory environment was considered more friendly;
the positive development was also seen to be faster.

                       Does the regulatory environment of the Baltic States
                      hinder efficient materials flow of your company's goods
                                                   ?
                         Market         Establishing       Present         Anticipated
                        entrance          market                            EU time
                                        position   »
                       » 1994-1996       1996-1999        » 1999-2002       » 2004 -
               1.00




               2.00




               3.00




               4.00




               5.00
                                   1 = No hinder … 5 = Strong hinder

                                     Estonia     Latvia        Lithuania




Figure 19. Case companies' evaluation of the regulatory environment

Most case companies evaluated the business environment giving ratings that indicate a
steady improvement. However one firm in consumer durables made an exception to this,
which deserves to be mentioned. This respondent considered that the regulatory
environment has in fact presently become worse than in market entrance and when
establishing market position. The recently implemented changes in materials flow (moving
from country based warehousing into physical distribution using cross-docking concepts)
set greater challenges for information flow than previous arrangements. The new model is
more developed and included various carefully designed arrangements with a logistics
provider. Additional work in Latvia and Lithuania was caused by trade and transport
documentation regulations in Latvia and Lithuania (Box 1). The evaluation for the
regulatory environment given by this case firm for these countries are therefore presently
much worse that in earlier business stages.




                                                                                         37
The above described case indicates the dynamic link that prevails between the overall
development of the regulatory environment and the altering logistics arrangements
implemented by logistics users. Although the absolute development in regulatory
environment may steadily occur, the improvements may be considered inadequate if the
new logistics strategy sets even greater challenges.



4.4 Logistics Organization

The results indicate relatively active reconfiguring the logistics organization as in materials
flow discussed earlier. 11 out of the 15 cases firms implemented at least two different
organizational patterns. The selected organizational structures seem to be in connection
with the centralization trend in physical distribution. Figure 20. summarizes the logistics
organization forms used by the case companies.

Often the organizational changes were made simultaneously for all the three countries.
This was also the case in materials flow. The link can be interpreted as companies' aim to
see the Baltic States as one market area. The detailed results on logistics organization
structures are presented in Attachment 13.
                                                                                                                 Establishing
                                                                                                       Market                               Anticipated
                                                                                                                   market      Present
                                                                                                      entrance                               EU time
                                                                                                                   position
                                                                                                    » 1994-1996 » 1996-1999 » 19 99-20 02    » 20 04 -

                                                                       Baltic States
                                 Marketing
                                                                       region

All functions             Physical Distribution                           Distribution

centralized except   D.      Administration                               Centre
                                                                                                         6            6          12            26
local sales                        Sales
                                                           EE
                                                                LV          Sales
                                                                     LT     subsidiaries

                                                                      B al tic S ta te s

Marketing, logistics
                                 M a rk et in g
                                                                      r eg io n

                          P hy s ica l Di st rib ut io n
and part of                                                           D i str ib ut io n


                     C.                                                                                  6            9          16             9
                              A dm i ni str at io n                   C entr e


administration              A dm ini str at io n
                                   Sa le s                                  Sa le s

centralized                                                EE
                                                             LV
                                                                     LT
                                                                            s ubs idi ar ie s



                                                                                Baltic State s
                                   Marketin g
                                                                                regio n
Marketing centralized -
                          Physical distributio n
other functions     B.        Administ ratio n                                      Sales                9           12           3             3
locally present                      Sales
                                                                 EE
                                                                   LV
                                                                                    subsidiarie s

                                                                            LT


                                  Marketing

                          Physical distributi on
All functions
                     A.       Administration                                        Sales
                                                                                                        23           17          13             3
locally present
                                                                                    subsidiaries
                                     Sales
                                                                     EE
                                                                          LV
                                                                               LT




Figure 20. The number and transfer of different arrangements in logistics
           organization




                                                                                                                                                          38
Every stage includes each sample firm's 3 arrangements (1 for Estonia, 1 for Latvia and 1
for Lithuania)8. The arrows indicate the direction and the number (boldness) the of
changed arrangements.

The underlying motives for reconfiguring the logistics organization were mostly business
driven; altering business culture, market demand and efforts to reach cost effectiveness
were the major forces driving the change. The organization was often configured to be the
lightest possible arrangement for channeling logistics flows to customers - and therefore
subject to rather dynamic changes in the past and future.

The development of the logistics organization was also closely linked to the distribution
channel in general. In some cases a firm needed to have certain functions present locally
because of a relatively fragmented customer base with large number of customers. General
trend of consolidation in retailing sector was anticipated to reduce the number of
customers. Future retailers were also expected to be larger in size.

Little connection was seen with logistics providers, regulatory environment or transport
and telecommunications issues infrastructural issues. Just one firm stated that a heavy
organization was necessary to have at the market entrance in order cope with a difficult
regulatory environment.

At the market entrance stage country based management was the dominating form of
business organization. Typically all the business functions were present locally. The
concept seems to be a usable tool for market entry but much less used in later business
stages. Only one firm expected to work with a such - full organization in the anticipated
EU time.

An accelerating trend towards more centralized organization can clearly be seen at the later
business stages. Nine out of the 15 companies consider centralizing all functions other than
operational sales in the anticipated EU time.



4.5 Distribution channel

The 15 case firms have applied various different strategies in configuring the structure of a
distribution channel. The choices made naturally depend on the type of business the firm
represents. For many - the configuration was also heavily influenced by corporate policy
outside the Baltic States. Generally, the decisions on distribution channel were said to be
made based on business driven factors rather than influence from the business environment

8With certan exceptions: if the sample firm did not have business operations established in some of the
Baltic State or if the information was not available. The detailed data is presented in Attachment 13.

                                                                                                    39
such as from the availability of logistics services or the regulatory environment.
Attachment 14 summarizes the implemented patterns.

Due to the overall importance of logistics flows and their close linkage with the core
contents of this Section it is relevant to acknowledge that the strategic choices of
configuring a distribution channel often have a certain impact on sharing the responsibility
between the channel members in operating the logistics flows. Five different case groups
can be separated in this respect. These are:

·   Volume business, consumables
·   Volume business, electronics
·   The suppliers of institutional end users
·   The logistics developers
·   The retailers



4.5.1 Volume business, consumables

Two large multi-brand firms in consumer consumables seem to follow a similar pattern of
working through distributors that have been given exclusive rights of sales representation.
Relatively long channels include also wholesalers and retailers. The firms seem to have
basically two motives for the arrangement: the aim to reach as large coverage in the Baltic
markets as possible and secondly, to accept only a very limited number of customers that
are able to purchase in large quantities. Because of relatively small sizes of the Baltic
markets, in practice this may mean exclusive representations. The two case companies also
allow the distributors to handle most of the logistics arrangements: international
transportation of the products from European distribution centres, warehousing and
domestic distribution.



4.5.2 Volume business, electronics

Two consumer electronics case companies operated via wholesalers and authorized
retailers, which the companies preferred to call as resellers. Both companies have chosen to
give the logistics decision making to the customers. One of the companies had gone
through a path of different materials flow patterns (II and IV), first self having the logistics
responsibility and finally letting customers to take over for cost reasons.




                                                                                             40
4.5.3 The suppliers of institutional end users

Two large case companies producing mostly electric equipment for industrial purposes
have both chosen to deal directly with institutional end user customers. These
customerships are mostly implementations of larger project. Smaller equipment are sold
through wholesalers and retailers. The products of these two case companies are typically
considerably high in value. Timely deliveries of components to project sites was
considered as the key question in logistics. One of the companies had therefore ensured the
fast deliveries by producing the domestic distribution services in-house.



4.5.4 The logistics developers

Two companies - one in consumer electronics and the other in consumer durables - sell
their products through authorized dealers. The two case companies have taken active
measures in developing the logistics flows. The consumer electronics firm operates own
warehouses selling logistics services also outside. This firm considers having special
expertise in handling a large number of stock keeping units and finding logistics providers'
services usable only in simpler forms of logistics such as transportation.

The firm in consumer durables has taken active steps in designing and implementing a
workable type IV kind of cross-docking based physical flow pattern together with a
logistics provider. The difference to other such arrangements is that in this case the concept
included working mostly with international shipment sizes of less than a full truckload.
The logistics system can here be seen as an enabling tool - first, in avoiding local and
Baltic regional stocks - and secondly, in making possible to deal directly with retailers.
Due to the advanced logistics arrangement the wholesaler step is not needed to ensure large
purchase amounts.



4.5.5 The retailers

The two large retail case firms mainly sell their products directly to consumers. Logistics
services are produced in-house or they are partly bought from outside, largely on "arm's-
length-basis" - aiming at cost effective service performance from local logistics providers.
Although the distribution channel forward seems relatively simple, the companies face
challenges at the supply side of the chain. The share of the local producers is relatively
high (70 - 95 %). The large number of these local suppliers (several hundreds) cause great
pressure to outlets that some of them may have to receive as many as 150 incoming
deliveries per day. To solve this problem both retail companies were both in process of
building new own warehouse capacity.


                                                                                           41
The retail case companies face also another problem backward of the supply chain.
Holders of major international product brands tend to give exclusive sales representation
rights in the Baltic markets to distributors that are able to buy in large quantities. The retail
firms are forced to buy the products from these intermediates that naturally add their sales
commission to the price. The brand holders were said to prefer exclusive rights because the
markets are very fragmented and such agreements are needed to ensure sufficient market
coverage. The retail firms opposed such market behavior considering that the agreements
limit free competition. The monopolistic market situation caused by exclusive sales
representation rights was also expected to break by the growth of the major retail chains
and the anticipated EU membership of the Baltic States.



4.5.6 Conclusions

The major question that should be derived from the presented results is: Why do the major
companies especially in consumer consumables and consumer electronics prefer customers
to control logistics flows?

It would seem more sensible to manage the flows centralized in order to reach higher
efficiency. Overall cost efficiency was the generally given answer to the above question.
But how is the overall cost efficiency generated? Following factors are suggested to
explain the market behavior:

(1) The firms want to cut the logistics costs that show up in their own books. The costs
    will not go away but will be transferred to other parties in the supply chain. However,
    large multinational companies such as interviewed in this study, generally pay much
    attention to total landed costs of the distribution channel and the final price of the
    products in a market.

(2) The companies want to avoid parallel logistics functions. For example, a next channel
    member forwards might want to operate a warehouse anyway, regardless if the case
    firm already does it or not.

(3) The channel members close to customers tend to know better how to forecast seasonal
    demand changes. This was the explanation given by an experienced respondent in this
    type of business. The problem of forecasting is especially big in consumer electronics
    at end of each year.

(4) The previous item (3) may be in connection of a relatively low utilization of computer
    aided materials planning applications that connect the chain members in order to better
    forecast the demand changes.


                                                                                              42
(5) Later channel members possess better know how in producing or buying logistics
    services. Distributors or wholesalers may also gain synergies by combining several
    types of products in domestic distribution (a respondent's comment on the matter in
    Lithuania).



4.6 Provision of logistics services

A large range of logistics services were used by the case companies. Table 7 presents a
summary of bought services presently and in the anticipated EU time.

The companies buying the logistics services are however relatively low in number relating
to the total number of case companies (15). Some companies have made a strategic choice
of not getting involved with materials flow at all but letting the customers make decisions
relating to logistics flow. This is especially the case of large electronics companies.


Table 7: Case companies' bought logistics services presently and in the
         anticipated EU time
                                                                    ess                        oe
                                                       Number of companies that             Forecast of
                                                        reported to buy a service            change in
                                               Presently     In the anticipated EU time       service
                                                                          As                  demand
                                               (Yes or no)    Less     before     More Present / EU
                                                                      EU time                  time *
Import full truck loads transportation                   10         1         4          5 +++++
Domestic transportation of import goods                  10         0         3          7 +++++++
Customs clearance services                                9         7         1          2 - - - - - - -
Import transportation less than 2500 Kgs                  8         1         4          3 ++
Import transportation 2500 - 10000 Kgs                    7         0         6          2 ++
Ocean transportation                                      6         0         2          5 ++++
"Pick & pack" services                                    5         2         1          3
Customs duty payment services                             4         3         0          3
Export transportation less than 2500 Kgs                  4         0         1          4 ++++
Domestic transportation (sender and receiver)             4         0         2          2 ++
Airfreight transportation                                 4         0         2          2 ++
Parcel/package deliver - by air                           4         0         2          2 +++
Country based warehousing                                 3         1         1          2+
Parcel/package deliver - by land                          2         1         1          1
Domestic transportation of export goods                   2         0         1          1+
Baltic central warehousing                                1         0         1          2+
Export full truck loads transportation                    0         0         0          1
Export transportation 2500 - 10000 Kgs                    0         0         0          1
Labelling services                                        0         0         0          1
*) The number of plusses or minuses indicate the expected change in absolute demand of the service



The bought services are also very import related, which undoubtedly results from the
sample companies' orientation mainly to distributive trade. The services that will be more


                                                                                                       43
in demand in the anticipated EU time are of rather basic type such as import of full unit
loads and domestic transportation.

It is noticeable though that the bought services are quite basic in nature: international
transportation and domestic distribution dominate whereas the services that require more
advanced coordination by the logistics provider - are fairly few. Only three out of the eight
companies operating by distribution from country based warehouses had outsourced the
activity to a logistics provider.

The demand for customs related services is understandably expected to reduce in the
anticipated EU time; most of the case companies' materials inflow originated from the
European Union and customs clearances for these shipments will no longer be required.
Some companies planned to route product flows from overseas areas directly to the Baltic
States instead of routing via European hubs. The increase in demand of these services is
however small.

The respondents were generally more satisfied with logistics providers in Estonia than in
Latvia and Lithuania. Figure 21. presents case companies' evaluations of logistics
providers during each stage of a market presence. A significant improvement can be seen
for all three countries. The companies have also high expectations for further improvement
towards the anticipated EU time.
                    How well do logistics providers fulfil your company's
                        requirements for efficient materials flow ?

                      Market        Establishing      Present        Anticipated
                     entrance          market                         EU time
                                      position
                    » 1994-1996     » 1996-1999      » 1999-2002      » 2004 -

             1.00




             2.00




             3.00




             4.00




             5.00
                                 1= Very well... 5=Very poorly
                                Estonia     Latvia       Lithuania




Figure 21. Case companies' evaluation of logistics providers


                                                                                          44
5   CONCLUSIONS

In recent years the studied case companies in the Baltic States have actively reconfigured
their logistics systems in respect of materials flow, information flow, logistics organization
and distribution channel. The processes seem to have accelerated towards the present time.



The level of transport and telecommunications infrastructure

The level of transport and telecommunications infrastructure is no longer a hindering factor
for major logistics buyers. If in the early 1990's the key issues in logistics was to find the
access to transportation capacity and how to cope with border crossing formalities,
presently the focus is clearly on adopting an efficient logistics solutions in accordance with
corporate policy - powered by reliable and high-quality logistics services.



The regulatory environment

The regulatory environment of the Baltic States is still perceived hindering logistics
activities somewhat in Latvia and Lithuania but not in Estonia. This is the view of
internationally operating case firms. For them the anticipated EU time will mean the
beginning of an era that conforms to regulations that these firms are already familiar with
and which are often favorable for them. However, EU membership will substantially
increase regulations and bureaucracy for domestic firms in the Baltic States that have been
accustomed to very low level of regulation as shown by Brunetti et al. (2001).

The logistics hinders in Latvia and Lithuania are related to the compulsory trade and
transport documentation. Large logistics buyers are implementing more advanced logistics
concepts that are often based on outsourcing of logistics activities. The documentation
requirements in Latvia and Lithuania may be workable if logistics services are produced
for own account but more flexibility is necessary when outsourcing is used.



Firms' responses to the changing logistics environment

The anticipated EU membership will significantly change the logistics environment of the
Baltic States. The removal of customs borders will enable companies to centralize physical
distribution activities and connect their supply chains more intensively to those in the
European Union.




                                                                                           45
The results indicate that major logistics buyers in the Baltic States are planning major
changes in the anticipated EU time. Direct distribution from European logistics centres by
using cross docking concepts is a likely model in the near future for large companies.
Fewer products will be kept available in country specific warehouses.

Some increase can be expected in Baltic regional warehousing although only few
companies said to use this distribution pattern in the future. This may be the result of
negative experiences from its high process complexity in non-EU environment. The length
of the process will be half shorter in EU environment (Attachment 7), which may well
make companies prefer Baltic regional warehousing more than can be interpreted from the
respondents' statements.

Figure 22. summarizes of the detected transfer of the implemented logistics management
options introduced earlier in Section 1.2. A commonly detected change was moving from
country based management towards multinational integration.

Option 1: Country based management                          Option 3: Multinational integration
   • Direct export/import
                                                               • Warehouses centralized
   • Country based warehouses
                                          EE                     outside the Baltic States
   • Little Baltic regional co-
                                                               • Centralization of logistics organization
     operation
   • No synergies from                                         • Distribution by using cross-docking
     consolidating                   LV        LT                concepts
   • likely to be used less                                    • Following common corporate policy
                                                               • Strong involvement of
Option 2: Cross border teaming                                   capable logistics provider in
                                                                 key role
   • Often Baltic regional stock          EE                   • Likely to increase significantly
   • Synergies from main
     haulage and warehousing
   • Complicated and expensive                                               SCM
                                     LV        LT
     process structure because
     of many customs borders                                                 LV
   • Likely to be used some more                                        EE         LT
     in the anticipated EU time
                                                    2004?

Figure 22. The case firms reconsider logistics management options in favor
           for multinational integration.
The study indicated how logistics decisions in a firm are in a close interaction with
management in other areas such as marketing. The materials flow system design may be a
tool for configuring a desired kind of distribution channel. The strategic decisions in
logistics are motivated by companies' long term goal of maintaining profitable business.
The trade-off decisions between logistics costs and the customer service level are the
companies' way to allocate the available resources in the most efficient way. In this study
the case companies were selected among the multinational corporations that could be
assumes to have the necessary capabilities and knowledge to implement state-of-the-art
logistics concepts.

                                                                                                    46
Concentration of logistics operations in capital regions

Cargo volumes are strongly concentrated in the capital regions in Latvia and Estonia. This
may be a potential threat to efficient logistics management. Insufficient cargo volumes
destined to rural areas lead into higher transportation production costs. Higher domestic
service prices are again transferred to the prices of the transported products. Also, logistics
buyers may consider less centralized and inefficient distribution arrangements more
attractive in the absence of competitive domestic transportation services (Figure 23).

                   High concentration of cargo volumes in capital areas


                   Too low volume levels in areas outside capitals


                   High domestic distribution prices and low service performance


                                             Cost efficient centralized logistics
                                             arrangements are less attractive and
                                             implemented less in number


                   Higher costs for end users in prices of the distributed products



Figure 23. Potential negative consequences caused by a high cargo volumes
           concentration in capital areas
 Following actions are suggested to minimize the negative effect of volumes concentration:

 1.   Co-operate on

 ·    The Baltic States level
 ·    on country level
 ·    on industry level

 in order to increase domestic transportation efficiency. Logistics associations and governmental
 organizations together can find the ways, which could be difficult by individual logistics buyers and
 suppliers operating on business driven motives. Part of the co-operation could be to create a system that
 follows and registeres service providers' loading degrees.

 2. Remove obstacles from outsourcing
 The trade and transport documentation requirements in Latvia and Lithuania were considered as a an
 obstacle for logistics users to outsource logistics activities. Other ways should be found to control and to
 ensure that lawful VAT payments are submitted to the government.

 3. Promote buying logistics services
 A great share of domestic transportation is stil known to be carried out for own account, often using
 relatively aged equipment. Logistics providers are better able to consolidate cargo volumes, which should
 result in higher transportation efficiency. Efforts, such as taxation could be used to encourage the general
 trend of outsourcing the logistics activities.

 4. Promote regional development
 Domestic cargo volume concentration largely results from low purchasing power in rural areas. Logistics
 efficiency would therefore likely benefit from long term regional development programs.



                                                                                                           47
Presently, a number number of logistics providers offer domestic distribution services.
However, the market is fragmented and the companies seem to be unable to provide
satisfactory service level because the cargo volumes are split between a large number of
operators. Joining the EU will open up the distribution market in the Baltic States.



The need for continuous monitoring of logistics efficiency

Allocation of logistics resources affects the efficiency of firms and industries. The overall
effects for the entire economy are, however, often indirect and therefore largely hidden.
Development in this area is of interest for all players in the economy - finally the
consumer. Therefore:


5. Build up ways to monitor companies' logistics efficiency on a continuous basis

Developing logistics environment is a process which should also include continuous monitoring of the
achieved results and identifying future challenges. In practice this could mean that comparable logistics
surveys are carried out regularily in each country. An example of this is the logistics survey conducted in
Finland every three years. A corresponding Baltic survey could be commisioned by Tedim.

It would be interesting to conduct such studies in each EU accession country. This would naturally require
funding and participation from the EU.




The case firms focus has changed from transport to advanced logistics issues.

Freight transport is often presented as a three-layer model that illustrates the hierarchical
nature of a transport system. The layers are in interaction through market relations
involving demand and supply sides. The lowest level, the transportation infrastructure
provides capacity to traffic markets. Market operators, such as shipping lines, form the
demand side of the traffic market by using the infrastructure and operating the transport
flow with vessels, vehicles and other transportation units. The materials flow of individual
logistics buyers forms the demand on the transportation market.

Figure 24. presents the described model, added with a fourth layer - logistics concepts. The
results of this study indicated how the 15 logistics buyers have implemented different
forms of logistics configuration that can be divided into three types of logistics
management. The materials flow, the information flow, the logistics organization and the
distribution channel are integral parts of these concepts. Market conditions prevail also
between the upper two layers. An advanced logistics solution typically required active
involvement of a third party logistics provider together with companies' internal resources.



                                                                                                         48
Two case companies had transformed internal logistics functions into separate legal units
that provide logistics services to in-house customers.


                                                                         Entrance   Establish               EU-time
                                                                                    market      Present
                                                                                                          (anticipated)
                                                                                    position




   Advanced
                                              EE


                  Logistics
                                                                                                              X
                                                              SCM

   logistics      concepts
                                        LV         LT

                                                         EE
                                                              LV
                                                                    LT

   users                                      EE



                                         LV         LT




      .                   Advanced logistics
      .                   services market
      .
      .
      .
                  Material flow
                                                                                                 X
      .
      .                    Transport market
      .
      .
      .
      .
                  Transport flow
                                                                                      X
      .
      .                       Traffic market
      .
    Policy
    makers        Infrastructure                                           X


Figure 24. The four layers of freight transport and the main concerns during
           the stages of market presence
(Adapted from Ojala 1996 and Wandel et al. 1992)

Figure 24. also summarizes the key areas of concern in different stages of market presence.
Infrastructural issues and availability of logistics services were not any longer seen as
problematic issues for the case firms. The key issue now is the possibility to integrate their
logistics in the Baltic States into their European-wide chains. The anticipated EU
membership is seen to make this task much easier.

The trend presented in Figure 24. exhibits the overall positive development in the logistics
environment of the Baltic States. Today's situation is challenging for policymakers,
because many of the actions that further improve the logistics environment seem to be out
of the immediate sphere of political influence. Active involvement and co-operation with
non-governmental organizations on industry level is therefore likely be the fruitful way to
maintain the connection to the end users of advanced logistics services.


                                                                                                                          49
6   REFERENCES

Berglund, Magnus (2000) Strategic Positioning of the Emerging Third-Party Logistic
      Providers, Linköping Studies in Management and Economics, Dissertation No 45,
      Linköping,

Berglund, Magnus and Laarhoven van, Peter and Sharman, Graham and Wandel, Sten
      (1999), Third-Party Logistics: Is There a Future? The International Journal of
      Logistics Management, Vol. 10, No 1

Brunetti, A., Kisunko, G. and Weder, A. (2001) How businesses see Government
      Responses from Private Sector Surveys, IFC Discussion Paper No. 33, available at
      http://www.ifc.org/economics/pubs/dp33/dp33.pdf

Central Statistical Bureau of Latvia (2000) The Baltic and The Nordic Countries – A
       Collection of Statistical Data, Riga

Eurostat (2002 a), Key structural data for the 10 Acceding Countries, News Releases,
       General statistics, http://europa.eu.int/comm/eurostat/Public/datashop/print-
       product/EN?catalogue=Eurostat&product=1-05122002-EN-BP-
       EN&mode=download, read 12.2.2002

IRU (2000), Road Transport and EU Enlargement, Main Problem Areas in the Pre-
      Accession Period, Progress Report No. 1, 2000,
      http://www.iru.org/EUenlargement/Welcome.E.html, read 1.3.2002


IRU (2001), Competition in East-West Road Transport Markets, Providing Opportunities
      for All, Executive Summary, http://www.iru.org/EUenlargement/Welcome.E.html,
      read 15.1.2002

Korhonen, Ilkka, EU-kandidaatit ja rahaliitto (2001), The Bank of Finland, Institute of
      Economies in Transition, 2001, http://www.bof.fi/bofit, read 14.1.2002

Latvian State Revenue Service, http://www.vid.lv/likumi/MK_noteikumi_268.htm

Murphy, P. R. and Daley, J. M. (1999) Revisiting logistical friendliness: perspective of
     international freight forwarders. Journal of Transportation Management, Spring
     1999, 65-71.




                                                                                           50
Naula, Tapio (2002), Structural Analysis of Third Party Logistics Providers in the Baltic
       States, Master’s Thesis in Turku School of Economics and Business Administration

Naula, Tapio and Taurins, Aivars (2002) Logistics Providers’ Service Concepts In The
       Baltic States, accepted conference paper presented at NOFOMA 2002 in
       Trondheim.

Norrman, Andreas (1997) Organizing Timebased Distribution in Transnational
     Corporations. Linköping Studies in Management and Economics, Dissertations No.
     33, Linköping

Ojala, Lauri and Queiroz, Cesar (2002) Logistics Friendliness, GDP And The Perceived
       Level Of Corruption Of Countries, LRN 2002 Conference Proceedings in
       Birmingham, The Institute of Logistics and Transport, Northants

Ojala, Lauri M. (1995) Logistics Management in Finnish Foreign Trade Transport.
       Publications of the Turku School of Economics and Business Administration, Series
       A-3, Turku

Ojala, Lauri and Queiroz, Cesar, Transport Sector Restructuring in the Baltic States, The
       World Bank, Turku, 2001 – available also in the Internet at:
        http://wbln0018.worldbank.org/eca/eca.nsf/66d6f5004ed085ca852567d1001
        1a8b8/285b85155cb0455885256ab800689a2a?OpenDocument

Statistics Lithuania (2000) Estonia, Latvia, Lithuania: Foreign Trade 1999, Vilnius

Statistics Lithuania (2001) Estonia, Latvia, Lithuania: Foreign Trade 2000, Vilnius

Transparency International, Corruption Perceptions Index 2002,
      http://www.gwdg.de/~uwvw/

UNCTAD (2002), World Investment report - Transnational Corporations and Export
    Competitiveness - Country fact sheets - Estonia,
    http://r0.unctad.org/wir/pdfs/wir02_fs.ee.en.pdf, read 11.12.2002

UNCTAD (2002), World Investment report - Transnational Corporations and Export
    Competitiveness - Country fact sheets - Latvia,
    http://r0.unctad.org/wir/pdfs/wir02_fs.lv.en.pdf, read 11.12.2002




                                                                                            51
UNCTAD (2002), World Investment report - Transnational Corporations and Export
    Competitiveness - Country fact sheets - Lithuania,
    http://r0.unctad.org/wir/pdfs/wir02_fs.lt.en.pdf, read 11.12.2002

UNECE, Number of TIR carnets issued by IRU to different national associations from
    1995 to 2000 http://www.unece.org/trans/new_tir/div/carnets.htm, read 1.3.2002

Waller, D.G and D’Avanso, R.L. and Lambert, D.M (1995) Supply Chain Directions For A
      New North America, Council of Logistics Management, Oak Brook

The World Bank - country at a glance tables, available at:
http://www.worldbank.org/data/countrydata/aag/est_aag.pdf, read 4.12.2002

The World Bank - country at a glance tables, available at: http://www.worldbank.org/cgi-
bin/sendoff.cgi?page=%2Fdata%2Fcountrydata%2Faag%2Flva_aag.pdf

The World Bank - country at a glance tables, available at: http://www.worldbank.org/cgi-
bin/sendoff.cgi?page=%2Fdata%2Fcountrydata%2Faag%2Fltu_aag.pdf

The World Gattzeteer, http://www.world-gazetteer.com/fr/fr_ee.htm, read 20.11.2002

The World Gattzeteer, http://www.world-gazetteer.com/fr/fr_lv.htm, read 20.11.2002

The World Gattzeteer, http://www.world-gazetteer.com/fr/fr_lt.htm, read 20.11.2002




                                                                                       52
Attachment 1: Estonia at a glance




                                    53
54
Attachment 2: Latvia at a glance




                                   55
56
Attachment 3: Lithuania at a glance




                                      57
58
    Attachment 4: Number of exporters and importers by value exported and
                         imported in 2000
    Source: Statistics Lithuania 2001, 74-75



Value of exports   Estonian exporters                 Estonian importers
and imports          number             %               number             %
thousand USD                   of number of value                 of number of value

TOTAL                   5 896      100.0      100.0       10 254      100.0      100.0
Less than 1               580        9.8        0.0        1 144       11.2        0.0
1 - 99                  3 579       60.7        2.0        6 171       60.2        2.8
100 - 999               1 266       21.5       11.3        2 229       21.7       14.8
1000 - 4 999              356        6.0       19.6          544        5.3       22.3
5 000 - 9 999              54        0.9        9.6           96        0.9       13.0
10 000 - 49 000            57        1.0       28.3           66        0.7       25.3
Over 50 000                 4        0.1       29.2            4        0.0       21.8


Value of exports   Latvian exporters                  Latvian importers
and imports          number              %              number             %
thousand USD                    of number of value                of number of value

TOTAL                   5 576      100.0      100.0       12 471      100.0      100.0
Less than 1               750       13.4        0.0        1 770       14.2        0.0
1 - 99                  3 388       60.8        2.2        7 957       63.8        2.9
100 - 999               1 013       18.2        9.8        2 140       17.2       11.6
1000 - 4 999              309        5.5       19.5          447        3.6       16.4
5 000 - 9 999              63        1.1       13.0           77        0.6        9.2
10 000 - 49 000            43        0.8       26.7           63        0.5       22.8
Over 50 000                10        0.2       28.8           17        0.1       37.1


Value of exports   Lithuanian exporters               Lithuanian importers
and imports          number              %              number              %
thousand USD                    of number of value                 of number of value

TOTAL                   7 962      100.0      100.0       13 537      100.0      100.0
Less than 1               747        9.4        0.0        1 217        9.0        0.0
1 - 99                  5 226       65.6        3.2        8 563       63.3        3.7
100 - 999               1 536       19.3       12.8        2 983       22.0       18.1
1000 - 4 999              332        4.2       18.9          626        4.6       24.0
5 000 - 9 999              64        0.8       11.5           86        0.6       11.2
10 000 - 49 000            52        0.7       26.4           58        0.4       21.3
Over 50 000                 5        0.1       27.2            4        0.0       21.7




                                                                                        59
Attachment 5: Distribution of different types of customs declarations in
                         1998-2000
Source: Statistics Lithuania 2001, 53 and Statistics Lithuania 2000, 52




                         Estonia                 Latvia                 Lithuania

     100 %


       80 %


       60 %


       40 %


       20 %


        0%
                  1998    1999     2000   1998   1999     2000   1998    1999    2000

          Permanent exports                              Temporary exports for processing
          Exportation after inward processing            Exportation from customs warehouses
          Other

                         Estonia                 Latvia                 Lithuania

      100 %


       80 %


       60 %


       40 %


       20 %


        0%
                  1998    1999     2000   1998   1999     2000   1998     1999   2000
         Permanent imports                              Temporary imports for processing
         Re-imports after processing                    Imports to customs warehouses
         Other




                                                                                               60
        Attachment 6: Case companies' business stages of presence in the Baltic
                                  States markets


                                                      Establishing
                                        Market                                         Anticipated EU
                                                        market            Present
                                       entrance                                              time
                                                        position




                                  1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Unilever Baltic       Estonia
                      Latvia
                      Lithuania

Philips Latvia        Estonia
                      Latvia
                      Lithuania

Procter & Gamble      Estonia
                      Latvia
                      Lithuania

GNT Baltic Holding    Estonia
                      Latvia
                      Lithuania

York International    Estonia
                      Latvia
                      Lithuania

Samsung Electronics   Estonia
                      Latvia
                      Lithuania

Hydro Texaco          Estonia
                      Latvia
                      Lithuania

ABB                   Estonia
                      Latvia
                      Lithuania

ICA Baltic Ab         Estonia
                      Latvia
                      Lithuania

Siemens               Estonia
                      Latvia
                      Lithuania

Kesko Food            Estonia
                      Latvia
                      Lithuania

Electrolux            Estonia
                      Latvia
                      Lithuania

Volvo Parts           Estonia
                      Latvia
                      Lithuania

Hilti                 Estonia
                      Latvia
                      Lithuania

Robert Bosch          Estonia
                      Latvia
                      Lithuania



                                                                                                                  61
Attachment 7: Distribution from Baltic regional warehouse: in non-EU
                    versus in EU environment

                                                 2004?

                               COLLECTION                  COLLECTION

                                TERMINAL                    TERMINAL


                             EXP. CLEARANCE              INT. TRANSPORT

        (Non-EU)                                                           (EU)
                             INT. TRANSPORT                 TERMINAL


                                TERMINAL                   STOCK - IN


                              CLEARANCE IN               RELEASE ORDER


                                STOCK - IN                 STOCK OUT


                             RELEASE ORDER               DISTRIBUTION


                                STOCK OUT


                                TERMINAL

                             EXP. CLEARANCE

                             INT. TRANSPORT

                                TERMINAL

                             IMP. CLEARANCE

                              DISTRIBUTION




Attachment 8: Sales orientation of 15 large Baltic logistics providers into
                    Baltic regional warehousing services


             Turnover
             (sales)




                    0%                20%                40%              60%

                   Share of Baltic warehousing sales in logistics provider's turnover
                       Bubble size: Baltic warehousing sales in EUR

                   Estonian company          Latvian company    Lithuanian company

Source: Naula (2002) Structural Analysis of Third Party Logistics Providers in the Baltic
            States, 106




                                                                                        62
   Attachment 9: Case companies' materials flow structure during different
                           business stages



                                              Establishin
                                   Market                             Anticipated
                                               g market     Present
                                  entrance                             EU time
                                               position

Unilever Baltic       Estonia         I            II         IV           IV
                      Latvia          I            II         IV           IV       I           Factory /         Terminal    Customer
                                                                                                Central
                      Lithuania       I            II         IV           IV                   W/H                 EE
Philips Latvia        Estonia      II / III     II / III      IV           IV
                      Latvia       II / III     II / III      IV           IV
                                                                                                W/H                 LV
                      Lithuania    II / III     II / III      IV           IV
Procter & Gamble      Estonia        III          III         IV           n/a
                                                                                         Country border             LT
                      Latvia         III          III         IV           n/a
                      Lithuania      III          III         IV           n/a
GNT Baltic Holding    Estonia        III          III         III           II
                      Latvia         III          III         III           II
                      Lithuania      III          III         III           II
York International    Estonia         II           II          I           IV
                      Latvia          II           II         III          IV       II    Factory /
                                                                                          Central
                                                                                                         Baltic
                                                                                                         Regional
                                                                                                                          Terminal Customer

                                                                                          W/H            W/H
                      Lithuania       II           II          I           IV                                                EE

Samsung Electronics   Estonia        IV           IV          IV            II
                      Latvia         IV           IV          IV            II                W/H
                                                                                                            LV
                                                                                                            W/H
                      Lithuania      IV           IV          IV            II
Hydro Texaco          Estonia         I             I         III       IV / III
                      Latvia          I             I         III       IV / III                                             LT
                                                                                           Country borders
                      Lithuania       I             I         III       IV / III
ABB                   Estonia        III          III         III          III
                      Latvia         III          III         III          III
                      Lithuania      III          III         III          III
ICA Baltic Ab         Estonia         I             I         III          III
                      Latvia          I             I         III          III      III          Factory /         Country    Customer
                                                                                                 Central           W/H
                      Lithuania       I             I         III          III                   W/H                EE
Siemens               Estonia         I             I          I           IV                                       W/H

                      Latvia          I             I          I           IV                                       LV
                                                                                                 W/H
                      Lithuania       I             I          I           IV                                       W/H

Ruokakesko            Estonia        III          III         III        III / II        Country border             LT
                      Latvia          I             I          I         III / II                                   W/H

                      Lithuania        -            -           -            -
Electrolux            Estonia        III          III         IV           IV
                      Latvia         III          III         IV           IV
                      Lithuania      III          III         IV           IV
Volvo Parts           Estonia        III          III         III          III                      Factory /     Customs Customer
                      Latvia         III          III         III          III           IV         Central       clearance
                                                                                                    W/H           & cargo
                      Lithuania      III          III         III          III                                    segregation
Hilti                 Estonia         I           III         III          IV
                      Latvia         III          III         III          IV
                      Lithuania      III          III         III          IV                         W/H
Robert Bosch          Estonia         I            II        I / II         II
                      Latvia          I            II        I / II         II                Country border
                      Lithuania       I            II        I / II         II




                                                                                                                                         63
Attachment 10:Case companies' regional distribution of cargo volumes in
                  Estonia

              Robert Bosch
                         Hilti
                Volvo Parts
                 Electrolux
               Kesko Food
                  Siemens
                  ICA Baltic
                         ABB
              Hydro Texaco
       Samsung Electronics
          York International
         GNT Baltic Holding
          Procter & Gamble
              Philips Latvia
             Unilever Baltic

                                 0 % 10      20   30   40   50    60    70   80      90 100
                                     %       %    %    %    %     %     %    %       % %

                 Harju     Tarto        Pärnu     Lääne Viru     Ida Viru    Other




                                                  Harju
                                                                                      Ida Viru
                                                                       Lääne-Viru




                                             Pärnu
                                                                             Tartu

                                 80 - 90 %
           Estonia               70 - 80 %
                                 60 - 70 %
                                 50 - 60 %
           Average               40 - 50 %
           percentages           30 - 40 %
           of volumes            20 - 30 %
                                 10 - 20 %
                                 5 - 10 %
                                 0.5 - 5 %
                                 < 0.5 %
                                                                                                 64
Attachment 11:Case companies' regional distribution of cargo volumes in
                     Latvia

            Robert Bosch
                      Hilti
              Volvo Parts
               Electrolux
             Kesko Food
                Siemens
                ICA Baltic
                     ABB
            Hydro Texaco
     Samsung Electronics
        York International
       GNT Baltic Holding
        Procter & Gamble
            Philips Latvia
           Unilever Baltic

                              0 % 10       20   30   40   50    60   70     80     90 100
                                  %        %    %    %    %     %    %      %      % %

             Riga    Daugavpils        Ventspils     Liepaja     Valmiera        Other




                                80 - 90 %
          Latvia                70 - 80 %
                                60 - 70 %
                                50 - 60 %
          Average               40 - 50 %
          percentages           30 - 40 %
          of volumes            20 - 30 %
                                10 - 20 %
                                5 - 10 %
                                                               Valmieras
                                                               Valmieras
                                0.5 - 5 %
                                 < 0.5 %

       Ventspils
       Ventspils




                                       Rigas
                                       Rigas




          Liepajas
          Liepajas



                                                               Daugavpils
                                                               Daugavpils


                                                                                            65
Attachment 12:Case companies' regional distribution of cargo volumes in
                    Lithuania

          Robert Bosch

                    Hilti

            Volvo Parts

             Electrolux

              Siemens

              ICA Baltic

                    ABB

          Hydro Texaco

   Samsung Electronics

      York International

     GNT Baltic Holding

          Philips Latvia

         Unilever Baltic

                            0 % 10    20   30    40     50    60   70      80     90 100
                                %     %    %     %      %     %    %       %      % %

          Vilnius   Kaunas       Klaipeda       Panavezys       Siauliai        Other




                                     Siauliai                Panevezio



      Klaipedos




                                                Kauno



                     80 - 90 %                                      Vilniaus
    Lithuania        70 - 80 %
                     60 - 70 %
     Average         50 - 60 %
     percentages     40 - 50 %
     of volumes      30 - 40 %
                     20 - 30 %
                     10 - 20 %
                     5 - 10 %
                     0.5 - 5 %
                     < 0.5 %




                                                                                           66
       Attachment 13:Case companies' logistics organization structure during
                                different business stages




                                           Establishing
                                 Market                             Anticipated
                                             market       Present
                                entrance                             EU time
                                             position

Unilever Baltic     Estonia        A            C           C           C
                    Latvia         A            C           C           C
                    Lithuania      A            C           C           C                  Marketing
Philips Latvia      Estonia        A            B           D           D             Physical distribution
                    Latvia         A            B           D           D         A     Administration                       Sales
                    Lithuania      A            B           D           D                                                    subsidiaries
                                                                                             Sales
Procter & Gamble    Estonia        B            B           D          n/a                                     EE
                    Latvia         B            B           D          n/a                                       LV
                                                                                                                   LT
                    Lithuania      B            B           D          n/a
GNT Baltic Holding Estonia         A            A           A           C
                    Latvia         A            A           A           C
                    Lithuania      A            A           A           C
York International  Estonia        C            C           C           D                                                  Baltic States
                                                                                            Marketing
                                                                                                                           region
                    Latvia         C            C           C           D
                    Lithuania
Samsung Electronics Estonia
                                   C
                                   D
                                                C
                                                D
                                                            C
                                                            D
                                                                        D
                                                                        D
                                                                                  B   Physical distribution
                                                                                        Administration                       Sales
                    Latvia         D            D           D           D
                                                                                             Sales                           subsidiaries
                    Lithuania      D            D           D           D                                      EE
Hydro Texaco        Estonia        B            B           A           D                                        LV
                                                                                                                      LT
                    Latvia         B            B           A           D
                    Lithuania      B            B           A           D
ABB                 Estonia        A            A           B           B
                    Latvia         A            A           B           B                  Marketing
                                                                                                                      Baltic States
                    Lithuania      A            A           B           B                                             region
ICA Baltic Ab       Estonia        A            A           A           A
                                                                                      Physical Distribution           Distribution
                    Latvia         A            A           A           A
                    Lithuania      A            A           A           A         C      Administration               Centre

Siemens             Estonia        B            B           C           D
                    Latvia         B            B           C           D               Administration
                    Lithuania      B            B           C           D                   Sales                           Sales
Kesko Food          Estonia        A            A           C           D                                      EE
                                                                                                                 LV
                                                                                                                            subsidiaries
                    Latvia         A            A           A           D                                             LT

                    Lithuania      -            -           -           -
Electrolux          Estonia        A            A           C           D
                    Latvia         A            A           C           D
                    Lithuania      A            A           C           D                    Marketing
                                                                                                                           Baltic States
Volvo Parts         Estonia        C            C           C           D                                                  region
                    Latvia         C            C           C           D
                                                                                       Physical Distribution
                    Lithuania      C            C           C           D                                                  Distribution
Hilti               Estonia        A            A           A           C         D       Administration                   Centre

                    Latvia         A            A           A           C
                    Lithuania      A            A           A           C                      Sales
Robert Bosch        Estonia        D            D           D           D                                      EE
                                                                                                                             Sales
                                                                                                                    LV
                    Latvia         D            D           D           D                                             LT     subsidiaries
                    Lithuania      D            D           D           D




                                                                                                                                 67
    Attachment 14:Structure of case companies' distribution channel

                                          Distributor   Wholesaler   Retailer   End user


                       Unilever Baltic
              1)
                     Procter & Gamble
"Volume
business"
                    Samsung Electronics
              2)
                           Philips




                            ABB
"Project
deliverers"   3)
                         Siemens




                         Electrolux
"Logistics
developers" 4)
                    GNT Baltic Holding


                         ICA Baltic
"Retailers"   5)
                        Kesko Food




                       Hydro Texaco



                       Robert Bosch



                        Volvo Parts


                            Hilti


                     York International


                   Logistics flows primarily controlled by case firm
                   Logistics flows primarily not controlled by case firm

                                                                                           68
Attachment 15:The questionnaire

 1. Background information

Name of your firm

Your name and position

Your organizational unit

Location of corporate headquarters

Corporate structure

What are the main product groups that you sell in the Baltic States markets ?

To which industry group does your firm represent ?

       Consumer durables                                Automotive                        Machinery
       Retailing                                        Electric equipment                Chemical & plastics
       Fast moving consumer goods                       Cosmetics                         Office automation
       Pharmaceutical                                   Printing & publishing             Other, please specify


Business operations in the Baltic States since
             Export / Import since:                         Partially or fully owned subsidiary since:
             Estonia             __________                          Estonia              __________
             Latvia              __________                          Latvia               __________
             Lithuania           __________                          Lithuania            __________
Number of employees for the Baltic States
             Within the Baltic States:                                                    Outside the Baltic States:
             Marketing/sales                        _________
             Logistics                              _________                             _________
             Other                                  _________
Total sales in 2001 (EUR)
             Estonia                                __________
             Latvia                                 __________
             Lithuania                              __________


Time perspective in this study is divided into following four stages. Please indicate the
year of beginning of each stage in your firm’s business operations in the Baltic States.
                                           Establishing                         (Anticipated)
                        Market entrance                        Present
                                          market position                         EU time

            Estonia

            Latvia

            Lithuania

                                                                                                                       69
         2. Materials flow

                Factory /     Terminal        Customer                          Factory /     Baltic     Terminal Customer
       A        Central                                                  B      Central       Regional
                                                                                W/H           W/H
                W/H               EE                                                                       EE


                                                                                                  LV
                 W/H              LV                                              W/H
                                                                                                  W/H


         Country border           LT                                                                       LT
                                                                        Country borders




                                           Indicate the point of change in goods ownership
                                           Indicate the point of consigning goods to final customer

                                                                                      Factory /   Customs Customer
         C      Factory /
                Central
                                 Country
                                 W/H
                                            Customer
                                                                          D           Central     clearance
                W/H                                                                   W/H         & cargo
                                 EE                                                               segregation
                                 W/H

                                 LV
                 W/H
                                 W/H
                                                                                        W/H
           Country border        LT
                                 W/H
                                                                                Country border



Which of the four simplified options for materials flow fits your firm at the different stages
of market presence ? Please mark A, B, C or D.
                                                       Establishing
                                        Market                                    (Anticipated)
                                                         market       Present
                                       entrance                                     EU time
                                                         position

                        Estonia

                        Latvia

                        Lithuania




What was the total quantity of goods distributed to the Baltic States in 2001 ?

                                                       Kgs                Cbms

                            Estonia

                            Latvia

                            Lithuania



What is your estimate for total quantity of goods distributed to the Baltic States in 2005 ?

                                                       Kgs                Cbms

                            Estonia

                            Latvia

                            Lithuania




                                                                                                                             70
How did the quantities in 2001 distribute among the regions in each country ? Please
mention maximum 4 most important ones and their percentage share per country.



                                   Region                        %

                       1
                       2
          Estonia
                       3
                       4


                       1
                       2
          Latvia
                       3
                       4


                       1
                       2
       Lithuania
                       3
                       4


How well do logistics providers fulfil your firm’s requirements for efficient materials
flow? Please make a statement for each stage of your firm’s market presence.
                                   ( Very well      1   2    3      4    5   Very poorly )


                                               Establishing                                         Anticipated
                       Entrance                                               Present
                                              market position                                        EU-time


       Estonia     1   2   3   4   5      1     2   3    4      5        1   2   3   4   5      1   2   3    4    5

       Latvia      1   2   3   4   5      1     2   3    4      5        1   2   3   4   5      1   2   3    4    5

       Lithuania   1   2   3   4   5      1     2   3    4      5        1   2   3   4   5      1   2   3    4    5

                                         (ring appropriate number on scale)


In what ways has the development of your materials flow been constrained by the
availability of logistics services ?

Does the regulatory environment of the Baltic States hinder efficient materials flow of your
firm’s goods? Please make a statement for each stage of your firm’s market presence
according to your experience.
                                       ( No hinder       1      2    3   4   5   Very strong hinder)

                                               Establishing                                         Anticipated
                       Entrance                                               Present
                                              market position                                        EU-time


       Estonia     1   2   3   4   5      1     2   3    4      5        1   2   3   4   5      1   2   3    4    5

       Latvia      1   2   3   4   5      1     2   3    4      5        1   2   3   4   5      1   2   3    4    5

       Lithuania   1   2   3   4   5      1     2   3    4      5        1   2   3   4   5      1   2   3    4    5

                                         (ring appropriate number on scale)                                           71
In what way has the development of your materials flow been constrained by uncertain
regulatory environment ?

Does the transport and telecommunications infrastructure of the Baltic States hinder
efficient materials flow of your firm’s goods ?
                                       ( No hinder       1      2   3   4   5   Very strong hinder)

                                               Establishing                                        Anticipated
                       Entrance                                             Present
                                              market position                                       EU-time


       Estonia     1   2   3   4   5      1     2   3    4      5       1   2   3   4   5      1      2   3   4   5

       Latvia      1   2   3   4   5      1     2   3    4      5       1   2   3   4   5      1      2   3   4   5

       Lithuania   1   2   3   4   5      1     2   3    4      5       1   2   3   4   5      1      2   3   4   5

                                         (ring appropriate number on scale)

In what way has the development of your materials flow been constrained by transport and
telecommunications infrastructure ?

3. Information flow

Please describe your firm’s logistics information flow at the present.

                 Order – delivery process
                 Information systems in use
                 The handling of sales & transport documentation

In what way has your firm’s logistics information flow been constrained and/or supported
by:

                 The availability of logistics services ?
                 Regulatory environment ?
                 Transport and telecommunications infrastructure ?

How do you expect that the membership of the Baltic States in the European Union will
effect your firm’s logistics information flow ?




                                                                                                                      72
          4. Logistics organization



    Which of the four simplified options for logistics organization fits your firm at the different
    stages of market presence ?
                                                                                                           Marketing

                                                                           Marketing                 Physical distri bution

                                                                                                 A      Admini stration                        Sales
                                                                 •   market responsibility:                   Sales
                                                                                                                                               subsidiaries
                                                                                                                                   EE
                                                                 •   price decisions                                                 LV
                                                                 •   sales promotion                                                   LT

                                                                 •   decision on product range
                                                                                                                                       Baltic States
                                                                                                            Marketing
                                                                                                                                       region

                                                                      Physical distribution
    Please mark A, B, C or D.                                                                    B
                                                                                                     Physical distribution

                                                                 •   logistics responsibility:          Administration                       Sales
                                                                                                                                             subsidiar ies
                        Establishing                             •   warehousing decisions                   Sales
                                                                                                                                  EE
              Market                             (Anticipated)   •   transportation decisions                                       LV
                          market       Present
             entrance                              EU time       •   inventory decisions
                                                                                                                                      LT
                          position

Estonia                                                                                                     Marketing
                                                                                                                                      Baltic States
                                                                                                                                      regi on

                                                                                                      Ph ysical Di str ibutio n
                                                                             Sales                                                    D istribution
Latvia                                                                                                                                C entre
                                                                                                 C
                                                                                                         Admini stration


                                                                 • operational sales                    Admini stratio n

Lithuania                                                        • customer relationships                    Sales
                                                                                                                                  EE
                                                                                                                                             Sales
                                                                                                                                             subsidiar ies
                                                                                                                                    LV
                                                                                                                                      LT




                                                                         Administration                                                    Baltic States
                                                                                                             Mar keting
                                                                                                                                           regi on

                                                                 • order handling                      Physical Distr ib ution             D istr ib ution
                                                                 • producing invoices            D        A dmin istration                 Centre

                                                                 • payment collection
                                                                                                               S ales
                                                                                                                                  EE
                                                                                                                                    LV       S ales
                                                                                                                                      LT     subsidiar ies




    In what way has the development of your logistics organization in the Baltic States been
    constrained and/or supported by:

    The availability of logistics services ?
    Regulatory environment ?
    Transport and telecommunications infrastructure ?



          5. Distribution channel


    Please describe your firm’s distribution channel (agent, own sales representation,
    wholesaler, retail chain, other) during different stages of market presence?

    Market entrance
    Establishing market position
    Present
    Anticipated EU time



                                                                                                                                                             73
 6. Logistics services

Please indicate if you are currently buying following logistics services and to what extent
will your firm continue to buy them in the anticipated EU-time.
                                                Presently                  EU-time
                                                                Buy                        Buy
                                                Yes   No    (   much   1   2   3   4   5   much
                                                                less                       more


Import full truck loads transportation                                 1   2   3   4   5


Import transportation 2500 – 10000 kgs                                 1   2   3   4   5


Import transportation less than 2500 kgs                               1   2   3   4   5


Export full truck loads transportation                                 1   2   3   4   5


Export transportation 2500 – 10000 kgs                                 1   2   3   4   5


Export transportation less than 2500 kgs                               1   2   3   4   5

Domestic transportation of import goods                                1   2   3   4   5


Domestic transportation of export goods                                1   2   3   4   5


Domestic transportation (sender and receiver)                          1   2   3   4   5


Air freight transportation                                             1   2   3   4   5


Parcel/package deliver – by land                                       1   2   3   4   5


Parcel/package deliver – by air                                        1   2   3   4   5


Ocean transportation                                                   1   2   3   4   5


Country based warehousing services                                     1   2   3   4   5


Baltic central warehousing services                                    1   2   3   4   5


“Pick and pack” services                                               1   2   3   4   5


Customs clearance services                                             1   2   3   4   5


Customs duty payment services                                          1   2   3   4   5


Customer order processing services                                     1   2   3   4   5


Other, what ?                                                          1   2   3   4   5

                                                                                                  74

				
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