Supply Chain Frontiers issue #46
What does Silicon Valley have in common with an artists’ colony in 14th-century Florence, Italy? Both are clusters of expertise created to benefit the participants. Logistics is another type of expertise shared in this way. These entities have become major commercial centers and generators of jobs. In his new book, Logistics Clusters: Delivering Value and Driving Growth (MIT Press, 2012), Professor Yossi Sheffi, Director of the MIT Center for Transportation & Logistics (MIT CTL), traces the evolution of logistics clusters, and explains how they offer important economic opportunities for communities and society.
Sheffi defines a logistics cluster as a “geographical agglomeration of firms providing logistics services.” Examples of these organizations include third-party logistics services providers (3PLs), transportation carriers, warehousing companies, manufacturers, and distributors.
The PLAZA (Plataforma Logística de Zaragoza) logistics park near Zaragoza, Spain, which opened in 2000, is a highly successful example. MIT CTL was part of the collaborative effort that created PLAZA, and this compelling story – retold in the book – inspired Sheffi to delve further into the logistics cluster phenomenon.
“My curiosity led me to investigate logistics clusters worldwide, a subject that has received scant attention in the economic literature,” he says.
Over a period of several years, Sheffi visited facilities in many countries, and interviewed executives, government officials, consultants, and academics. What emerged is a picture of highly diverse and dynamic communities of enterprises that have a profound economic impact on their host regions as well as the global supply chains they support.
“The growth in globalization is, in significant part, the result of the efficiency of the global logistics and supply chain management system,” says Sheffi. And logistics clusters represent a key element of that system.
One of the main attractions of logistics clusters from a government investment perspective is that once seeded – assuming the concept is commercially sound – they are self-reinforcing. Member companies attract their suppliers and contribute to the growth of the local employee pool. Improved transportation services make the cluster more attractive for other companies to move in. Moreover, as the community grows, it becomes a magnet for further investment and government largesse.
This positive feedback loop has many more dimensions, points out Sheffi. Increasing traffic volumes lead to better services and lower costs, for example. Productivity tends to improve as the incumbents learn how to share resources. Also, it becomes easier to harness economies of scale as the community expands.
A remarkable benefit that these hubs bestow upon the regions that develop them is job creation. Sheffi offers many notable examples. The Memphis International Airport, for instance, is responsible for 220,000 jobs in the local economy, 95% of which are tied to cargo operations.
The types of positions created belie the logistics industry’s image as a blue-collar activity. Yes, there are manual jobs, but these clusters also generate demand for white-collar work, and many stimulate the growth of educational programs. There is also a high degree of social mobility in many communities, as workers are encouraged to enhance their skills and climb the managerial ladder.
The employment opportunities also are extremely varied, because successful logistics clusters provide a wide range of value-added services. UPS repairs Toshiba laptops in its Supply Chain Services campus next to the carrier’s Louisville Worldport hub, for example.
Crucially, jobs in logistics clusters are not “offshorable,” notes Sheffi. The economics of transportation, and the nature of the late-stage customization services that logistics clusters provide, dictate that hubs are located in relatively close proximity to end markets.
But job creation is not the only important, and highly topical, challenge that logistics clusters help to address. Two other examples are environmental sustainability and the urgent need for new investments in transportation infrastructure.
Within clusters, companies often cut fuel consumption per shipment and hence pollution levels by consolidating loads. However, this strategy also leads to a concentration of pollutants. As a result, logistics clusters are a hotbed of green innovation, says Sheffi. They also require significant infrastructure such as roads, railway tracks, and ports, and underscore the need for a national freight infrastructure plan, particularly in the United States.
The concept does have its detractors. Some local communities resent the noise, heavy traffic, and pollution that come with logistics clusters. In April 2012, a German court upheld a ban on night flights in Frankfurt Airport that restricts freight operations in the hub, for instance.
However, the long-term outlook for these entities looks bright. The role of logistics clusters as a source of innovation is gaining in importance, notably in developing new approaches to environmental sustainability. They provide a level of operational flexibility that is more important than ever, given the volatile nature and interconnectedness of world markets. As Sheffi explains in his book, some two billion people are joining the middle classes in the so-called BRIC (Brazil, Russia, India, and China) nations. And logistics clusters are a key part of the supply chains that serve these markets.
The author is hopeful that his book “will lead to a public-private consensus that a well-executed logistics cluster creates a quintuple win: good jobs for workers, low-cost necessities for all people, robust growth for jurisdictions that support clusters, profits for participating companies, and sustainability for the Earth on which we live.”
For more information on Logistics Clusters: Delivering Value and Driving Growth by Professor Yossi Sheffi, and new research on the phenomenon at MIT CTL, please contact the author.