Summary - Logistics ClustersDelivering Value and Driving Growthby Yossi SheffiMIT Press © 2012304 pages

ClusteringThroughout history, certain geographic locales or regions have served as magnets for specific industries: For example, Switzerland for watches, Paris for fashion, New York for finance, Detroit for automobiles, Hollywood for films, Las Vegas for gambling and Silicon Valley for technology. These clusters, also known as “growth poles,” attract funding, intellectual capital, workers and entrepreneurial activity, as well as political focus and support. Moreover, clusters promote educational development, worker training and specialized research.

Cluster BenefitsClusters provide numerous benefits for the firms that they attract:• “Trust” – Due to their proximity, clustered companies share common experiences and environments.• “Tacit knowledge exchange” – Businesses and employees share various kinds of information through casual day-to-day meetings and conversation. This leads to the benefit of “knowledge spillover.”• “Collaboration” – Firms in the same industry located in the same locale often engage in joint activities.• “Supply base” development – Vendors prefer to locate near clients.

Logistics clusters are a form of industry cluster. They bring together various vendors including “third-party logistics service providers (3PLs), transportation carriers, warehousing companies and forwarders,” as well as offices that handle the “logistics operations of industrial firms, such as the distribution operations of retailers, manufacturers (for both new products and after-market parts) and distributors; and the operations of companies for whom logistics is a large part of their costs.” A logistics cluster may include various office parks and campuses.A logistics cluster is a “region with a high concentration of logistics activities relative to the local population or economy.” Some logistics clusters are compact; others are diffuse. For example, the Panama Canal logistics cluster extends across the entire country. The “Dutch Logistics Corridor” runs from the port of Rotterdam to the German border. Typical logistics clusters include Duisburg, Germany; São Paulo,

Brazil; Chongqing, China; Rotterdam in the Netherlands, Singapore and Spain’s Zaragoza industrial area. Notable logistics clusters in the United States include Chicago, Louisville, Dallas/Fort Worth, New York/New Jersey, Miami, Kansas City, Memphis and Los Angeles.

Zaragoza, SpainGovernments often help clusters develop. For example, US military defense spending in the San Francisco Bay area after World War II helped promote early entrepreneurship in Silicon Valley. The governments of the city of Zaragoza, Spain, and the Spanish state of Aragón, played a major role in the creation of the Plataforma Logística de Zaragoza (PLAZA) logistics cluster, a “greenfield” project. Zaragoza, a city of fewer than 800,000 people in northeastern Spain, is ideally suited for a logistics cluster, being “equidistant” from the Mediterranean and Atlantic coasts. Located at convenient railroad and highway intersections between Madrid, Barcelona, Valencia and Bilbao, with quick access to the Barcelona, Tarragona, Valencia and Bilbao seaports, Zaragoza serves an “inland port” for these seacoast industry clusters.Jorge Savirón, automation manager for the clothing retailer Zara and a PLAZA client, explains, “Zaragoza is a good distribution location for us because here at PLAZA we are right next to the airport and have fast access – with no traffic – to major European highways.” He notes, “Barcelona and Madrid are a mere three hours away, and even Paris is relatively close.”The government of Aragón designed PLAZA to be big. It is Europe’s largest (12,826,898 square meters) logistics park, “six times as big” as the next-largest Spanish logistics park in Guadalajara. PLAZA’s planners and designers understood that the bigger they made their industrial cluster, the more efficiently it would operate. The planners knew that by developing PLAZA on a grand scale, they also would discourage other Spanish regions and locales from creating competitive logistical or industrial clusters. The economic term for this proactive tactic is “entry deterrence.”PLAZA’s developers planned their logistics cluster on a “build-it-and-they-will-come” basis, and come they did. Zara’s distribution center was one of PLAZA’s first clients. Imaginarium, which sells toys, followed, along with Memory Set, which distributes IT gear; DHL express services; ARC International tableware supplier; and Pikolín, a Spanish bed and mattress company.

Necessary FactorsSuccessful logistics clusters depend on accessible geography and a robust physical infrastructure with “wide roads, deep ports, long runways and spacious rail yards.” Successful logistics clusters also require a strong labor pool, enthusiastic government support, proper funding, the backing of financial services firms, a friendly regulatory climate, a local tradition of collaboration, and a viable “information

and communications technology infrastructure.” They tend to be “research and innovation centers,” such as San Pedro, California, home of PortTechLA.Logistics clusters are strong economic contributors. Jobs in logistics can make up for lost manufacturing jobs and are only minimally vulnerable to offshoring. Clusters provide infrastructure services for industries needing particular “logistics capabilities.” Logistics clusters serve multiple industries, and they are less vulnerable to unexpected negative business developments. Many extend their services beyond traditional “moving and storage activities” to include value-added operations “that transform, modify, augment, tag, sequence or repair goods.”Logistics clusters aren’t just for large multinational firms. Start-up logistics companies operate within two distinct cluster types: the traditional logistics cluster housing various “distribution and supply-chain management activities,” and the “economic cluster” that depends on logistical services, such as Detroit. Small, “asset-light” companies – like entrepreneurial freight-forwarding firms – can begin in logistics clusters. Such firms can oversee various logistics activities and serve as brokers among “carriers, suppliers, customers, service providers and government agencies.”

“Operational Advantages”Besides geographic locations and the critical mass benefits of providing related capabilities from defined hubs, logistics clusters offer operational advantages. These derive from their variety of interchangeable logistical and transportation assets. Companies working within logistics clusters gain two operational advantages: Logistics clusters provide lower prices and more comprehensive services, and they help clients achieve better business performance. The larger the logistics cluster, the greater the performance increase.Logistics clusters give clients more “value-added services,” such as allowing manufacturers to handle crucial product differentiation as late in the delivery cycle as possible. Manufacturers can cost-effectively have providers within a logistics cluster perform any necessary product customization – “packaging, colors, decals, tags” or other changes not involving complex manufacturing processes – at the last minute.Manufacturers utilizing late-breaking or last-minute mass customization can reduce inventory costs and provide their customers with products that most closely match their ever-changing preferences. Logistics clusters’ cost-effective flexibility offers manufacturers an invaluable capability. No matter how a supply chain is configured, numerous different firms along the chain “touch” the product as they move it along: “Finding the item, removing it from the shelf, doing something, recording the action and sending it somewhere or putting it somewhere.” The manufacturer pays a fee for every single touch. Manufacturers can reduce their costs if the touches occur mostly in a distribution center inside a logistics cluster, instead of at far-flung specialty vendors.

Crucial InfrastructureLogistics clusters require complex infrastructures, including ports, airports, warehouses, roads, railroad tracks and canals. The value of physical infrastructures

runs into the trillions of dollars. For example, United Parcel Service holds “$1 billion in land, $6 billion in buildings and improvements, $6.6 billion in plant equipment and nearly $20 billion in the company’s 225 aircraft and nearly 100,000 delivery vehicles.” Logistics clusters rely upon the support of well-developed infrastructures. Zaragoza now functions as the “crossroads of Spain,” with “high-capacity roads, an intermodal railroad yard, and a rail hub, as well as a cargo airport.” Ricardo García-Becerril, manager of PLAZA, explains, “The...infrastructure is crucial...electricity, supply, water, waste and communications...Internet and telephone lines [and] intermodal connections to fast highways and rail.”

Government SupportLogistics clusters’ physical infrastructures depend on government funding for development. Governments build, own and regulate “public roads, ports, airports and (in most countries) railroads.” Governments that don’t create economic-development assets may provide incentives to nongovernmental entities to build them instead, thus encouraging the growth of competitive infrastructure and providing jobs. The creation of well-paying jobs makes logistics clusters attractive to local and regional governments. To build the PLAZA complex, Aragón’s officials authorized new laws and organized bureaucratic approvals. The government created a “self-funding model,” secured the land through appropriation, constructed the infrastructure and recruited various corporations. Governments benefit from lower capital costs than private companies, so they are wellplaced to develop logistics clusters for their locales and regions.

Human CapitalLogistics clusters also offer significant human capital. Clusters must fill a wide range of professional, technical and labor-related positions, including “equipment operators and mechanics, inventory managers, supply chain managers, information systems professionals and distribution executives.” Most clusters build close ties with local educational institutions to secure vocational training for current and future workers. Many serve as living research-and-development laboratories for local colleges and universities. Logistics clusters become productive job factories. Zaragoza’s PLAZA employs 10,000 people; its goal is 14,000 jobs by 2014-2015. An estimated 55,000 people work at the port of Rotterdam and 90,000 more Dutch jobs tie indirectly to the port’s activities. The AllianceTexas Logistics Park near Fort Worth, Texas, houses 265 companies that employ 30,000 workers; by 2011, this park had created 63,000 “indirect jobs.” In the Memphis economy, 220,000 jobs derive from the Memphis airport; 95% of them connect to its cargo operations.Worldwide, the development of logistics clusters tracks with the growing importance of the logistics sector, overall. Through the end of 2007, the growth rate of the logistics industry in Europe outpaced overall GDP growth by 2.5 times. In America, logistics jobs climbed from 17% of total US jobs in 1998 to 20% in 2008.

Expanding the Middle ClassBillions of people worldwide are moving from abject poverty to the middle class. The logistics industry aids and supports this transformation by making mid-range goods available to people everywhere. Efficient global supply chains rely on well-placed, stateof-the-art logistics clusters that deliver good jobs, economic growth and solid profits.