Geography in Logistics Clusters by Sheffi, Chapter 3

Logistics per Capita or per GDP

This book defines a cluster as a region with a very high concentration of logistics activities relative to the local population or economy. For example, Memphis, Tennessee, with only 1.3 million people, handles an astounding 3.69 million tons of airfreight per year (nearly 3 tons of airfreight per person per year). In population terms, the Memphis MSA (metropolitan statistical area) ranks around 43rd in the United States. In logistics terms, Memphis ranks number 1 in airfreight, number 3 in rail shipment, and number 4 in inland barge freight,undefined making this smallish city on the Mississippi a significant logistics cluster. Economists use more technical measures of the concentration of logistics activities. For example, de Langenundefined used a modified logistics quotient (LQsee p. 53 in chapter 2) to map out logistics hot spots in Brabant in the Netherlands, based on a register of local companies. In my own work with Rivera,undefinedaimed at identifying the important logistics clusters in the United States and their development path, we used a two factor criterion based first on a modified LQ criterion, known as Horizontal Cluster Logistics Quotient (HCLQ),undefined and second on an index capturing the number of logistics establishments in the region under study. This type of work identifies the locations of logistics clusters in the area of interestbe it a Dutch county or the entire United Statesallowing for various analyses and insights.

Logistics clusters vary markedly in size. In some cases, a logistics cluster might be fairly compact, such the Aragn cluster with its flagship PLAZA in Zaragoza. In other cases, a logistics cluster might span a much larger, more diffuse, region. For example, logistics activities in Panama span the width of the country, extending along the canal and including ports on both the Pacific and Atlantic Oceans. Or consider the Dutch Logistics Corridor, which stretches 150 kilometers from Rotterdam to the German border. This corridor includes, naturally, the port of Rotterdam with its terminals and concentration of logistics service providers; Brabant with its focus on sustainable logistics; Breda, along the main highways connecting the hinterlands of Amsterdam, Rotterdam, and Antwerp; and Fresh Park Venlo on the German border, which sports around 130 companies providing trading, transport, warehousing, and value-added services dealing with fresh products. A similar massive logistics cluster in southern California stretches from the Los Angeles/Long Beach Ports and the surrounding logistics infrastructure; to southeast Los Angeles in the north; Orange County and John Wayne Airport to the south; and Anaheim, and the Inland Empire to the east, including Riverside, Ontario (with its airport), and San Bernardino.

Logistics Campuses, Parks, and Clusters

To help sharpen the definition of logistics agglomerations, this book distinguishes between logistics clusters, logistics parks, and logistics campuses. Whereas a cluster is an amorphous agglomeration of companies and facilities with logistics-intensive operations with fuzzy borders and no central management, logistics parks are clearly defined by their ownership and geographic property boundaries. A logistics park is developed by an agency which can be a real estate investment trust (REIT), such as publicly traded ProLogis, Cache Logistics, and DCT Industrial; or by private companies such as CenterPoint Properties, Hillwood, and Watson Land Company; it can be a port/airport authority, such as the Panama Canal Authority (ACP) or the Schiphol Area Development Company (SADC); or it can be a government agency, such as Dubai Holding.

A logistics campus is a special type of a logistics park with even more tightly coordinated operations, where not only the land and the buildings are operated by a single entity, but this same entity handles all the logistics and distribution activity in the park. An example is the logistics campus of United Parcel Service Inc. (UPS) in Louisville, Kentucky, housing many customers for whom the UPS Supply Chain Solutions division manages transportation, distribution, inventory, forwarding, customs brokerage, and multiple value-added activities. Some large, multidivision enterprises may create their own campus. Steve Carter, director of transportation planning and strategy at the Target Corporation mentioned that Target sometimes colocates its own food distribution center, regional DC (for general merchandise), dot-com DC, and an import warehouse next to each other to get some campus advantages.

Thus, logistics clusters, as extended regions, often contain more than one park as well as a range of other logistics-related facilities. A cluster might have multiple logistics parks. For example, Singapores Air Logistics Park (ALPS) next to Changi airport and Singapores large Pasir-Panjang seaport operated by PSA International are both logistics parks within the logistics cluster of Singapore. Similarly, while PLAZA in Zaragoza is a logistics park, the broader logistics cluster in the state of Aragn includes logistics parks in the nearby towns of Teruel, Huesca, and Fraga, as well as private logistics facilities elsewhere in the region (see p. 22 in chapter 1).

What matters to managers more than neat lines on a map are the relative costs and performance levels of logistics in, near, or far from a notional cluster of logistics facilities and infrastructure. Inside a logistics park, companies enjoy easy access to freight capacity, a choice of modes, and a range of special services. Companies sited near the park in the broader environs of the cluster also enjoy many of these advantages and probably pay less for the land, but they may experience more delays and may pay more for drayage (drayage is the short-distance movement of freight from a storage area to a long-distance conveyance). For example, inside CenterPoint Intermodal Center south of Chicago, Walmart pays on the order of $25 for draying a 40-foot container from the co-located BNSF Railway Companys intermodal yard to its warehouse. In contrast, draying that container to locations outside the park might cost $150. Parks might also offer special amenities within their boundaries, such as roads that can handle over-weight cargo (see also the discussion of terminal infrastructure on p. 148 in chapter 6), and various shared services (e.g., employee training).

Clusters can also transcend political or jurisdictional boundaries. For example, Memphiss Logistics Council oversees a region of some sixteen counties spanning three states in its planning efforts. This multicounty, multistate agglomeration defines the Memphis cluster in terms of critical infrastructure, the span of logistics companies, and the regional labor force that works in logistics. Thus, the boundaries of most clusters remain fuzzy.

Natural Advantages

The histories of these logistics clusters illustrate the strong contribution of natural geographic and climatic factors to the development of logistics. Such factors have led, over the years, to a culture and expertise in trading and logistics. Four natural geographic factors contribute to logistics cluster formation.

The Middle Ground

Places such as Memphis, Singapore, Chicago, and Zaragoza sit in the geographic middle between major regions of supply and major regions of demand and become, in turn, major centers for logistics activity. When a high volume of goods transships through a certain region, that region becomes a natural location for warehouses, consolidation/deconsolidation terminals, and transportation carrier operations. Naturally, the geography of population centers, placement of natural resources, and geography-influenced routing of transportation all affect what constitutes the middle.

Geographic Cost Cuts and Shortcuts

Managers in manufacturing, retail, and distribution typically consider logistics costs as a necessary evil. While all corporate functions are subject to cost pressures, functions such as engineering and manufacturing contribute to a products form and function; marketing and sales contribute to branding and revenue; and finance helps with raising funds and managing money. While logistics management contributes directly to customer service and sales, its importance has not traditionally been recognized, and many senior executives see transportation and logistics as a cost to be minimized. Some geographic locations, such as the port of Rotterdam and navigable rivers like the Rhine and the Mississippi, offer transportation cost advantages. Chicago sits at the edge of the Great Lakes, which allows water transportation to the East Coast and Europe from Americas hinterland. Natural or artificial geographic shortcuts, like the Malacca Straits or the Panama Canal, respectively, attract a high volume of shipments. Places situated along the shortest route, such as Singapore or Panama City, represent natural locations to consolidate shipments, change between regional carriers, locate warehouses, or have refueling and repair depots.

Natural Geographic Boundaries between Modes

Trucks and rail can carry goods only so far. Long-distance global trade requires crossing the oceans by ship or aircraft. Seaports such as Singapore, Rotterdam, and Los Angeles/Long Beach create a natural nexus where continent-crossing transportation (such as truck and rail) terminates and ocean-crossing transportation begins. The modal exchange at airports is typically from airplanes to trucks and vice versa. While some airports serve as transshipment hubs, the first and last leg of any air shipment requires a truck to haul the cargo between the plant or warehouse and the airport. Similarly, intermodal yards are terminals where truck and rail transportation systems interchange loads. One of the roles of distribution centers and freight yards at terminals is to match load sizes across different conveyances. In addition, many of these terminals involve export/import and therefore include government agencies to handle the formalities of international trade, including export controls, import inspections, customs payments, and free trade zones.

Weather Advantages = Reliability Advantages

Modern-day logistics depends on the absence of adverse weather conditions, especially extreme weather. Locations such as Memphis, Los Angeles, and Singapore derive some advantage by being out of reach of most major types of dangerous weather like hurricanes, tornados, and snowstorms. Weather delays arent acceptable in a world that depends on just-in-time deliveries for manufacturers, retailers, and distributors. Thus, logistics hubs located in good weather locations offer one of the performance elements shippers need mostreliability. (The shippers in a cluster include both beneficial freight owners [BFOs] such as manufacturers, distributors, and retailers running their own logistics operations, as well as third party logistics providers, who manage logistics on behalf of their customers, who are BFOs.)

Nature vs. Nurture

Geography plays a significant role in cluster formation, but the histories of these clusters show that natural factors alone cant explain everything. Many of the clusters discussed in this book have geographic advantages that apply to a broad region, rather than to a specific town or unique point on the map. Rotterdam wasnt the only Dutch city between the Rhine and the North Sea. Memphis wasnt the only town on the Mississippi thats beyond the normal reach of snowstorms and hurricanes. Similarly, Singapore might easily have lost to other Malaysian trading centers in the Malacca Straits, such as Melaka or Penang.undefined The Panama Canal might have been the Nicaragua Canal. Although a regions natural attributes (land forms, waterways, and climate) might make an area attractive for logistics operations, the specific town, county, or country that takes the lead in logistics is not preordained. Visionary investments in ports, canals, terminals, roads, and new businesses can turn a particular locale in a logistically favorable region into a thriving cluster. For example, FedExs move to Memphis and UPSs establishment of its hub in Louisville, Kentucky, helped these locales grow as clusters of logistics activity.

Nor do geographic advantages ensure a logistic clusters success in perpetuity. To this day, a Nicaraguan canal remains under serious consideration. Such a canal would reduce the distance between Los Angeles and New York City by about 500 miles, or one day of vessel travel. Similarly, Thailand might build a canal across the Kra Isthmus, attracting much of the ship traffic that now goes to Singapore. And the expansion of the Panama Canal, mentioned above, threatens US West Coast ports as the enlarged canal would enable more containers to travel on larger, more efficient ocean freighters directly to the East Coast. Such changes may create new logistics clusters on the East Coast and partially reduce the logistics intensity of activities in the western US ports and on the railroads carrying containers from the West Coast to the large clusters in Chicago, Kansas City, Memphis, and Dallas/Ft. Worth.

Natural geographic features might explain why some areas have more logistics activities than others, and why they may be initially attractive for transportation and logistics developments. But someone must still make investments in infrastructure, train the workers, lobby for favorable regulations, and attract companies to the area to support cluster formation. In a conference call organized by Bill Marrin, managing director of the World 50 Organization, several senior logistics executives responded to my questions regarding joint lobbying efforts. Randy Eck, director of global transportation and logistics outsourcing at Intel Corporation, gave an example, Were spending a significant amount of time [with the government] on how to get products in and out of Vietnam as quickly and at as low cost as possible. Eck added, [We collaborate] with anybody in the area that we can get to come out. I mean well pull in all our suppliers and work with them as much as we possibly can because theres strength in numbers. His comments were

What are some consequences/risks of this case?