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Logistics clusters: An alternative path to economic success

Yossi Sheffi explores how distribution centers can spur economic growth and innovation.
Yossi Sheffi
Yossi Sheffi
Photo: David Sella

Regions and countries around the world are competing fiercely to hold on to factories while incubating new, high-tech industries. Yet, for many, there may be a more sustainable path to success: becoming a logistics center for transportation and distribution.

In "Logistics Clusters: Delivering Value and Driving Growth" (MIT Press, 2012), MIT professor Yossi Sheffi explains how distribution centers are becoming much more than the places where goods are unloaded from boats and planes onto trucks and trains. With some government help, they often evolve into thriving sources of innovation.

"Like other clusters, logistics clusters enable tacit information exchange between companies and attract specialized labor and supplies, thereby improving efficiency and competition and making it easier to start new companies," says Sheffi, director of MIT's Center for Transportation & Logistics (CTL). "Yet logistics clusters have many additional benefits." These include low transportation costs, a high transportation service level, and a broad, stable base of non-offshoreable regional jobs, Sheffi says, as well as a wide range of complementary economic activity in repairs, maintenance, packaging, and manufacturing.

Sheffi’s best-selling book The Resilient Enterprise (MIT Press, 2005) offered strategies for responding to major disruptions to industrial operations and supply chains. He's now working on a major update that offers more insights into the proper role of government in responding to disruption, as well as risk-management lessons from Hurricane Katrina, Hurricane Sandy, and other natural disasters. Other recent projects include research into sustainable supply chains and the challenge of estimating carbon footprint across the supply chain.

Broad-based job creation

Logistics operations agglomerate in certain cities or regions to take advantage of geography, but also to enjoy the benefits that quickly arise from consolidation. "With clusters, transportation companies can deploy larger airplanes, trucks, and trains, thereby bringing down costs," says Sheffi, the Elisha Gray II Professor of Engineering Systems at MIT. "As more companies join the cluster, the level of service provided by the transportation carriers goes up. There's a higher frequency of service, and more service to further locations."

As Sheffi expected when he began his research, all of this adds up to company and job creation. Yet he also discovered that logistics clusters improve economic growth over a broader economic spectrum than do high-tech and innovation clusters like Wall Street, Hollywood, and Silicon Valley. "The average salaries in the logistics industry are similar to those in manufacturing, and they help people at the bottom of the ladder, not just highly trained experts and engineers," Sheffi says. "In logistics, it is common for people to start out by moving boxes and driving trucks and forklifts, and end up in senior management."

The working-class nature of the industry is reflected in the executive suite. "In distribution companies like UPS, the lion's share of top executives started on the floor," Sheffi says. "People tend to stay within the industry, so it has an element of moving people out of menial jobs to the middle class."

Logistics jobs have the further advantage of stability, Sheffi says. They are not being replaced by automation as quickly as manufacturing jobs, and they are far less likely to move overseas. "Logistics jobs are not offshoreable," Sheffi says. "These clusters have to be placed close to the last mile to the retailers."

Another benefit of logistics clusters is that they generate new jobs beyond logistics. As freight is distributed through these hubs, "you have people handling repair, maintenance, tagging, packaging — a whole range of activities," Sheffi says. For example, to speed laptop repairs, Flextronics placed its repair center right outside Memphis International Airport and the FedEx SuperHub.

Other jobs emerge that are even farther afield. "For processing incoming medical supplies, you'll need pharmacists on site," Sheffi says. "And Zappos has dozens of videographers in their Louisville cluster because they need a high-impact video of every shoe that comes through their center."

In many cases, manufacturers set up operations near logistics clusters to exploit reduced time and high level of transportation service, Sheffi says. He cites Indianapolis as a logistics cluster that evolved into a manufacturing subcluster.

In the U.S. right now, the high cost of fuel has encouraged the siting of manufacturing facilities near logistics clusters. 3-D printing and product customization also favor placing manufacturing closer to the edges of the distribution network. (These issues are detailed by CTL Executive Director Chris Caplice in a recent ILP Industry Insider profile, which also provides an overview of CTL activities.)

Beyond geography: The keys to a thriving cluster

Geography is important in establishing a successful logistics cluster, but it's not the whole story. "Most logistics clusters are located at the intersection of a number of different shipping routes, but geography itself does not make it preordained," Sheffi says. "There are places that should have become logistics clusters but did not. Port Said, at the mouth of the Suez Canal, sees thousands of ships pass by every year, but they don't stop. Port Said could have been the major point of distribution for much of Europe, but the Egyptians didn't get their act together."

On the other hand, Sheffi says, the Spanish city of Zaragoza hosts the largest logistics park in Europe, yet it is “a small city, with no big airport, and it doesn't even lie next to a port," Sheffi says. Despite these handicaps, the city was on its way to becoming a logistics success a little over a decade ago when Sheffi first visited to give a major speech. Under Sheffi's direction, MIT's Center for Transportation & Logistics chose Zaragoza as a location for one of the first research and education centers in its Global SCALE (Supply Chain and Logistics Excellence) Network, dedicated to the development of supply chain and logistics excellence through innovation. The CTL supply chain research has furthered Zaragoza's logistics success.

Intrigued by how this relative backwater rose to the top of the supply chain, Sheffi set about exploring what Zaragoza and other successful "super clusters" such as Rotterdam, Singapore, Miami, Memphis, and Los Angeles had in common. Although most of the successful clusters enjoyed geographic benefits, he found that they also had other advantages, such as a strong communications infrastructure, capable financial services, and a stable, supportive government. In particular, a strong public-private partnership was key to the Zaragoza story.

"Government investment in physical infrastructure, free trade zones, trade policies, land zoning, and a general good business climate are common to all the best clusters," Sheffi says. "The regions also need the right culture. A history and culture of trading is helpful; for example, it's very hard to be a logistics cluster in a place that does not accept immigration. Logistics involves people from around the world."

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