Logistics­Intensive Clusters

Logistics intensive clusters are agglomerations of several types of firms and operations: (i) firms providing logistics services, such as 3PLs, transportation, warehousing and forwarders, (ii) the logistics operations of industrial firms, such as the distribution operations of retailers, manufacturers (in many cases after-market parts) and distributors and (iii) the operations of companies for whom logistics is a large part of their business.

Such logistics clusters also include firms that service logistics companies, such as truck maintenance operations, software providers, specialized law firms, international financial services providers, etc.

Logistics clusters exhibit many of the same advantages that general industrial clusters (such as Silicon Valley, Hollywood, or Wall Street) do: increase in productivity due to shared resources and availability of suppliers; improved human networks, including knowledge sharing; tacit communications and understanding; high trust level among companies in the cluster; availability of specialized labor pool as well as educational and training facilities; and knowledge creation centers, such as universities, consulting firms, and think tanks.

Logistics clusters, however, exhibit other characteristics which make them unique in terms of cluster formation and their contribution to economic growth. Logistics operations may locate in a logistics cluster due to the cluster’s role in supporting economies of scope (mainly for direct operations transport modes) and economies of density (mainly for consolidated transportation modes); their provision of spill-over capacity for warehousing and transportation; and the ability to cooperate between providers when dealing with demand fluctuations. Such

clusters provide a range of employment opportunities – from moving boxes to executive, IT and other professional jobs, and they diversify the economic basis since they support many other industries, such as manufacturing as well as a range of “mini-clusters. ” This paper describes such clusters, based on primary research in several large logistics clusters around the world, interviews with dozens of executives in retail, manufacturing and distribution organizations; with transportation and logistics service providers; with infrastructure operators; with public and private development agencies; and with real estate developers.

1 D R A F T 1. Industrial Clusters It has long been observed that industries tend to be geographically “clustered. ” Well known examples of clusters include the concentration of information technology firms in Silicon Valley, California and their counterparts along Route 128 outside Boston, Massachusetts; film studios in Hollywood; wineries in Napa and Sonoma valleys in California; finance and investment banking in Wall Street and around Manhattan, New York City; fashion products in Northern Italy; computer products in Taipei, etc. In addition, certain corporate functions tend to be clustered.

Examples include biotechnology research and development centers in Cambridge, Massachusetts; garments and shoes design in Milan; corporate innovation centers in Silicon Valley; corporate planning and marketing in Zurich and Geneva, etc. This agglomeration of firms, or corporate functions, that draw economic advantages from their geographic proximity to others in the same industry or stage of value addition is a phenomenon that was originally observed and explained by the British economist Alfred Marshall (1920) in his classic work “Principles of Economics”.

Marshall hypothesized that the development of industrial complexes implies the existence of positive externalities of co-location. He attributed such externalities to three main forces: (i) knowledge sharing and spillover among the co-located firms; (ii) development of specialized and efficient supplier base, and (iii) development of local labor pools with specialized skills (see also Peneder, 1997).

Michael Porter (1998) expanded on this hypothesis in a landmark paper, providing a detailed framework for cluster analysis, as well as many more examples of clusters in various industries. His paper focuses on the competitive advantages and the increased innovation offered by clusters. He suggests that clusters affect competition by (i) increasing the productivity of the colocated companies, (ii) increasing the pace of innovation, and (iii) stimulating the formation of new businesses.

Most of the economic literature deals with regional and supra-regional industrial clusters, some even span several countries, such as the life science companies in Medicon Valley (extending from Eastern Denmark to Western Sweden) and the US automotive industry spanning several Midwestern states. A similar phenomenon, however, exists also among retailers on a micro-scale of certain streets or city blocks. Thus, when hairdressers in Boston talk about working on “The Street,” they do not mean Wall Street, but rather Newberry Street in the Back Bay of Boston, which is home to dozens of women’s beauty salons.

There are 25 Italian restaurants on Mulberry Street in Lower Manhattan, in the two block stretch between Broome and Hester Streets; most British newspapers are located on Fleet Street in London; and six out of the seven concrete plants in Singapore are located in the Port of Jurong, even though the Port of Singapore is significantly larger. 2 D R A F T Obviously, many of the economic reasons for clustering used in the literature to explain the advantage and role of clusters do not apply to such “sub clusters,” agglomerated along a single street or around a few blocks area.

Neither the work force, nor the suppliers’ base, nor the customers are located in the vicinity of such clusters. So why aren’t they spread all over the urban area in locations where inexpensive real estate and parking would be more available? In reality, some do – there are hundreds of Italian restaurants in Manhattan and many are the only ones on their block; and there are many beauty salons in Boston located in suburbs and shopping malls with few competitors within walking distance. Yet the phenomenon of sub-clusters is evident.

The two major types of inter-firm relationships which contribute to the success of clusters can be defined as “vertical” and “horizontal. ” Vertical relationships are links between trading partners. To understand the importance of trade partner relationships, note that the lion’s share of value sold by most enterprises to their customers is obtained through procurement of parts and services from suppliers. And, naturally, the product or service generated by any commercial enterprise, after adding their own value to that purchased from suppliers, has to be sold to customers.

Thus, on the procurement side commercial enterprises interact with a network of material and part suppliers and an array of service providers. On the sales side they interact with distributors, customers, and other service providers. The management of these relationships is of prime importance, especially as firms move away from vertical integration and increasingly outsource many functions and stages of production. The ultimate examples of vertical clusters are those created by a single “channel master,” such as “Toyota City” or the cluster of aviation suppliers servicing Boeing in Everett, Washington.

As an example of the wider economic effect of such a channel master, consider Shain’s (2009) description of the impact of the BMW plant in Greer, South Carolina. It employs 5,000 workers, yet it supports over 23,000 jobs in the state, as many suppliers decided to colocate around Greer. Horizontal relationships are between firms at the same stage of production, such as automobile manufacturing plants in Detroit, Michigan, or film studios in Hollywood, California.

Such firms both compete with each other and cooperate along dimensions that benefit them. Horizontal relationships also exit between functions in firms of the same or different industries. Thus, HR, legal, procurement, finance, and supply chain management functions may collaborate across companies and industries. Clusters grow due to “positive feedback” or “reciprocal reinforcement” forces. As more companies of a certain type (or certain corporate functions) move in, more suppliers and customers move in, making the cluster even more attractive.

Furthermore, as the cluster grows, its influence with government grows, affecting more infrastructure investments as well as advantageous regulations, attracting – again – even more companies. 3 D R A F T Naturally, most clusters include both vertical and horizontal types of relationships. Thus, Detroit and its vicinity is composed of not only many automotive plants but also a legion of suppliers and sub-suppliers’ plants, as well as educational institutions and a large employee pool.

Similarly, Hollywood includes major studios but also a myriad of technical and artistic suppliers, as well as the professional human resources necessary to bring films to life. 2. Why Clusters? In many ways, the existence of such clusters today is surprising. While there are many welldocumented examples of clusters in ancient times1, it is not intuitive to associate clusters with economic success in today’s global economy, with its far reaching and efficient supply chains, instant communications and the free flow of money and knowledge across borders.

In many ways, Tom Friedman’s (2005) best seller “The World Is Flat” popularized the ideas that today’s efficient processes, supported by advanced communications technologies mean, as earlier authors argue, “The End of Geography” (O’Brien, 1992) and “The Death of Distance” (Cairncross, 1997). Yet – even in today’s world of modern and efficient global supply chains; instant communications; electronic worldwide financial industry; free flowing knowledge; and enhanced human mobility– over half the world’s population now live in urban areas, as reported by the UN Population Fund (2007) and that portion is increasing.

(2008 was the first year in which more than half the world’s population lived in urban areas. ) Commensurate with this trend, Sassen (2001) showed that the economic leadership of mega cities has become more pronounced. Urban areas are obvious clusters of human activity, leading to superior economic performance. The agglomeration of people and businesses mean that it is economical to develop the many levels of infrastructure needed for enhanced economic performance, including the physical layer (road and bridges, water and sewage systems, etc.

); the energy system (power generation and transmission); information and communication layer (broadband, cellular, satellite); legal and enforcement system (ownership and intellectual property rights); and the myriad of services, basic and advanced, that urban areas provide (emergency, health, mobility, entertainment, cultural, educational, etc. ). Similarly, data shows that industries do tend to cluster, in urban areas or elsewhere, raising the question why this phenomenon takes place given today’s advanced abilities. The answer to this question is that industrial clusters embody certain advantages:

• Trust. Clusters include, by and large, people with similar backgrounds, language, culture, religion and customs. It is thus easier to develop trust, among organizations and people, leading to lower transactions costs between firms whether they are trading partners or 1 Examples include the Incense Route along the Horn of Africa, carpet-weaving in North-West Persia, glass-blowing in Phoenicia, the obsidian industry of Teotihuacan, Mexico – the pre-Aztec culture that introduced the world to chocolate – all of which were keys to economic growth.

4 D R A F T • • • • horizontal collaborators/competitors. In most cases this trust is based on relationships forged outside the work environment. Thus, Hollywood, Wall Street and Silicon Valley are famous for their deal making ability, based on deal participants reputation and familiarity, giving them a competitive advantage over outsiders. Tacit knowledge exchange. As systems and services become more complex, much of the knowledge associated with their development and operations cannot be codified in an email attachment sent to a supplier.

Such tacit knowledge exchange supports discussions over specifications with a supplier; exchanging benchmarking information with a competitor; or supporting a customer – all made easier, faster, less expensive and more effective when conducted within a cluster – using face-to-face and chance meetings. This holds both for vertical and horizontal corporate relationships. A related phenomenon is knowledge spillover, which as Rodr??

guez-Posea and Crescenzi (2008) argue “the process of knowledge accumulation gives rise to spillovers that could benefit a whole set of potential (intended or unintended) beneficiaries. ” Much of this knowledge exchange takes place informally, between programmers, traders, technicians, and growers – depending on the type of cluster involved. It is characterized by interactions along individual contributors, unlike deal-making or formal benchmarking. Collaboration.

The concentration of firms in the same industry, with their similar needs and concerns, gives natural rise to joint activities. These include lobbying for the provision of infrastructure, regulatory relief, incentives, and other government largess; development of and participation in organizations dedicated to the cluster development, such as chambers of commerce; developing cluster-focused procurement strategies, leading to lower costs and higher quality for all members; engaging in cluster-specific marketing and branding activities; etc. Research and education.

The strength of engineering and computer science in Stanford University and bio-technology and engineering at MIT mean that companies located in Silicon Valley and “Bio-Cambridge” have access to state of the art research and have a steady supply of educated employees, while faculty and students can work in their laboratories on real problems using actual data. Such symbiotic relationships between university and industry clusters are not limited to the information technology or biotechnology industry. Thus, Sonoma Valley sports the Wine Business Institute in Sonoma State University and the nearby University of California, Davis offers,

arguably, the leading program in the US for viticulture and enology. Many clusters support vocational education and training both to increase the supply of employees and to upgrade capabilities. While on-line training and education is an option, it is still not as effective as a classroom where students can learn as much from each other as from the instructors, and where they can interact with executives from various cluster firms who can share their wisdom and interact with the students in a way that no webinar can yet match.

Supply base. As mentioned by Marshall almost 100 years ago, clusters attract suppliers who see advantages in locating next to their customers. Even in today’s environment, the 5 D R A F T opportunity for unstructured and chance interaction with customers, the opportunities to learn where their business is heading and the opportunities to forge strong, trusting and collaborative relationships with customers is very important when firms make location decisions.

From the customers’ point of view, a strong supplier base with multiple suppliers bodes well for competitive pricing and supplier innovation which are crucial for competitiveness. Given all these advantages, one can ask why firms in a cluster don’t end up acquiring each other to form larger enterprises if closeness is so advantageous. Of course, to some extent this takes place in an active merger and acquisition environment. Yet, in many ways a cluster may be an optimal balance between the complexity and bureaucracy that hamper innovation in large enterprises, and the lack of scale that holds back smaller firms.

In a dynamic environment, when innovation and fast market response are keys to competitive advantage, the tacit communication and trust-building between smaller firms (and between their employees, who share culture and extensive personal contact) allow for joint learning and adoption of best practices. Yet the separate and independent decision making of the firms in the cluster may avoid “groupthink,” allowing the cluster to adopt new technologies and process innovation, thus renewing itself and remaining competitive.

Consequently, a cluster may be an optimal organizational structure, balancing flexibility and fast decision making on the one hand with the reach and resource availability on the other. In Porter’s (1998) words “A cluster allows each member to benefit as if it had greater scale or as if it had joined with others formally – without requiring it to sacrifice its flexibilityi. ” 6 D R A F T 3. Logistics Clusters The focus of this paper is on a particular type of cluster – a cluster of firms with logisticsintensive operations.

This includes mainly three types of companies: (i) logistics services providers, such as transportation carriers, warehousemen, forwarders, third party logistics companies (3PLs)2, customs brokers, and specialized consulting and IT providers, (ii) companies with logistics-intensive operations, where value added operations may be small relative to the logistics-related activities, such as distributors, light manufacturing and kitting companies, and (iii) the logistics operations of industrial firms, such as the distribution operations of retailers, and after-market parts suppliers.

3. 1. Examples of Logistics Clusters There are, literally, thousands of logistics clusters around the world. They are known as “Logistics Villages” in Germany, “Distribution Parks” in Japan, “Logistics Platforms” in Spain and various other names around the world. This section describes some of the largest and most visible logistics clusters, including Memphis, Tennessee; Zaragoza, Spain; Rotterdam Port in Holland; the Singapore Port area; the Panama Canal Zone; and Alliance in Fort Worth, Texas.

Note that one can define and analyze logistics clusters in several scales. For example, one can view the entire area in the triangle Rotterdam (Holland)-Antwerp (Belgium)-Duisberg (Germany) as a single logistics cluster, covering the two large port complexes and the German rail hub. 3 Or, one can look at the “Dutch Logistics Corridor” stretching 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 over 70 companies providing trading, transport, warehousing and value added services dealing with fresh products (de Langen, 2010).

Each of these provinces is, at the same time, a local logistics cluster, comprising many logistics parks. Such parks can be classified into two types: (i) managed logistics parks – which are developed and managed by real estate developers, local governments or public authorities, providing a range of value added services – in fact, port authorities are logistics parks according to this definition, and (ii) unmanaged agglomeration of logistics facilities.

In many cases such facilities operate in the vicinity of managed parks due to the availability of logistics infrastructure. In this paper the term 3rd Party Logistics (“3PL”) is used interchangeably with Logistics Service Provider (“LSP”) and Integrate Logistics Provider (“ILP”) to mean a company offering an array of logistics services, such as transportation, warehousing, custom brokerage, forwarding, return management, part distribution, etc.

3 Unfortunately, however, trade and economic data can usually be obtained only by province, municipality, state, or country. 2 7 D R A F T Singapore The modern history of Singapore dates to 1819 when Sir Thomas Raffles established a British port on the island with the express intent of developing free trade (Josey, 1980) and loosen existing Dutch trading monopolies at the time. In 1965 Singapore was separated from Malaysia and lost its hinterland.

In order to compete, Singapore redoubled its focus on trade and developed a re-export-oriented manufacturing economy, requiring efficient port operations, continuing Singapore’s role as entrepot for Southeast Asia (about 85% of the containers that come to Port of Singapore never enter the country and over half of the remaining material leaves Singapore as reexport). It is a hub for global corporations, or their subsidiaries, importing raw materials and transforming them into world exports (Choy, 2009).

To fulfill this need, first and foremost Singapore developed into a world-class transshipment port, later establishing itself as a world-leading container port. This was naturally followed by the move of logistics-intensive industries into Singapore, transforming it to a regional as well as a global warehousing and distribution center. In parallel, Singapore developed oil port facilities to cater to the needs of oil companies in South East Asia.

It is important to note that Singapore development in general, and its logistics and trade in particular, rest upon a virtually corruptionfree environment, an educated and motivated workforce, and well-established legal and financial business frameworks. Singapore was rated #2 in the World Bank’s (2009) International Logistics Performance Index and #1 in the World Economic Forum’s The Global Enabling Trade Index (Lawrence, Drzeniek and Moavenzadeh, 2009). At the same time, the Singaporean Port Authority (PSA) kept investing in automation, leading to continuous optimization of port services, reducing time and cost to its tenants.

Hand in hand with this policy, the PSA and the government made sure that port services were competitively priced and regulations were simplified and streamlined. As a result of these policies and investments, Singapore today is the world’s busiest container port in terms of total shipping containers according to the American Association of Port Authorities (2009), it is the world’s busiest transshipment port, and according to the Port Authority of Singapore (PSA, 2010), it is handling one fifth of the world’s container transshipment throughput as well as handling half of the world’s annual supply of crude oil.

It is serviced by 200 shipping lines, sailing to and from 600 ports worldwide. The port boasts the fastest customs clearing process in the world. While the Port of Singapore is a logistics park, including many terminal operators in its midst, there is another, smaller port in Singapore -Jurong. Furthermore, the Air Logistics Park of Singapore (ALPS), on the premises of Changi Airport, houses many logistics operators.

Yet, the entire nation-island of Singapore can be considered a logistics cluster as many operators and various logistics services providers, including forwarders, customs agents, and information technology providers, are located in the city itself. 8 D R A F T Rotterdam, the Netherlands A coalition of Dutch businesses coined the slogan “Holland is Logistics” to increase awareness to the importance of this sector to the Dutch economy. Like Singapore, re-exports constitute a large fraction of total Dutch export – in this case close to 50%.

It is worthwhile to point out, that Holland has been a trading hub for centuries. Notably, the Dutch East India Company (VOC) was the first multinational in the world, operating hundreds of vessels throughout Asia and between Asia and Europe in the 16th century and beyond. In fact, in 1770, Holland’s re-export share was 70% of all exports. Today, free trade policies (aided by the creation of the European Union), an educated and multilingual work force, and a sophisticated financial transactions capability support the Dutch trading tradition, creating several strong logistics clusters throughout Holland.

Holland is ranked 4th in the World Bank’s International Logistics Performance Index (2009). Rotterdam is the busiest container port in Europe. 4 In addition to several large terminal operators, the port encompasses three logistics parks (“distriparks”): Eemhaven, Maasvlkte, and Botlek. While the logistics service providers in Botlek specialize in chemicals, Eemhaven and Maasvlkte5 are located next to large container terminals (among others, the ECT Home terminal at Eemhaven and the ECT Delta terminal at Maasvlakte).

The land of Eemhaven is owned by the Albrandswaard municipality, while the land owner of Maasvlkte is the Port of Rotterdam. Both distriparks are connected to the European hinterland by highways, rail, inland waterways and short seas shipping, allowing for efficient distribution of shipments from Rotterdam to Europe. A dedicated freight rail line is used to move containers directly from the Rotterdam port to Duisburg, which is a rail hub in Germany close to the Dutch border.

Zaragoza, Spain The city of Zaragoza is the capital of Aragon. It is the fifth largest city in Spain, located strategically almost equal-distance from Spain’s four largest cities: Madrid, Barcelona, Valencia and Bilbao, as well as the industrial concentration in Toulouse, France. The logistics cluster in Zaragoza presents a very special case since it was newly conceived and constructed from the ground up, despite not being close to a port, a large city or a main airport.

It operates, however, as an inland port, connecting the Mediterranean ports of Barcelona, Tarragona and Valencia, to the Atlantic ports of Bilbao, Gijon, and Aviles y Sines (in Portugal). It is connected to the European rail freight network through a direct rail link to Barcelona. The logistics park in Zaragoza, PLAZA (Platforma Logistica de Zaragoza) was conceived by the Government of Aragon in the early 2000s in response to the need to diversify the region’s economic base away from its reliance on the big Opel plant in the area.

The park was built on a green field site, literally from scratch, with investments in high speed roads, rail intermodal Followed by Antwerp and Hamburg (based on 2008 figures). For comparison, however, note that in 2008 the Port of Singapore handled more TEUs than these three ports combined. 5 The Port of Rotterdam is reclaiming more land for the development of the next phase of Maasvlkte, which will more than double its capacity. 4 9 D R A F T

facilities, an expanded airport, and supporting services, connecting Zaragoza efficiently to the entire Iberian Peninsula and the rest of Europe. PLAZA is the largest (and newest) logistics park in Europe (Cambra-Fierro & Ruiz-Benitez, 2009); it encompasses more than 12 million square meters (130 million square feet) focused on transportation, distribution and logistics-intensive operations. It provides companies in PLAZA and the surrounding areas with state-of-the-art logistics and, particularly, intermodal services. While it is clear that the Government of Aragon took a

significant gamble in developing PLAZA at such a size, deliberately eschewing plans for gradual development, the gamble paid off handsomely. 6 Today, leading companies, including the likes of Inditex, Imaginarium, Porcelanosa, Decathlon, TDN, DHL Express, Acciona Infraestructuras, Memory Set, Caladero and many others moved into the park and established logistics-intensive operations there (http://www. plazalogistica. com/index. aspx). As PLAZA grew, new services catering to trucking, shopping and hotels were developed in the park. The Aragon logistics cluster, however, is more extensive than just PLAZA, large as it is.

The Aragon Government has developed other, specialized logistics parks in the vicinity of PLAZA. These include PLATEA in Truel, with a railroad access to the Valencia port; PLHUS in Huesca with connections to the Bilbao and Barcelona ports; and PL FRAGA in Fraga. Private developers also built specialized logistics parks, including Mercazaragoza, with a focus on agribusiness logistics; PTR Zaragoza, focusing on recycling; CTZ, specializing in automotive logistics; and TMZ, the Zaragoza Maritime Terminal (which is an inland port). Memphis, Tennessee

Folklore suggests that when Fred Smith, the legendary founder of FedEx, proposed a reliable overnight delivery service in a computer information age in a paper at Yale’s management School, he got a ‘C’ grade. The professor wrote: “The concept is interesting and well-formed but in order to get better than ‘C’ the idea must be feasible…” The paper became the idea for FedEx (for years, the sample package displayed in the company’s print advertisements featured a return address at Yale University). Memphis is the largest cargo airport in the world, handling 3.

7 million metric tons of cargo in 2009,7 largely due to the FedEx operations there (Credeur, 2010). FedEx handled an average of over 3. 5 million packages every day in 2008, while delivering almost as many in its ground operations segment. The air service offered by FedEx attracted a score of companies who compete based on time-sensitive logistics to Memphis. For example, Mallory Alexander International handles the logistics for 1-800-FLOWERS. It receives flowers from growers in the US, Europe and Latin America into its temperature-controlled warehouse in Memphis. It then 6 7

The huge scale of investment in PLAZA was likely used, in part, to deter the development of competing logistics parks elsewhere in Spain. Hong Kong, the #2 cargo airport, handled 3. 35 million tons in 2009 10 D R A F T processes customer orders until 8:00 pm and then picks, packs, and ships more than 100,000 orders a year. These orders can be delivered the next morning anywhere in the US. Flextronics, the US contract manufacturing company headquartered in Singapore, repairs 5,000 laptops every night shipping them to customers for next day delivery; Thomson Technicolor ships 1.

2 million DVDs per day from its Memphis location (representing half of all the DVDs purchased in the US), and Advanced Toxicology runs 5,000 lab test a night for next day delivery of results throughout the US. The airport-related economic growth generated what Kasarda (2009) has termed an “Aerotropolis. ” The term refers to a concentration of aviation-intensive businesses around a major airport, creating a new urban form including “shopping malls, office buildings, hotels, hospitals, an international business center, conference and exhibition spaces, warehouses and even a residential community” (Mih