Logistics Clusters Summary and Review

by Yossi Sheffi

Has Logistics Clusters by Yossi Sheffi been sitting on your reading list? Pick up the key ideas in the book with this quick summary.

From crude oil to heavy machinery, from cars to clothing. Modern logistics gets products from point A to point B, and logistics clusters are the engines that keep this massive flow moving.

Determined by geography and supported by a nimble workforce and favorable governments, logistics clusters power our globalized economy.

This book summary show you just how these clusters have come to be and how they work, shedding light on the long reach of logistics into local investment, regulation and trade policy.

Yet even as established European clusters start to fade and new clusters in today’s Asian megacities rise up, the flow of trade continues, with a renewed focus on the environment and job creation.

In this summary of Logistics Clusters by Yossi Sheffi, you’ll also learn

  • how auto cluster “groupthink” killed Detroit;
  • why even Roman emperors knew that Rotterdam would become a top port; and
  • which universities you need to attend to get a job in Silicon Valley.

Logistics Clusters Key Idea #1: A logistics cluster makes it easier for companies to get their products from point A to point B quickly.

How exactly did your favorite pair of shoes get from the factory that produced them to the store you bought them in?

The set of operations needed to coordinate this complex chain of events is called a logistics cluster: a group of logistics-related business activities concentrated in a single geographic area.

Interestingly, different companies utilize clusters in different ways.

Zara, a Spanish clothing retailer with over 1,500 stores across the globe, uses a logistics cluster located in Zaragoza, Spain. (Although Zara was not named after Zaragoza!) The company chose this small Spanish city as the site for a major distribution center and springboard for coordinating the company’s worldwide logistics.

Why Zaragoza? Why not a fashion capital such as Paris or Milan, or some city in China that specializes in low-cost clothing production?

Zara’s distribution center is a part of Europe’s largest logistics park, called the PLAZA – or Plataforma Logística de Zaragoza – which means the logistics platform of Zaragoza.

This park boasts excellent highway, rail and air freight infrastructure, allowing Zara to deliver ready-to-sell products within 24 hours to all its European stores, and within just 48 hours, to all its stores worldwide.

Another company that benefits from PLAZA’s logistics prowess is Caladero, Spain’s largest processor and distributor of fresh fish. With its 80 fishing boats worldwide, Caladero’s distribution chain needs to be flawless: no easy task, as the company only has a few days to deliver fish to ensure freshness.

So Caladero centralizes all its distributional operations at this one site, with its optimal location and transportation infrastructure.

But how does this benefit Caladero exactly? Conveniently, Zaragoza is equidistant from Spain’s four biggest cities: Madrid, Barcelona, Valencia and Bilbao. This enables the fish company to deliver the freshest fish possible to the most customers.

Logistics Clusters Key Idea #2: Industry clusters can help companies stay nimble and current; but they also can lead to groupthink.

Silicon Valley. Hollywood. Detroit. There are countless examples of geographic areas becoming renowned hubs for a particular industry. But why do companies cluster by industry?

Industry clusters provide a variety of advantages for all companies involved.

Clustering helps build trust between companies. Hollywood, Wall Street and Silicon Valley are regions known for making well-planned business decisions quickly, a major competitive advantage. The reason this happens is that all the important industry players are clustered in a single place, helping to make business connections quickly and effortlessly.

Another advantage of clustering is tacit knowledge exchange, including communicating with suppliers about specifications or discussing benchmarking statistics with competitors. Since communication isn’t always easy, clustering offers a huge advantage as it makes the process faster and more effective, especially with face-to-face or even chance meetings.

A third benefit of clustering is that it fosters a collaborative environment. As a high concentration of firms share a common industry, addressing similar needs is a natural impetus for joint activities. Companies can collaborate in a variety of ways, including lobbying the government for things like infrastructural improvements or tax breaks.

But clustering isn’t without its risks. Actually, most clusters don’t last forever – but tend to grow, mature and then decay. Why is this the case?

One explanation for cluster failure is the very advantage that clustering provides. The information flow and increased knowledge that clusters enjoy can lead to groupthink, which in turn dulls the ability of companies to respond to change.

Just consider Detroit’s failed auto industry, a cluster composed of Ford, General Motors and Chrysler. These auto manufacturers were so engrossed in their own “conversation” they missed the public’s rising environmental awareness and failed to develop more fuel-efficient automobiles.

Additionally, they underestimated international competitors in Asia and Europe. And in the end, this groupthink led to GM declaring bankruptcy, and Chrysler being taken over by Italy’s FIAT.

Logistics Clusters Key Idea #3: Logistics clusters offer more efficient transportation options at bargain prices and resource sharing.

So we’ve learned the benefits of clustering in general, but what are the main advantages of logistics clusters?

One major benefit is that, as a result of increased freight traffic, carriers in logistics clusters can offer reduced transportation costs with improved service.

How does this come about?

Transportation services fall into two categories: direct operations (DO) and consolidated operations (CO). With direct operations, a carrier takes a shipment directly from pickup to delivery. With consolidated operations, a carrier takes multiple shipments from a local area and makes several deliveries in a destination region.

While DO services tend to be on demand, CO services are usually scheduled.

Logistics clusters offer a transportational advantage as they handle more freight originating from and destined for a single location, which leads to more CO transportation. So transport to and from logistics clusters is much faster, since time between shipments is reduced.

But DO carriers are also drawn to logistics clusters, as making a delivery into a cluster increases the likelihood of a new load to pick up and deliver somewhere else – thereby reducing empty trips.

Another advantage of logistics clusters is the sharing of resources. Most companies have peaks and lulls at different times – online retailers see a surge leading up to year-end holidays, while 1-800-Flowers.com does a lot of business around Mother’s Day, for example.

As a result, warehouse operators in logistics clusters can shift overflow from one warehouse to another, if one space is temporarily at capacity while another has room to lease. Not just that, but companies can share heavy equipment such as forklifts when demanded by a sudden surge in activity.

Logistics Clusters Key Idea #4: Logistics clusters can also efficiently handle product customization, repair and returns processing.

It’s easy to think of logistics as just the moving, storing and preparing of goods for transport. But modern logistics clusters offer many different services, from laptop repair to flower arranging – value-added services that go above and beyond the usual.

Logistics clusters offer an efficient location for companies to conduct last-minute product customization. Companies can store “base” products that can quickly be repackaged or have features added that usually don’t require a time-intensive process to do so.

But what makes a logistics cluster the ideal location for product customization?

Conducting these value-added activities at a logistics cluster offers companies the chance to make changes right up until when a product is sold.

UPS Supply Chain Solutions, based at a logistics cluster in Louisville, Kentucky, handles the distribution of all of Nikon’s photographic equipment in the Americas. This means that UPS “kits” Nikon cameras before they’re shipped, adding accessories like batteries, chargers or promotional materials.

The possibility for last-minute adjustments isn’t the only benefit of a logistics cluster, as such centers also provide the perfect location for product repair and refurbishment.

Consider that consumers on average return 11 to 20 percent of purchased consumer electronics, things like cell phones, laptops and televisions.

When a return is made, the product is sent to a central location where it is prepared for resale by removing any customer data, resetting software and conducting tests, as well as undergoing any repairs.

Logistics clusters provide a natural location for doing this, as locations are often central and transportation infrastructure is excellent. And once a returned product is refurbished, it can immediately be sold and shipped directly.

So now you know why logistics clusters develop, but how exactly do they develop?

Logistics Clusters Key Idea #5: Moderate weather, good roads, convenient sea access all make for good logistics centers.

Geography plays a major role in the development of high-performance logistics centers. Let’s take a look at four key clusters: in the Netherlands, Singapore, Panama and Memphis, Tennessee.

In the Netherlands, river ports such as those along the Rhine River, as well as seaports such as those on Europe’s northern shores, have been natural loci for both ancient and modern supply chains.

Some 2,000 years ago, Julius Caesar marched legions down the banks of the Maas River and across the Rhine with the goal of expanding the Roman Empire. During this campaign, he noted just how suitable the waterways of Holland were for logistics; a fact that history would later corroborate, as Rotterdam became one of the largest, most influential seaports in the world.

In Singapore, both geography and climate inspired the establishment of a high-functioning logistics cluster. Singapore is an obvious center point for the East Asian economies of the Pacific Rim, South Asian markets and Western nations.

Not only this, but as Singapore sits on the equator, it experiences virtually no extreme weather. With its ideal location and calm seas, Singapore has evolved as a logistics cluster that today handles a fifth of the world’s maritime containers.

An ideal geographical location is also what helped push Panama to prominence as a logistics hub. The Panama Canal, completed in 1914, connects the Pacific and Atlantic oceans. This has made the canal a hub for international maritime trade, and has led to the establishment of a logistics cluster there.

Yet convenient sea lanes aren’t the only things a logistics cluster needs. Global courier FedEx based its logistics operations in Memphis for two main reasons.

Memphis’s location in the United States is just right: not too far east, but not too much in the “middle.” This means optimal flight distances and schedules to and from the coasts. Additionally, the city is located just south enough to avoid hurricanes, blizzards or prolonged periods of icy weather – making it an ideal flight logistics hub.

Logistics Clusters Key Idea #6: Logistics clusters depend on efficient physical, financial and informational infrastructure.

Logistics, in essence, is all about the flow of moving stuff from one place to another.

There are three distinct types of flows that logistics clusters manage. The first is the physical flow of products from suppliers to manufacturers to retailers. The second is the information flow, including specifications, orders and status messages. And the third is the cash flow.

How do logistic clusters manage these three types of flow?

To handle physical flow, clusters need physical infrastructure. Rotterdam offers a great example.

Although the Rhine and Maas rivers comfortably handled early sailing vessels, they’re not deep enough for today’s gigantic container ships. The Dutch thus modified their natural waterways into a network of straight, deep channels, dry industrial parks and flood-preventing dikes.

These were then complemented with a series of roads, railways and pipelines that link the Rotterdam cluster to European economic centers.

So logistics clusters harness natural resources like rivers, bays and oceans to move physical goods. Importantly, to handle high volumes, such resources often need to be improved upon and developed, requiring proper investment.

Equally important, how do logistics clusters handle the flows of information and money?

Information flow actually mimics the flow of physical goods: specifications, orders, delivery deadlines and various regulatory details move from retailers to distributors to manufacturers. To handle such a complex communication chain, logistics companies employ sophisticated information technology.

Cash flows have their own rhythm, too. Let’s say you’re an exporter who has just transferred your products to a carrier at a foreign port. The carrier notifies your bank that he has received the goods, and that bank tells your customer’s bank that the goods are in transit. At this point, the customer authorizes payment to you through his own bank.

As you can see, the transportation, delivery and sale of goods is a complex business which often involves multiple financial transactions. Financial firms serving logistics clusters must handle this complexity with ease.

Logistics Clusters Key Idea #7: Governments can play a key role in the development and health of logistics clusters.

The logistics centers of Rotterdam, Singapore and Panama are not only prime examples of how clusters benefit from geography but also show how logistics operations profit from government support.

There are several ways that a government can influence the development of logistics clusters.

First, logistics operations rely on transportation infrastructure such as roads, ports, airports and rail, all things that are often financed by local, state or federal governments.

For instance, FedEx changed its logistics hub from Little Rock, Arkansas, to Memphis, Tennessee, as the capital city wouldn’t increase its investment in local airport infrastructure.

Second, clusters usually require space, often a huge tract of cleared land. Therefore a cluster also needs government help in seeking land use permits, issuing building permits or enabling private investment.

Third, governments can help logistics clusters grow by offering companies incentives to set up shop, such as subsidized land, temporary tax abatements or loan guarantees. In both Singapore and Panama, the government offers tax cuts for companies who relocate headquarters to the country.

Fourth, governments can expedite the flow of goods through logistics clusters by designating special trade zones exempt from import duties and export paperwork.

For instance, most of the goods moving through Rotterdam and Singapore are bound for a foreign destination. If companies using these clusters had to pay import duties just to move goods through the door, they’d never be able to turn a profit.

Governments also help forge relationships between foreign logistics clusters, either promoting or often preventing free trade through diplomacy, trade agreements and regulations.

And good trade relations, especially free trade agreements, means a freer flow of goods. Because of the North American Free Trade Agreement, or NAFTA, trade between the United States, Canada and Mexico more than doubled in dollar value in just over 15 years.

Logistics Clusters Key Idea #8: Moving a box doesn’t make you a logistics expert. Higher education is crucial to cluster success.

Working in a warehouse doesn’t require highly skilled labor, yet modern-day logistics is so much more than pushing boxes around. The increasing use of technology to track and manage the movement of goods translates to a strong need for highly trained, professional employees.

An increasing number of logistics clusters partner with or manage their own educational institutions that are designed to train the workforce they need.

For instance, the AllianceTexas logistics park maintains about 30,000 employees working at over 290 companies. To ensure a steady supply of workers, the park enlisted the help of a local community college that now serves as a training center.

The center focuses on training workers to become foundation-level certified logistics associates (CLAs) and mid-level certified logistics technicians (CLTs). With such certifications, a hiring company knows that a potential employee has the skills necessary to do the job.

The Zaragoza Logistics Center in Spain offers advanced degrees as well as a special degree called a “master de logística” (MdL), designed to improve the capacity of the local workforce.

Knowledge-intensive industry clusters in particular rely heavily on academic institutions. A key example is the relationship between Stanford University and the University of California at Berkeley, both located near Silicon Valley. The computer science programs at these institutions feed companies a steady stream of well-educated engineers.

Since logistics management is a highly sophisticated and analytic field, universities located in logistics clusters often offer specialized degrees. Erasmus University Rotterdam offers a Master of Science in maritime economics and logistics, a degree with a focus on urban, port and transport economics.

Logistics Clusters Key Idea #9: Logistics clusters offer wide-ranging economic benefits to local economies.

Not only do logistics clusters inspire infrastructure investments, but also these investments can produce positive economic returns for a surrounding area.

Logistics clusters are huge job creators, which helps to diversify a local economy and foster economic growth.

Logistics centers create jobs for both skilled and unskilled labor alike. The port of Rotterdam, for example, has 55,000 direct employees and 90,000 indirect ones. Memphis international Airport has created 220,000 jobs for the local economy, 95 percent of which are related to cargo operations.

The best part is, logistics clusters provide jobs for all types of workers. At the low-end, clusters need truck drivers, forklift operators and warehouse workers. Clusters that offer value-added services also  need electronic technicians and assembly workers.

In fact, many clusters successfully recruit entire companies to move their headquarters to the cluster’s location, bringing with them various corporate jobs such as marketing, strategy and management.

Clusters also inspire economic diversity and growth. In fact, diversification is the most major qualitative difference between logistics clusters and other industry-specific clusters.

The success of the city of Detroit rose and fell with changes in the American auto industry. In contrast, a logistics cluster supports economic activity across multiple industries, each of which is subject to its own business cycle.

For instance, the logistics cluster in Louisville, Kentucky, distributes spare aircraft parts, cell phones, office equipment, digital cameras, shoes, pharmaceuticals and many other items.

Rising employment and a constant flow of goods means that logistics clusters have a pronounced effect on a region’s gross domestic product, or GDP.

For example, about 10 percent of GDP in the Netherlands is a result of logistics activities. In fact, the port of Rotterdam alone contributes some $22 billion a year to the country’s economy.

Logistics Clusters Key Idea #10: Environmental concerns over fossil fuels are pushing clusters to explore “green” logistics.

Logistics clusters reflect the dynamism of global economics and are always evolving. This will lead to the formation of new clusters in emerging economies while existing clusters gradually decline.

New clusters will find fertile ground in emerging markets. Some 2 billion people are enjoying rapidly rising living standards in the BRIC countries of Brazil, Russia, India and China as well as in the CIVETS countries of Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa.

Rapid economic growth and large populations offer prime conditions for new, large-scale logistics clusters. In China, new clusters are developing in Beijing and Shanghai, as well as in Shenzhen, where UPS maintains its North Asian center. As of 2012, Shenzhen announced plans to build one of the world’s largest logistics centers, investing some $46 billion to do so.

The world’s megacities – Chongqing, China, with 32 million people; Mumbai, India, with 21 million; and Mexico City with 21 million – will lead to clusters designed to serve the needs of these massive populations.

These new clusters however couldn’t grow without existing ones phasing out, a fact that means many existing clusters are transitioning to more sustainable methods of transport.

For instance, an increased concern about fossil fuel use and overall environmental sustainability has affected supply chains as well as logistics clusters.

The huge carbon footprint of freight transport has made logistics clusters a prime target for government environmental regulations. But this shouldn’t be seen as limiting, as environmental controls can lead to technological development, making logistics clusters often early adopters of “green” technologies.

FedEx is actively testing and using some dozen different combinations of sustainable fuels and vehicles – everything from biodiesel to natural gas to electric vehicles.

In fact, the company has partnered with many car and engine manufacturers to develop, test and implement “green” technologies for high-volume logistics.

In Review: Logistics Clusters Book Summary

The key message in this book:

Logistics clusters offer many advantages to companies while spurring economic growth for the local economies in which they operate. A cluster’s path to development is marked by prime geography, strong infrastructure and supportive governments.