Q&A with Yossi Sheffi

MP: What is a logistics cluster?

YS: A logistics cluster is a geographical agglomeration of logistics-intensive operations. It includes mainly three types of companies: logistics services providers, logistics operations of industrial firms, and manufacturing and headquarters of companies with logistics-intensive operations. Such clusters include supply chain management facilitators such as customs brokers, and specialized consulting and IT providers, as well as academic and research institutions dedicated to logistics.

MP: Where are logistics clusters found?

YS: Logistics clusters are located strategically to enable efficient transportation and delivery services to large populations. Typically, they are positioned in mode-changing locations such as busy seaports (Rotterdam, Shanghai, Los Angeles), airport hubs (Hong Kong, Seoul, Memphis) and major intermodal yards where freight shipments transfer from railcars to trucks (such as Chicago, Dallas and Kansas City). Some of the world’s largest logistics hubs, including Singapore, São Paulo and Memphis, bring together multiple elements at once: mode-changing services, distribution to nearby populations, and trans-shipment services.

MP: What differentiates logistics clusters’ growth dynamics from other industrial clusters?

YS: Every industrial cluster grows through a "positive feedback loop." It gets more effective the larger it is, leading to more growth. As a cluster establishes itself, the more opportunities there are for tacit knowledge exchanges, for suppliers to move in, and to develop a specialized labor pool. This causes local government to become more attentive to the need of that industry, which in return leads to more companies moving in.

Logistics clusters benefit from these factors but also from the economics of transportation. Such clusters are invariably transportation hubs and the cost of transportation in and out of the cluster decreases the larger it is due to better utilization and the use of larger conveyances. At the same time more flow in and out of the cluster lead to higher level of service due to high departure and arrival frequencies as well as more direct service to and from more destinations.

In addition, logistics operations are, for the most part, undifferentiated by industry: the operation conducted on a box – picking, packing, transportation, tracking, etc. are independent of its content. Consequently, logistics operations in close proximity to each other can exchange equipment, labor and warehouse space, allowing cluster companies to weather the up and down of the business cycle in different industries.

MP: What kind of jobs can be found in logistics clusters? Why should local governments seek them?

YS: Many local and national governments focus their cluster development efforts on high technology, knowledge-intensive industries such as information technology, nanotechnology, and biotechnology. Most of the jobs in these industries require engineering and science graduate degrees, a segment of the population for whom unemployment is not a problem. In contrast to high-knowledge clusters, logistics taps labor pools across a very wide range of skill levels, including blue collar, white collar and no-collar jobs. At the low-end of the spectrum, jobs such as truck driver, forklift operator, or warehouse worker require little formal education and modest levels of training or work experience. Yet logistics isn’t all manual labor because the industry is one of the heaviest users of sophisticated information and communications technologies to interact with suppliers and customers around the globe, control product flows, cope with global risks, satisfy exacting customer service requirements, and cut costs at the same time. It also requires complex cross-border accounting and financial acumen, in addition to managerial and executive functions.

MP: How good are these jobs?

YS: Compensation statistics for the USA as a whole demonstrate that average logistics salaries are in line with average salaries in the manufacturing sector, and even higher than many other sectors employing workers without advanced degrees.

Furthermore, the logistics profession offers a measure of social justice. This is an industry which values on-the-floor experience. Consequently most executives in logistics enterprises started at the bottom. The numbers from UPS bear this out: an Accenture 2006 report mentions that “54 percent of UPS’s current full-time drivers were once part-time employees; 68 percent of its full-time management employees rose from non-management positions; and 78 percent of its vice presidents started in non-management positions.” To this end many logistics companies and logistics clusters offer extensive education opportunities to employees, including advanced certification and degrees.

MP: You say that this is just the tip of the (jobs) iceberg. What do you mean?

YS: The profile of skills employed in a logistics clusters expands beyond those required to perform logistics and supply chain management activities. First, logistics clusters include many value-added activities. For example, Flextronics repairs laptop computers in the Memphis cluster, UPS dispenses medical supplies by pharmacists working in its Louisville Supply Chain Service campus in Louisville, and ATC performs returns management service for mobile phones, including testing and repairs, in the AllianceTexas logistics park. Such activities can be performed most efficiently in logistics clusters due to the low cost and high level of transportation service in and out of such clusters.

Second, many logistics clusters actively recruit companies to relocate their headquarters to the cluster. The need to be in the “center of the action” – the locations from which customers are served – motivates companies to locate their global, regional, or divisional headquarters to the same location that handles distribution of products to customers. Headquarters brings additional non-logistics jobs across a wide range of white-collar corporate functions such as marketing, IT, strategy, and executive management.

Third, logistics clusters also provide jobs for the creative class, because many design-intensive consumer goods companies (such as clothing, toys, and housewares) choose to co-locate headquarters and design centers near their major global distribution hubs. For example, designers for Tabletops Unlimited in Los Angeles work next to and even in the warehouse, ensuring a tight coupling between the designer’s vision for housewares products and the supplier’s delivery of goods coming in and going out of the distribution center.

Fourth, logistics clusters often attract manufacturing businesses that need efficient transportation and logistics services; and these businesses sometimes spawn sub-clusters. Indianapolis, for example, has some 1,500 logistics and related services companies, including distribution centers for Amazon.com, Hewlett-Packard, CVS Caremark and many others. With four intersecting interstate highways, good rail connections and a busy airport, Indianapolis has already attracted a number of life science companies, including Eli Lilly and Co., WellPoint Inc., Dow AgroSciences LLC, Cook Group, Pfizer and Roche Diagnostics. Similarly, Memphis, with extensive logistics resources already in place, has emerged as a significant medical devices cluster, and Singapore has attracted an aerospace maintenance repair and overhaul cluster.

MP: What is the long term outlook for jobs in logistics clusters?

YS: Due to the undifferentiated nature of logistics operations, logistics clusters offer certain regional job stability. Jobs in a logistics cluster are not tied to the up-and-down business cycle of any one industry. Thus, while one industry (or company) may see a reduction in demand (and therefore flows in and out of its distribution network), other industries may see an uptick and the general level of jobs remains stable.

In addition, logistics jobs in local distribution clusters are not “off-shorable.” The economics of transportation dictate that transporting shipments over long distances have to be conducted using the largest possible conveyances (e.g, Shanghai to Los Angeles on a large ship and from LA to Chicago on long trains). Local distribution has to take place in proximity to customer locations, thereby minimizing the length of trips by small, local trucks.

Furthermore, with growing globalization the role of logistics clusters as nodes in the logistics network is becoming more and more important, enabling more global operations, which in turn funnel more flow through logistics clusters, making them even more efficient and attractive to logistics companies.

MP: What is the impact of logistics clusters on the environment?

YS: Although not as injurious as heavy industry, logistics activities create heavy vehicle traffic, which degrades the environment with noise, pollution, and road congestion. Objections by residential and environmental groups can stymie development and hinder operations.

The concentration of logistics assets in a cluster, however, creates an opportunity for these clusters to become hotbeds for green innovation in using renewable and clean energy for transportation and warehousing. Consider, for example, the Southern California region, sporting the largest logistics cluster in the US anchored by the ports of Los Angeles and Long Beach. The ports are testing numerous alternative fuel vehicles, including an LNG yard hostlers, CNG port drayage trucks, and LNG locomotives. As of 2012, the port of Los Angeles has some 900 alternative fuel vehicles in use. The result of this and other programs helped slash emissions from container-hauling trucks by 89 percent.

MP: Several authors claim that high technology clusters lead to new business formation. Is this true for logistics clusters as well?

YS: Logistics clusters do lead to new business formation, as is the case with other clusters. Consider, for example, the Miami logistics cluster. The Miami Super Pages listed no less than 946 freight forwarding companies in the area, with new ones appearing seemingly every week. Logistics Clusters profiles several such new companies in the logistics clusters of Chicago, Detroit, Miami, and Singapore.

MP: What role does government play in creating a successful logistics cluster?

YS: Governments, both on a national and local level, are responsible for much of the infrastructure underlying logistics clusters — ports, airports and roadways. National governments  support the formation of logistics clusters through trade regulation and support, the approval of free trade zones and a general pro-business climate, whereas local governments can offer incentives for companies to move into the cluster in the form tax relief, favorable zoning, education and training support, etc. Successful clusters are places where city, county, state and Federal governments work together with local businesses, academia, labor groups, and other parts of local civil society to attract companies, build infrastructure, and help companies stay competitive in their respective industries.

MP: What can agencies expect in return for their investments in Logistics Clusters?

YS: The main impact of logistics clusters are in terms of economic development and jobs. As described in the book, the logistics clusters which tracked the incentive public capital invested over many years concluded that government inducements to businesses did work out well for the region. Most companies delivered on their promised levels of hiring and stayed in the region beyond the term of the initial incentives.