FA L L 2 0 1 2 V O L . 5 4 N O.

Intelligence

Driving Growth and

Employment Through
Logistics
A brief discussion on how logistics clusters — local networks of
businesses providing logistics services — are helping to create jobs
and drive economic growth in multiple sectors, by Yossi Sheffi.

REPRINT NUMBER 54111

INTELLIGENCE

[LOGISTICS ]

Driving Growth
and Employment
Through Logistics
Logistics clusters create jobs that are
difficult to move offshore and lead to
economic growth in multiple sectors.
BY YOSSI SHEFFI

The Port of Rotterdam is the

center of a logistics cluster
that has grown to employ
Ever since British economist Alfred Marshall wrote about the impor- 50,000 people directly and
another 90,000 indirectly.
tance of industry clusters in his classic 1920 book Principles of
Economics, academics and policymakers have been trying to under-
stand and nurture the ingredients that are essential to industrial Logistics clusters are local networks of businesses that provide a
success. In the late 1990s, business strategist Michael Porter argued that wide array of logistics services, including transportation carriers,
clusters make businesses more competitive by increasing the pace of warehousing companies, freight forwarders and third-party logis-
innovation and stimulating new business formation. National and re- tics service providers. They also include the distribution operations
gional governments quickly embraced the idea that once they seeded a of retailers, manufacturers (for both new products and aftermarket
cluster, good things would happen: Businesses would be drawn to the parts) and distributors. These clusters attract companies for whom
area and attract employees and more employers, and these activities logistics is a critical element of their service offering or a large part of
would feed on themselves, leading to economic growth. their overall costs. In recent years, logistics clusters have received
In recent decades, numerous industrial clusters have developed support and funding from regional and national governments all
around the world. Some of the best known are the knowledge clus- across the world seeking to promote economic growth.
ters around Silicon Valley (for information technology), Logistics clusters are located strategically to enable efficient
Hollywood (for entertainment), and Boston (for life sciences). In transportation and delivery services to large populations. Typi-
each case, one of the most powerful lures for companies and em- cally, they are positioned in mode-changing locations such as busy
ployees has been knowledge spillover. Strong clusters are seaports (Rotterdam, Shanghai, Los Angeles), airport hubs (Hong
ecosystems of venture capital resources, universities, research cen- Kong, Seoul, Memphis) and major intermodal yards where freight
ters, employers, highly skilled workers and institutions for shipments transfer from railcars to trucks (such as Chicago, Dallas
collaborations, such as chambers of commerce. There are ques- and Kansas City). Some of the world’s largest logistics hubs, in-
tions, however, about the nature of the economic benefits cluding Singapore, São Paulo and Memphis, bring together
knowledge clusters are capable of generating. While such clusters multiple elements at once: mode-changing services, distribution
can generate employment for highly skilled engineers and scien- to nearby populations, and transshipment services.
tists, for the most part they do less to directly address the problem
of unemployment among less educated and less trained workers. A Positive Feedback Loop
Logistics clusters are attractive to government officials for several rea-
The Benefits of Logistics Clusters sons. After an initial seed investment, they generate a self-reinforcing
Many economists believe that the manufacturing sector in the positive loop — more so than most other clusters. All industrial clus-
West will have an uphill climb because of a long-term disadvan- ters produce a chain of mostly desirable events: more companies lead
tage in labor cost and flexibility compared with developing to the arrival of new suppliers seeking to be close to their customers
countries. But there is another sector — logistics — where indus- — and more employees develop skills to meet the needs of the indus-
trial clusters have a brighter long-term future. try. This leads to further growth, and as the cluster expands, so does its

20 MIT SLOAN MANAGEMENT REVIEW FALL 2012 COURTESY OF PORT OF ROTTERDAM

 service in and out of a logistics cluster can sell their services to the
full range of businesses in the cluster. Furthermore, when distribu-
tion centers are located near each other, companies can share
resources, such as forklifts and warehouse space, allowing them to
respond effectively to changing demand patterns.
Consider the example of AllianceTexas, a logistical hub located
40 minutes north of the downtown Dallas. The 17,000-acre devel-
opment, created by the Perot family’s Hillwood Development
Company LLC, includes a cargo airport and a Burlington Northern
Santa Fe intermodal yard. These facilities, along with the strong
highway connectivity of the region, allow AllianceTexas companies
to receive bulk freight from the Los Angeles ports via rail, add value
to it without incurring tax (because of a free trade zone designation)
and distribute the goods to 45 million people living within one day’s
trucking distance. The total investment prior to 2011 was $7.35 bil-
lion, with less than 6% coming from public sources; the rest was
from private investors. So far, AllianceTexas has attracted more than
260 companies (including General Motors, Chrysler, Ford, Best Buy,
Home Depot, Coca-Cola, LG Electronics, Exel and FedEx), and as of
clout, leading to more favorable government regulations and perhaps 2011 it generated more than 30,000 direct and 73,000 indirect jobs,
public funding for training and research centers. with total economic impact of $40.6 billion.
A logistics cluster, however, offers the potential for an especially Job creation, in fact, is one of the strongest arguments for logis-
strong positive feedback loop by virtue of its involvement in a wide tics clusters. Memphis International Airport, for example, is
array of activities that crisscross the economy. As the flow of goods responsible for 220,000 jobs in the local economy, 95 percent of
into and out of the cluster increases, transportation costs decline which are tied to cargo operations. Louisville International Air-
and the level of service improves. For example, larger vehicles have port, the worldwide air hub for UPS, plays a similarly influential
a lower cost per ton-mile hauled than smaller vehicles, evidenced role for greater Louisville, employing more than 55,000 people lo-
by the growth in the size of trucks, planes, maritime vessels and cally. In the Port of Rotterdam, an average of 34,000 oceangoing
train lengths over the years. High freight flow into and out of logis- ships and an even larger number of inland vessels arrive annually.
tics clusters allows transportation carriers to operate larger The logistics cluster that has grown up around the port provides
conveyances, reducing operating costs. A corollary benefit to more direct employment for more than 50,000 workers and indirect
freight volume moving through logistics clusters is more frequent employment for another 90,000.
service by carriers. Better service attracts more distribution and A major distinction between logistics clusters and other kinds of
logistics operations, which in turn generates more freight move- industrial clusters is the range of jobs. In contrast to Silicon Valley,
ments and attracts even more carriers. Wall Street and other knowledge-based clusters, which tend to em-
Some of the unique drivers of growth for logistics clusters are ploy highly educated people with starting salaries in the top five to
rooted in the interchangeability of both transportation and logis- seven percent of U.S. workers, logistics clusters generate a diverse
tics assets. Although the contents of the packages that travel spectrum of blue collar, white-collar and no-collar jobs. Although
through the UPS Worldport in Louisville, Kentucky, and the con- logistics work may appear to involve relatively low-skill activities
tents of containers in Shenzhen are varied and highly specific, the such as transporting boxes and driving trucks, the requirements for
list of services required to move the cargo to the various destina- success are sophisticated and advanced in terms of the work pro-
tions — the picking, sorting, loading, transporting, tracing, cesses and information technology used. Extensive operational
unloading and delivery operations — is very much the same. Fur- experience “on the floor” is highly valued, even for senior execu-
thermore, conveyance sizes and capacities are similar among tives. Thus, many logistics companies have well-established
transportation providers because of regulations and standards. patterns of promoting from either within the organization or
The result: new distribution operations that join a logistics cluster within the industry. To improve the overall skill level of employees,
can take advantage of the services of transportation carriers al- many companies provide opportunities to earn advanced certifica-
ready serving it, and new transportation carriers that inaugurate a tions and degrees. (Continued on page 22)

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INTELLIGENCE

Driving Growth and EmploymentThrough Logistics Facilitating returns Consumer electronics customers return up
(Continued from page 21)
to 20% of the products they buy, but only about 5% of returned
The record of UPS bears this out. A report by Accenture shows items have an actual defect; most are returned for other reasons,
that a large majority of full-time management employees at UPS including buyer’s remorse. Logistics clusters play an important
rose from non-management positions, and more than three role in repairing and refurbishing returned merchandise, a role
fourths of its vice presidents started in non-management posi- performed by the same logistics service providers involved in dis-
tions. In the United States, salaries for non-college-educated tributing the new products, thereby building on existing
employees in the logistics sector are competitive with — and in relationships and processes.
some cases exceed — those in manufacturing. To appreciate how logistics companies assume roles that used to be
reserved for manufacturers, consider Neptune Lines, a Miami-based
Beyond Direct Logistics Employment forwarder with operations in Panama’s Colón Free Zone. Neptune
One advantage of logistics jobs is that they are less subject to off- specializes in refurbishing secondhand pieces of heavy equipment for
shore relocation than jobs in some other sectors. The economics of Caterpillar and Komatsu. It handles about 5,000 pieces of equipment
transportation means that cargo has to travel long distances in bulk, per year. Once a bulldozer or an excavator is resold, Neptune repairs it
while demand from retailers and just-in-time manufacturers means to the manufacturer’s standards and ships it to the customer. To de-
that final distribution must be handled locally in small quantities in liver this service, Neptune employs a team of skilled mechanics in
response to the ups and downs of customer demand. This funda- addition to its transportation and logistics specialists.
mental architecture enables the global supply chain system to be Attracting other industries and jobs Logistics clusters often at-
responsive to changing local requirements while keeping costs tract manufacturing businesses that need efficient transportation
down. Another advantage is that the logistics industry isn’t overly and logistics services, and these businesses sometimes spawn sub-
dependent on a narrow set of industries but serves thousands of clusters. Indianapolis, for example, has some 1,500 logistics and
businesses in multiple industries, thus making it less subject to the related services companies, including distribution centers for Ama-
vagaries and business cycles of any given industry. In particular, lo- zon.com, Hewlett-Packard, CVS Caremark and many others. With
gistics clusters provide several key benefits related to job creation. four intersecting interstate highways, good rail connections and a
Value additions Once products are in a distribution center, it is busy airport, Indianapolis has already attracted a number of life sci-
efficient to perform limited value-added operations on them in situ, ence companies, including Eli Lilly and Co., WellPoint Inc., Dow
in response to retailers’ or manufacturers’ needs. For example, every AgroSciences LLC, Cook Group, Pfizer and Roche Diagnostics. Simi-
year, 50,000 Mazda cars destined for England sail past Britain to the larly, Memphis, with extensive logistics resources already in place, has
European coast of the North Sea for final processing in Rotterdam emerged as a significant medical devices cluster, and Singapore has
before being delivered to the United Kingdom. UPS Supply Chain attracted an aerospace maintenance repair and overhaul cluster.
Solutions, for its part, repairs Toshiba laptops at its facility in Louis- Logistics clusters have the ability to address several challenges
ville, next to the UPS Worldport air hub, reducing service turnaround many economies face, including the pressing need for good jobs,
times from two weeks to four days. Many of the activities performed higher levels of foreign trade and infrastructure renewal. Although
at logistics hubs, such as final preparation of products and creating this article emphasizes job creation, logistics clusters offer other
promotional packages and displays, require specialists who are lo- clear benefits to growth-oriented businesses. In addition to helping
cated nearby, including designers and electronics technicians. companies navigate global supply networks, logistics clusters can
Demand response Given the vagaries of market demand, com- lead the way in sustainable transportation and energy-efficient stor-
panies often hold off on final customization of their products to age and transportation operations. Without question, they are
maintain flexibility. This is a special type of value-added operation contributing to the efficiency of global supply chains. In the process,
that can be performed in logistics clusters at distribution or fulfill- they are increasing international trade and global trade flows.
ment centers. It gives the shipper one last chance to modify,
customize or augment the product before it is shipped to the cus- Yossi Sheffi is the Elisha Gray II Professor of Engineering Systems at
MIT and director of its Center forTransportation and Logistics. He is
tomer. Nikon, for example, uses UPS Supply Chain Solutions in the author of Logistics Clusters: Delivering Value and Driving Growth
Louisville to receive photographic equipment from its factories in (MIT Press, Cambridge, Massachusetts, forthcoming October 2012).
Asia for distribution in the Americas. Before being shipped to re- Comment on this article at http://sloanreview.mit.edu/x/54111, or
contact the author at [email protected].
tailers, products are either “kitted” with accessories (such as
batteries and chargers) or repackaged for in-store display in accor- Reprint 54111.
dance with a retailer’s latest requirements. Copyright © Massachusetts Institute of Technology, 2012. All rights reserved.

22 MIT SLOAN MANAGEMENT REVIEW FALL 2012 SLOANREVIEW.MIT.EDU

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