All of this is self-reinforcing, with growth feeding further growth.
Professor Yossi Sheffi, The Director of the MIT Center for Transportation and Logistics, is an expert in systems optimisation, risk analysis and supply chain management. But what fascinates him most is the modern phenomenon known as logistics clusters.
“Logistics clusters are agglomerations of similar types of companies in one geographical area,” he explains. “These can be logistics operators – such as DHL or UPS – along with the logistics functions of retailers or manufacturers. Basically, any business where logistics plays a key role.”
Examples of such clusters are myriad, says Sheffi, whose book on the subject, Logistics Clusters: Delivering Value and Driving Growth, was released in 2012 by MIT Press. They include the whole island of Singapore; numerous US transport hubs such as Chicago, Dallas, Miami and Long Beach; Rotterdam (Europe’s biggest port); Sao Paolo and, as for China, “they’re building them like there’s no tomorrow,” says Sheffi.
The obvious question is, why? Sheffi says that logistics clusters, like any other industrial cluster, can form organically due to a variety of factors, such as geographical suitability or through government intervention, such as in Singapore, which started life as a tax-free port. Even if government intervention isn’t always clear, it is always a factor, he stresses, due to zoning legislation, trade agreements, tax incentives and so on.
But none of this would be important if the clusters didn’t have benefits that enabled them to take hold and thrive. And it’s these, Sheffi states, that are the really compelling things about this burgeoning trend:
“Clusters in general are, in a macro sense, optimal industrial arrangements. Companies benefit from their proximity to one another; through knowledge transfer, attracting suppliers, cluster-specific development of the labour force and, when they reach significant size, political influence. As more companies join, the benefits increase. There is a kind of positive, self-reinforcing feedback loop.”
Clusters bring other, transport-related benefits, too. Logistics clusters have a great deal of freight moving in and out, and this increases as they grow. The larger the volumes, the larger the trains, vessels, trucks and planes needed to transport them. This in turn increases transport efficiency, lowering the tonne-per-kilometre costs. In addition, this breeds higher transportation frequencies and more direct routes to more destinations.
“All of this is self-reinforcing,” Sheffi says, “with growth feeding further growth. That’s the strength of the model.” This strength makes logistics clusters surprisingly resilient to the ups and downs of the global economy, says Sheffi: “If you consider other industrial cluster models, concentration is a risk. For example, 70 per cent of the world’s dynamic random access memory (DRAM) chips are made close to the border of North and South Korea. That’s a threat to the global supply of DRAM chips. Or consider the carmakers in Detroit. That focus was an obvious threat for the local workforce.
“But logistics clusters are both widespread and non-industry specific. If one is compromised by a threat, such as a conflict, or port strike, then goods can move to another hub. And if one manufacturing sector goes through a down-cycle another can be booming. So there’s a stability to regional employment that you don’t find in other clusters.”
Although there are no inherent risks the clusters, there is one key concern: the environment.
On a global basis Sheffi believes that the hubs are actually positive for the environment, as increased efficiency and utilisation should reduce the carbon footprint produced by the worldwide logistics industry. However, “try telling that to the family with a two-mile long train thundering by their backyard,” he says.
“So, there has to be an emphasis on clusters being ‘good neighbours’,” he says, “and to be fair, most are investing to that end. For example, LA Long Beach has introduced regulations banning trucks older than five years to limit emissions, while investing in a company called PortTech that is developing hybrid solutions. The two biggest bio-diesel plants in the world are next to two of the biggest clusters – Rotterdam and Singapore – and that’s no coincidence.
Clusters also allow the use of intermodal transportation, moving cargo from truck to rail, and that has obvious carbon footprint benefits.
“Logistics clusters should carry on growing,” Sheffi concludes, “and an increased environmental focus will make that growth sustainable.”
PROFESSOR YOSSI SHEFFI
Job title: Elisha Gray II Professor of Engineering Systems; MIT Professor, MIT Civil and Environmental Engineering; Director of the MIT Center for Transportation and Logistics.
Age: 65. Family: Married, two children, one granddaughter.
Books: Author of Logistics Clusters: Delivering Value and Driving Growth (MIT Press, 2012); The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage (MIT Press, 2005); Urban Transportation Networks: Equilibrium Analysis with Mathematical Programming Methods (Prentice Hall, 1985)
Logistics cluster: What? Where? Why?
1. Logistics clusters are geographical agglomerations of companies that are either directly related to, or heavily involved in, logistics.
2. Key clusters include: Rotterdam, Sao Paolo, Guangzhou, LA Long Beach, Miami, Singapore.
3. Benefits include lower transportation costs, greater efficiencies and growth powered by self-reinforcing success. Their non-industry specific nature also makes them stable employers for the local workforce.
4. Local environmental issues are a concern, but macro-environmental consequences are positive due to transport efficiencies.
5. One to watch: Panama. The canal expansion is being matched by investments in new shipping terminals. The authorities would like larger vessels to unload there, allowing the Atlantic coasts of North and Central America to be serviced by smaller ships.