Alert readers may have noticed that chapter 4 strayed from logistics a bit. Basic logistical activities don’t include repairing laptops or arranging flower bouquets. Yet these are the sorts of value-added activities found in logistics clusters in addition to the more plebeian tasks of moving and storing goods. Over time, a logistics cluster becomes more than just a location for warehousing and transportation activities. Logistics providers and shippers’ logistics operations within a cluster add value to the goods they handle in the cluster. Also, the availability of low-cost, high-performance logistics services found in logistics clusters attracts manufacturers, distributors, and other shippers that depend on efficient logistics.
A logistics cluster offers two main advantages for performing certain value-added activities: it allows for postponement of product-differentiation closer to the time the product is sold, and it typically offers a cost-effective opportunity for performing operations beyond logistics. Along any supply chain, various companies touch the product as they transport it, store it, or change it in some way. Each of these “touches” costs money as a result of the labor associated with finding the item, removing it from the shelf, doing something, recording the action, and sending it somewhere or putting it somewhere. The incremental cost of “doing something more” while the product is in a warehouse or distribution center is lower than moving it to a special facility because the product has been “touched” at this point anyway.
Robust logistics services serve as infrastructure for other economic activities, such as manufacturing. In fact, as chapters 6 and 10 will show, this is one of the important contributions of logistics clusters to economic development. The logistics infrastructure available in a cluster attracts manufacturers and suppliers who create their own “miniclusters” or “subclusters” that add to the region’s economic strength.
All these types of value-added operations in a logistics cluster mean that the jobs performed there go well beyond moving and storage. Many of these jobs require special skills and command high salaries.
Supply chain operations have become more volatile and less predictable over the last two decades for numerous reasons. First, the growing variety of goods available in every segment of the market means that each brand and product variant sells in a small quantity, which creates higher inherent demand variability.1 Second, increased customer expectations for product availability, coupled with decreasing “product loyalty,” means that if a product is not on the shelf (or “in stock” at an Internet retailer warehouse), then customers may switch rather than wait. Third, shorter product life cycles, particularly in fashion and high technology, offer little historical data on trends and seasonality, reducing forecast accuracy. Fourth, globalization creates long supply lead times during which demand can change. Fifth, globalization also entails more complex supply chains with dozens of actors, resulting in high susceptibility to disruptions, delays, quality problems, political upheavals, and natural disasters. One can add to this list the increased frequency of extreme weather phenomena and other factors.
One strategy for coping with supply chain volatility is to wait as long as possible before customizing or differentiating products. In the best of circumstances, a company may try to wait until it has a specific order in hand. At that point, however, the company must fulfill the order very quickly. Thus, companies may stock undifferentiated “vanilla” or “base” products that can quickly be customized with last-minute changes or additions, such as packaging, colors, decals, tags, or other features that do not require lengthy manufacturing processes and therefore can be performed just prior to shipping an order. Such coping strategies are known as postponement, delayed differentiation, or mass customization. Logistics clusters play a major role in these strategies because a distribution or fulfillment center offers the shipper one last chance to modify, customize, or augment the product while it is handled and before it is shipped to the customer. Furthermore, the superior transportation service associated with logistics clusters helps get the product to the customer quickly, after it has been customized.
Postponement allows manufacturers to reduce inventory carrying costs while keeping a high level of service—keeping inventories of undifferentiated products in a distribution center amounts to demand risk pooling (see the inventory discussion on p. 109 in chapter 4). The total inventory required to maintain a certain level of service is lower when stocking undifferentiated products in the distribution center as compared with stocking products in final, differentiated form. Ergo, risk pooling creates lower inventory carrying costs and satisfied customers.
The examples below highlight this aspect of the benefits of conducting such postponed customization in a distribution center.
Distribution centers often support retail operations by receiving goods in bulk from manufacturers, many of whom are located in Southeast Asia, and then distributing smaller quantities to a network of retail outlets. Most retail outlets have limited space and cannot handle large deliveries or large inventories. Consequently, distribution centers must send mixed shipments of various items to stores on a regular basis. As mentioned above, however, it is advantageous to perform value-added operations at the distribution center because its location offers an opportunity to perform late customization.
At the simplest end of the value-added spectrum are logistics operations that kit, bundle, label, or otherwise prepare a product for retail sale. For example, UPS Supply Chain Solutions in Louisville handles all of Nikon’s distribution of photographic equipment for the Americas. Much of UPS’s activity for Nikon consists of “standard” high-performance full service logistics: managing air and ocean transport and the related customs brokerage, as well as providing digital visibility to Nikon for all its freight moving from Nikon’s factories in Japan, Korea, and Indonesia to Louisville, Kentucky. UPS then ships the cameras, lenses, and other photographic equipment to Nikon dealers in North America, South America, and the Caribbean.
But what arrives in the Louisville warehouse on the UPS SCS campus isn’t quite ready for store shelves. Before the cameras are shipped to stores, they are either being “kitted” with accessories such as batteries, chargers, and promotional material, or repackaged for in-store display in accordance with a retailer’s requirements.2 As a result, retailers can specify what they need right before the selling season, once they better know consumer preferences, rather than ordering months in advance and waiting for shipments from Asia.
Similarly, UPS SCS works with Deer Stags Inc., a manufacturer of premium footwear sold by US retailers. Deer Stags ships finished product in bulk from Asia and Brazil to a UPS SCS distribution center. When a retail chain (or a store) orders the product, UPS customizes the shoes for the store by adding bar code labels, price tags to the eyelet, and color coding to the cartons, all according to the retailer’s requirements.
Another common task is building promotional bundles either for the product maker or for the retailer. “There are some operations that do bundling, where you put two selling units together and over-wrap them. There are other operations where we do coupon inserts,” explained Greg Kadesch, Exel’s director of operations. For example, a company might want to bundle a sample of its new product with an existing product, or offer a two-for-one promotion.
Custom Packaging for Promotional and Personalized Orders
In a phone interview, Jim O’Brien, director of operations for consumer products at BIC, said, “BIC is making a significant move towards postponement because it is a competitive advantage.”3 The BIC product line includes lighters, razors, and stationery. Companies use these products to create personalized items with company logos and event memorabilia. In addition, retail outlets use business products in promotional activities in various bundles as well as for seasonal packaging. BIC currently operates manufacturing plants all over the world but has two distribution centers in the United States in Cerritos, California, and Charlotte, North Carolina, where customized packaging operations take place. Since developing the packaging postponement, BIC has seen volumes grow 10 to 15 percent each year between 2000 and 2005. Based on its ability to customize quickly and efficiently, the company has become more of a customized product company, with over half of its products made for promotional and personalized orders. And this fraction was expected to grow significantly.
Numerous other examples of kitting and packaging services can be found in consumer electronics, apparel, and consumer packaged goods. For example, Stephan Muench, head of in-house consulting Asia Pacific for DHL described to me, in his Singapore office, how DHL’s Global Forwarding unit in the Netherlands also helps prepare clothing for retailers by adding price tags, security tags, labels, and plastic hangers before distributing the garments to the retail outlets. In fact, Exel promotes, in several of its published case studies, the benefits of having packaging customization operations colocated within its distribution centers. Discussing one such operation for a consumer packaged goods manufacturer, Chad Herr, Exel’s director of operations for the consumer industry, commented “we were able to demonstrate [to the CPG manufacturer] that … the right choice to manage secondary packaging [is] in the distribution center.”4
Retail Display Preparation
Logistics providers also prepare retail display pallets. The displays consist of temporary cardboard and plastic structures that hold quantities of a new product, holiday-themed promotion, or a special deal. When delivered, they’ll sit in the retailer’s space, often at the end of an aisle or on prominently located open floor space.
Preparing the displays is part of creating a promotion, so it makes sense for the distribution center, which is already fulfilling the retailer’s promotional product order, to supply the matching displays as well. In addition, most displays include the product itself. Because the distribution center carries the products that are scheduled for promotion, it can marry the structure of the display with the product samples to create the store displays.
Variations in store layout, merchandising, and retailer interest mean variations in the displays ordered by a retailer. While discussing Exel’s value-added operations in AllianceTexas, Greg Kadesch of Exel gave an example: “For many CPG customers we’re creating display pallets where you have multiple facings of different products on one pallet that will sit in the store aisle. Those facings are selectable by the buyer. Rather than the CPG manufacturer having a prescribed set of products on the display, the customer [a retailer] can pick and choose what products it wants and on which facings of the pallets it should be displayed. We build the displays and stock them to the customers’ specifications.”
Value-added activities in logistics clusters can go beyond the relatively minor postponement operations such as the kitting, bundling, and labeling mentioned above. Sometimes, the last stages of the manufacturing process itself take place at a distribution center—an even more advanced type of late customization.
A Sporting Chance at Last-Stage Customization
Sports fans around the world show their support and pride in winning teams and players by buying and wearing team-logo apparel. Sales of fan apparel track the fluctuating on-field performance of the teams and players. Moreover, some sports leagues have management policies that influence the predictability of who wins and who loses, with direct implications for the supply chain management process for team merchandise.
The US National Football League (NFL) manages player recruitment differently than do other professional league sports around the world, such as soccer. In the NFL, teams draft players from colleges in a well-controlled process. To ensure a competitive league, every year the team with the worst record in the previous season picks first, the team with the second worst record picks second, and the Super Bowl champion in the previous season picks last. A weak team in one year can thus pick up strong new players for the following year. Add to this a cap on the total amount that each team can spend on players’ salaries and one can understand why “On any given Sunday, any team in the NFL can beat any other.”5
To understand the consequences of this set of rules and processes, consider the European soccer leagues. There, teams may sign any player they want and pay any amount they can afford. Good players create successful teams, and successful teams enjoy better ticket sales and higher merchandise sales. Growing revenues let successful teams pay even higher salaries, attracting even better players. The opposite mechanism works for poorer teams who cannot afford the best players. The result is that the UK Premier League is dominated by clubs such as Manchester United, Chelsea, Arsenal, and sometimes Manchester City, Tottenham, and Liverpool. Other teams are decidedly in second and third tiers and have little chance of having success against the leaders. This phenomenon is even more pronounced in the Spanish Primera Division, where FC Barcelona and Real Madrid dominate.
The difference between the American and European leagues has supply chain management implications. Whereas soccer merchandise suppliers can easily predict sales of team jerseys of UK or Spanish soccer teams, this is not the case for the NFL in the United States. The balanced strength throughout the NFL means no one knows which quarterback will lead his team to success or which running back will break records. Not only is it not clear before the season, but teams and players’ fortunes can change dramatically during the season.
As a principal supplier for the NFL, Reebok6 sells over 1.5 million jerseys to football fans each year with team colors and players’ names. To control costs, Reebok cuts and sews the clothing in Central America, taking 6 to 24 weeks for the jerseys to reach the distribution center in Indianapolis.7 But because Reebok cannot predict which team will be “hot” and which player’s star will suddenly shine, Reebok also sends blank jerseys to the distribution center. Only when it is clear which player has signed late in the season with what team and which team exhibits early success are the jerseys printed and embroidered with the player’s name. Furthermore, demand usually spikes a week or so after a team’s big win or a player’s outstanding performance. Fortunately, Indianapolis is a logistics cluster with 1,500 logistics-focused companies, a “crossroads” central location for trucking, and a large regional airfreight hub for FedEx.8 Once a trend materializes, the Reebok distribution center in Indianapolis finishes the jerseys and supplies the retailers at breakneck speed. While it may be less expensive to finish the jerseys at the Central American source, the long lead time from there would invariably result in lost sales of some jerseys and extra, unwanted leftovers of others. At a retail price of $25 for a long-sleeve T shirt or $250 for an authentic jersey, the high cost of lost sales dwarfs the modest incremental cost to finish a jersey at the Indianapolis distribution center.9
Hewlett-Packard manufactures its popular Deskjet and Deskwriter printers in its Vancouver and Singapore plants and distributes them to the United States, Europe, and Asia. Selling printers in Europe means meeting each country’s requirements for printer configurations: different decals, a country-specific power plug, and language-specific manuals. In the past, Hewlett-Packard forecast demand for each European country and then manufactured the appropriate numbers of printers for each country. Unfortunately, the vagaries of forecast errors meant that HP might have had, for example, not enough printers for Denmark yet too many printers for Slovenia, without any way to convert Slovenian printers into Danish ones. Six printer models and twenty-three different country configurations meant that HP had 138 versions of the finished printers. The result was frequent shortages and overstocks.
To increase product availability without increasing the retailers’ inventory carrying costs, HP changed its processes in the early 1990s, switching to a pan-European forecast and shipping generic printers to its European distribution center in the Netherlands. HP chose Holland for the reasons mentioned throughout this book: frequent transportation connections to all European destinations, advantageous costs structure, and a trained workforce. As orders came in from specific retailers for specific countries, an easily accessible side panel in the shipping carton let HP’s Dutch distribution center workers quickly configure printers according to the destination country. This postponed customization operation converted a box containing one of the six generic printer models into one of the twenty-three country-specific printers.
Of course, HP still had to forecast the pan-European demand for each printer model, but this aggregated forecast was more accurate than any one of the twenty-three country-level forecasts for each model because of risk pooling. The result was a lower level of printer inventory needed to achieve high service levels to the European customers.
Extending the same supply chain design worldwide, HP outfitted its five other regional distribution centers around the world for postponement. Using postponement, HP reduced inventories by 18 percent while maintaining service levels.10 Overall, Hewlett-Packard cut printer supply costs by 25 percent.11
Building on its success, HP also extended the postponement concept to its packaging operation. HP began shipping printers in bulk to the distribution centers and packaging them for distribution to retailers only after it received the orders. Postponing both the configuration and the packaging afforded HP several additional advantages. First, shipping costs from the plants to the distribution centers dropped by millions of dollars. Because retail printer packaging includes a lot of cushioning, sending printers in bulk without that packaging increased the shipments’ density. That meant that HP could ship 250 percent more printers in a container-load from its plants to its distribution centers. Second, storage of the bulk-packed printers required 60 percent less space in the distribution centers. Third, dealing with unpacked generic printers simplified the configuration work at the distribution centers. Fourth, HP was able to offer its customers language-specific packaging rather than multilanguage packages. In addition, the printer cartons were “fresh” when arriving at the customer location, with no soiling or scuffing from the extra handling on the long voyage across the Atlantic.
Coping with Regulatory Edicts
When drug regulators make last-minute changes during a new-product launch, manufacturers must implement those changes prior to the launch. Having the ability to deal with late changes in requirements can be the difference between being the first to the market with a generic drug … or not.
Dr. Reddy’s Laboratories Inc., one of the largest pharmaceutical companies in India, specializes in generic and over-the-counter drugs. In 2007, it contracted with UPS SCS to distribute both its generic and its over-the-counter drugs out of UPS’s Healthcare Logistics Center in Louisville, Kentucky.12 Generic drug makers live for the end of patent protection on popular medications. When a blockbuster drug goes off patent, generic drug makers swoop in to provide more affordable alternatives to the original medication. The goal is to be the first drug maker to bring a generic version to market. A delay of only a few weeks can mean the difference between being a market leader and ceding the market leadership to competitors. Consequently, UPS accumulates the necessary inventory to be ready for the approval of the generic drug, which can take place as late as the day of the patent expiration. “Our customers expect a fulfillment blitz the moment of launch approval,” says Jeannie Dunk, UPS vice president for North American sales operations.13
One of generic drug makers’ major challenges is the regulatory requirement to implement any last-minute labeling changes required by the FDA. These governmental mandates sometimes call for relabeling of already produced, labeled, and warehoused drugs before they can be shipped to market. When the FDA requires a change to the label, UPS now handles the relabeling task instead of shipping the drugs back to Dr. Reddy’s for relabeling, which saves weeks. UPS workers pull the affected stock, strip the old labels, apply corrected labels, and restock the goods. Leveraging the large healthcare workforce of the UPS SCS Louisville campus enables the company to conduct the relabeling operation over a weekend with “all hands on deck” using qualified workers from throughout its healthcare logistics operations in Louisville.
Although relabeling the medications seems like a simple job, the FDA’s stringent regulations on the handling of pharmaceuticals mean that UPS had to be licensed by the FDA as a repacker/relabeler. To this end, UPS trains its workers in the healthcare industry’s current good manufacturing practice (CGMP)14 and operates a 21 CFR Part 11 validated warehouse management system (WMS).15
The postponement activities described in this chapter include traditional manufacturing steps that are being outsourced to logistics companies—typically in logistics or manufacturing clusters. They all include customization of the finished product. A different type of value-added activity takes place upstream in the supply chain—again involving activities traditionally performed by manufacturers. These types of activities lead to the formation of industrial clusters—driven by logistics needs and including many logistics service providers—around large original equipment manufacturers (OEMs), such as automotive manufacturers. The OEMs attract their suppliers because they operate a lean manufacturing and supply chain discipline. The OEMs require the suppliers to deliver the parts or subassemblies right into the production line (as opposed to the stock room), just-in-sequence of the production schedule and just-in-time. To achieve this precision, many of these suppliers have located in proximity to the automotive plants they are feeding, creating a cluster in the process.
ARD Logistics delivers harnesses manufactured by Delphi Packard in Juarez, Mexico to the Mercedes auto manufacturing plant near Tuscaloosa, Alabama. There, Mercedes builds the M-Class sport utility vehicle, the R-Class crossover vehicle, and the GLK-Class luxury sport utility vehicle. The ARD warehouse, situated next to the Mercedes plant, receives the harnesses, each of which is built for a specific automobile. ARD temporarily stores the harnesses and then sequences them for delivery to the plant according to Mercedes’ production schedule.16 This allows the Mercedes plant to delay the decision regarding which harnesses should come to the plant when, until the exact sequence of building the cars is finalized.
An example of delayed manufacturing is DHL’s support for the Audi Neckarsulm assembly plant in Germany. Exactly 300 minutes before an Audi A6 gets to the point on the production line where the four doors have to be attached to a vehicle, an order for that vehicle’s door side panels is printed in DHL’s Offenau facility, 5.8 kilometers away.17 In less than five minutes, DHL assembles the correct set of door side panels, going through laminating, punching, welding, screwing and final inspection. DHL loads the panels into special containers and every 90 minutes a truck picks up twelve containers and dispatches them to Neckarsulm for the nine-minute drive. Each truck must hit a ten-minute time window to deliver its correctly sequenced products just in time. Note that each door side panel includes about 100 components, and there are 7,000 configurations possible for the door panels. In 2011, Audi Neckarsulm produced 700 vehicles a day, requiring 2,800 door side panels daily.
So, instead of just sending material to the Audi plant, DHL assembles the door panels from its warehouse inventory, sequences it according to the production schedule, and delivers it just in time to the plant. Such value-added activities allow Audi to specify the type of door panel it requires only five hours before the doors are attached to a specific automobile on the production line, helping Audi reduce inventory carrying costs and reduce the complexity it has to deal with at the plant.
Over time, logistics clusters attract work that requires higher levels of skills than traditional logistics activities. The first-order effect of such activities is increasing employment of higher-skill workers with their higher salaries. The second-order effect, attracting new logistics-intensive manufacturers, is discussed in the last section of this chapter.
Technology retailers face a significant problem with new product returns. Consumers return about 11 percent to 20 percent of purchases of consumer electronics such as cell phones, laptops, computers, media players, TVs, and the like. When Accenture studied the reason for these returns, it found that very few of the returns were true product defects.18 In 68 percent of cases, consumers returned items as the result of a mismatch of expectations—the device was too hard to set up or didn’t work the way the consumer expected. Buyer’s remorse struck another 27 percent of the consumers who brought goods back for no other reason than regret. Accenture found that only about 5 percent of return products had a true defect. Ninety-five percent of the returns could be resold.
Retailers or manufacturers can recover much of the value of new product returns by refurbishing the goods. This entails shipping the returned item to a convenient central location where technicians perform tasks such as removing any customer data or apps; resetting the software to factory condition; testing the device for any faults; repairing the device if needed; cleaning and polishing the case and display; replacing any scratched body components; repackaging and ensuring the box contains all the manuals, power bricks, and accessories; and adding the manufacturer’s “refurbished” label. A logistics cluster provides a natural location for repair and refurbishment because it is centralized and it enjoys high-quality transportation services. Furthermore, the logistics company providing the service may already be engaged in the distribution of the new products. Accordingly, it already has relationships and processes in place for coordination with the manufacturer and the retailers and there is no need for a special set of processes for the refurbished products. Finally, the refurbished products can be distributed with the new ones, obviating again the need for a specialized distribution operation for refurbished products.
Dave Lyon, director of operations at ATC in AllianceTexas Logistics Park, walked me through ATC’s cell phone repair operations in the park. One of the key tests for assessing a cell phone’s functionality uses sophisticated electronics connected to an antenna built inside a special shielded box. The electronics and the box mimic a cell phone tower. A specially trained technician puts the phone inside the box and runs a test that attempts to communicate with the phone inside the box in order to test the multiple transmitters and receivers of the phone. The technician then interprets the results—testing whether the radio side of the phone is functioning normally or otherwise isolating the deficient part of the phone. “What we’re trying to do is to very quickly determine, ‘Is there really a problem with that phone?’” Lyon explained. Value-added activities like repair operations require specialized skills and equipment. Many of the electronics technicians doing repair and refurbishing services in these clusters have two-year associate degrees or other vocational training beyond high school.
Similarly, Flextronics’ Memphis Logistics Center diagnoses and repairs 1,500–2,000 laptops for Lenovo and other manufacturers every night, according to Denise Jack, director of operations at Flextronics Global Services. Flextronics’ operations in Memphis include “standard” distribution services for customers such as Kodak—taking product manufactured in Asia, holding it in the warehouse and then sending it, as required, to retailers’ (such as Best Buy or Walmart) distribution centers. (In case of late arrivals, Flextronics may send the product directly to stores.) The diagnostics and repair services, however, rely on both FedEx and UPS services in Memphis to get the products to the facility and distribute them back to customers. Jack added: “The business that we currently do in Memphis started as a laptop repair depot for Apple laptops. The users send their laptops to our facility, we repair them same day and ship them out that night, through FedEx.” Flextronics provides similar services to Kodak out of its Venray, Netherlands, distribution center for Kodak’s Europe, Africa, and Middle East business.
The same reasoning works for Neptune Lines, a Miami-based forwarder with operations in Panama’s Colón Free Zone, albeit for much larger pieces of equipment than high-tech consumer gadgets. With proper maintenance, heavy construction equipment can last for decades. Caterpillar’s second-hand equipment division buys used Caterpillar equipment, refurbishes it, and resells it. In the past, Caterpillar temporarily stored the used equipment in Panama, typically for several months. When Caterpillar got an order and knew exactly what the customer required, it would hire Neptune Lines to manage the shipment of the equipment to Miami for refurbishment and then ship the equipment to the customer.
Sitting in the Colón Free Zone office of Manzanillo International Terminal, on the Atlantic coast of Panama, overlooking stacks of containers and long queues of trucks entering the port, I discussed with Juan Carlos Croston, its vice president of marketing, several aspects of the Colón Free Zone operations. At one point in the conversation, he mentioned that Neptune Lines saw an opportunity to provide value-added services to Caterpillar, transforming itself in the process. Neptune told Caterpillar, “If you are sitting here for two months, taking this to Miami, why don’t you do the refurbishing in Panama?” Caterpillar agreed. Instead of moving the heavy equipment from Panama to Miami and then from Miami to the buyer’s location, Neptune Lines would refurbish the equipment in Panama and then make a single move directly from Panama to the customer’s location.
Providing this value-added service required a significant investment by Neptune Lines in Colón. Training the mechanics, buying the tools needed to refurbish Caterpillar equipment, and getting certified by Caterpillar took ten months. But the investment paid off. Soon, the company was refurbishing hundreds of those big pieces of equipment annually.
“But,” Croston added, “the story didn’t end there.” Caterpillar’s competitor, Komatsu, noticed this and asked Neptune Lines to replicate the same service for them. As of 2011, Neptune handles 5,000 pieces of equipment per year on behalf of the two equipment makers. Komatsu shut down its operations in Miami and Chile and consolidated them in Panama. The arrangement works well for the equipment makers, the logistics service provider, and Panama. Neptune Lines makes more money by refurbishing the equipment and getting closer to its customers; the equipment makers pay less in transportation by skipping the move from storage to a refurbishment center; and the region—in this case Panama—gets more high-paying mechanical equipment repairs jobs requiring specialized skills.
Caterpillar, for its part, did not object to Neptune’s relationship with its competitor. Daniel Stanton, a distribution research consultant with Caterpillar Logistics Inc., wrote in response to my email about the subject: “The answer probably is that we all benefit from the freedom in the relationship. The investments that our suppliers make in training and equipment to support our needs are more economical if they can be spread across other customers, too.” He then added, “We share many common logistics providers with our competitors. For example, one of our heavy-haul carriers has a shipping yard across the street from my office, and it is quite common to see competitors’ equipment there, side-by-side with Cat machines.” The phenomenon of a supplier serving several competing customers is unique neither to the heavy equipment business nor to logistics services. It is common, for example, in the high-tech industry where large contract manufacturers build products for many competing brand owners.
Operations such as ATC’s cell phone repairs in AllianceTexas, Flextronics’s laptop repairs in Memphis, UPS Supply Chain Solutions for Toshiba computer repairs in Louisville (described in chapter 4), and Neptune Lines’ heavy equipment repair in Panama, provide another important economic benefit to the local economy. The availability of a technically trained workforce in the area can attract other companies needing technical skill, leading to more high paying jobs and a positive feedback loop for the cluster.
So far, this chapter discussed only “behind the scenes” value-added activities. In the preceding examples, the skilled workers in a value-added fulfillment center might handle the merchandise or returned items, but they don’t interact directly with the customer. Some logistics providers, however, go well beyond these less visible services.
Customer-facing value-added services are a natural follow-on to warranty repair services offered by advanced logistics service providers (such as UPS and Exel) and contract manufacturers (such as Jabil and Flextronics). For example, UPS described how a laptop that is covered by the manufacturer’s warranty might arrive at their repair facility in Louisville, but the repair technician might find unambiguous evidence of situations that would void the warranty. These include Starbucks latte residue inside the keyboard, customer modifications inside the case, or outright damage from being dropped.
The simplest option, in cases of abuse, is to refuse service and ship the damaged product back as “out of warranty.” Although contractually defensible, it is certainly not the best option for anyone. Instead, UPS’s client (the brand owner) authorizes UPS to call the consumer on its behalf, explain what the repair technician uncovered, and offer to fix the item for an appropriate fee. Often, the consumer understands why the repair isn’t covered and pays for the repair. Offering such customer service adds value for everyone—consumers get their products repaired, the logistics provider earns repair revenues, and the brand owner gains a reputation for better service.
Taking on such value-added service, which is a natural extension of repair services, requires staffing by customer service representatives with technical know-how and problem-solving ability, as well as appropriate telephone etiquette.
One doesn’t expect to find a doctor in the middle of a warehouse. But online retailing allows home delivery of prescription orders to be shipped directly from the warehouse instead of through retail pickup. UPS also fulfills prescriptions19 directly to consumers. This service requires a pharmacy within the warehouse, staffed with professional pharmacists. Moreover, because the United States has a state-by-state approach to fulfilling prescriptions, any company that wants to dispense prescriptions through home delivery to all fifty states must have the licenses required in every one of the fifty states. Although some states have reciprocal relationships (e.g., a pharmacist licensed in Florida can readily get a license in Arizona20), enough states have their own idiosyncratic licensing requirements, tests, and application processes that no single pharmacist can cover the entire county. To this end, UPS SCS Healthcare Division employs more than twenty pharmacists in its Louisville campus to ensure that the company always has the required licensed professionals in its fulfillment centers to distribute prescription orders in all fifty states.
Becoming a pharmacist requires at least six years of college (to get a doctorate in pharmacy), multiple rotations of clinical experience, a professional examination, a state license, and continuing education. Pharmacists earn21 on the order of three times the salary of hourly warehouse workers.22
Logistics clusters attract other nonlogistics businesses in three ways. First, suppliers of companies conducting logistics operations are attracted to the cluster in order to be physically next to their customers. This phenomenon is not unique to logistics clusters and is evident in many other industrial clusters. The second way in which logistics clusters attract other businesses, particularly manufacturers, is by serving as “infrastructure” that can help these companies get raw material, receive inbound parts, and distribute the finished products to their customers. In both cases, the logistics cluster contributes, over time, to the creation of high-paying jobs in various industries. Third, logistics clusters are a fertile ground for forming new logistics-dependent businesses.
Suppliers to logistics firms in a cluster include both “direct” suppliers, who service the transportation and warehousing industry, and “indirect” suppliers, who service value-added activities performed in the cluster.
Conveyance Repair and Maintenance
Although emergency repairs can happen anywhere, carriers can defer many types of conveyance repairs and maintenance tasks until the conveyance reaches a convenient location. Conveyances can have non-emergency repairs, such as when an auxiliary generator on a ship isn’t working right, a hydraulic cylinder leaks a little oil, or one of the radios breaks down. These breakdowns don’t prevent the conveyance from completing a delivery but motivate corrective actions when the conveyance arrives at a depot. Conveyances also have a wide range of periodic maintenance activities such as oil changes, belt replacement, bearing regreasing, engine refurbishment, repainting, or mandatory reinspections to maintain certification.
Much like a NASCAR pit stop, the carrier wants its conveyance to get in and get out in the shortest time possible. Ideally, carriers want to repair conveyances en route between revenue-generating jobs and to minimize the time that the carrier can’t use the conveyance. If possible, carriers prefer to prearrange for minor repairs and maintenance to take place during loading and unloading operations when the vehicle is already at a port, an airport, or another terminal location. This means that the best sites for repairs will be cluster locations—places with a high density of conveyance activities that attract both scope and scale of repair service companies. For example, Singapore has some 100 companies offering a wide range of ship repair services that include gearbox repair, hydraulics, engine oil systems, desalination plants, HVAC, and rigging.23
When a logistics cluster location becomes a hub of minor maintenance and repair activities, it is a short step to providing full-service maintenance operations—those requiring pulling vehicles from service and, in the case of ocean-going ships, literally pulling them from the sea. Removing the ship from the water enables crucial services such as cleaning the entire hull, repainting, and repairing damage or wear of underwater parts of the vessel, such as hull panels, propellers, rudders, and bow thrusters. Dry docks also enable a thorough inspection of the ship by a surveyor from a classification society to certify the ongoing seaworthiness of the vessel. Singapore’s largest dry dock at the Jurong Shipyard can handle ultra large crude carriers (ULCCs) of up to 500,000 dead weight tons.
As these repair and maintenance operations develop and increase in their scope of services, they employ high-level technical talent, including marine engineers, mechanical engineers, factory-authorized repair technicians, and a highly skilled workforce comprised of welders, mechanics, and electricians.
Adding Value-Added Suppliers
Visit any distribution hub and you’ll find packaging suppliers—companies that provide pallets, crates, cardboard boxes, plastic wrap, cushioning materials, packing tape, and the like. With the rise of value-added activities comes a rising volume of business with suppliers who support those value-added activities.
For example, retail displays call for more than just plain cardboard. Retail displays require full-color graphics on high-quality glossy stock instead of brown corrugated cardboard. Moreover, retail displays need extensive engineering to design the intricate cuts and folds that make an attractive display and can hold hundreds of pounds of product. Such designs require significantly more skill and equipment than does assembling standard cardboard boxes. A logistics cluster with sufficient volume attracts new suppliers and induces local packaging suppliers to upgrade skills and equipment to meet the requirements of value-added distribution activities. The need for last-minute production of displays resulting from a production launch or a last-minute promotional surge means that shippers will prefer local production of the displays. A sampling of the dozens of display suppliers in the Chicago logistics cluster include: Joliet Pattern (retail signage, display graphics, merchandising kiosks), Rapid-Pac (packing supplies distributor), Rose Laboratories (contract packaging and assembly of creams and liquid products), and Advanced Packaging Concepts (custom-manufacturer of foam, cardboard, and wood packaging, boxing, and crating solutions).
Another example of this phenomenon is the move of Sealed Air Corporation to the PLAZA logistics park in Zaragoza (see p. 16 in chapter 1). Sealed Air developed the Cryovac system to help preserve Caladero’s fish freshness during the distribution process from Zaragoza. Its plant is located right next to the Caladero facility, allowing for coordination and the development of new and improved systems to seal in freshness.
Specialized Labor for Specialized Tasks
Logistics clusters can attract some unexpected types of specialized workers, such as photographers and photo editors. Zappos.com, the online shoe and apparel retailer, located its fulfillment center in Shepherdsville, Kentucky, just down the road from the UPS hub—a fact made obvious by the large number of Zappos boxes noticeable every night to anybody touring the UPS sorting facility. Zappos sells a staggering 116,932 styles of shoes and other apparel across 1,265 brands.24
Before Zappos.com can sell a product, it needs a high-quality photo of the product for its Web site. The manufacturers’ photos don’t suffice because they aren’t consistent across brands, and Zappos requires that the photos on the Web site exactly match the items in the store and can be easily compared across brands. This means that Zappos shoots its own photos and product description videos. The most efficient location for Zappos to produce high-quality product shots is in the Shepherdsville fulfillment center. When a new style of shoe arrives in the facility, Zappos pulls a sample and creates the images and video for the Web site. This is accomplished by two shifts of photographers, photographers’ assistants, editors, and the like. Every day, the photo department gets a first crack at incoming new products. In November 2010, the company celebrated its 50,000th product description video.25
One of the processes feeding the growth of all industrial clusters is the movement of suppliers into the cluster to better serve their customers. This is also the case with logistics clusters. Both the Dallas/Ft. Worth and the Chicago logistics clusters include distribution centers of consumer goods suppliers, such as LEGO, Clorox, and General Mills. The suppliers serve these clusters’ large distribution centers of retailers, such as Walmart and United Grocers. The proximity affords these companies not only the general advantages of close supplier-customer relationships, but it also minimizes the cost of the physical products hand-offs between the manufacturer and the retailer. Describing the suppliers and retailers, Vann Cunningham, assistant vice president for economic development at the BNSF Railway Company said, “Colocating offers them some significant advantages, both in terms of cost sufficiency, and also control over their supply chain. It reduces the risk and reduces their cost.”
But the colocation in logistics clusters has a further effect. If a logistics cluster becomes renowned for certain combinations of storage, transportation, and value-added services, then the cluster may attract a concentration of companies from within a particular industry who all benefit from that mix of services. Furthermore, those companies, in many cases, nucleate a local industrial cluster within the logistics cluster.
Rotterdam Car Distribution
Brittanniëhaven on the south-central part of the Rotterdam port region illustrates this cluster-in-cluster effect. Drive past Brittanniëhaven on the A15 highway near Rozemburg, and you might be excused for thinking that you’ve found the world’s largest car dealer. Tens of thousands of brand-new cars are parked row-after-row in tight diagonal formations. Groups of gray luxury sedans, white minivans, multicolored hatchbacks, and numerous makes and models sit waiting for buyers. Yet car buyers never come to this lot because all of these cars are destined for shipment elsewhere.
Brittanniëhaven is the center of a subcluster called the Rotterdam Car Center, dedicated to handling new cars. Massive, specialized Pure Car/Truck Carrier (PCTC) ships bring the cars to Rotterdam from overseas car makers. The tall boxy ships are like floating twelve-level parking garages holding 4,000 to 7,000 cars each. Cars are driven onto the ship at the automakers’ ports in Asia and driven off at Rotterdam. From Rotterdam, the cars may go to other European countries via a second, smaller PCTC ship, a short-sea freighter, a barge up the Rhine, a rail-car carrier, or be loaded onto a car transport semitrailer.
Of the some 300,000 cars that land in Rotterdam every year, 80 percent receive value-added treatments to prepare the cars for sale in specific countries. Value-added activities include technical modifications, predelivery inspection, damage inspection, waxing and dewaxing, installation of accessories, and preparation of demonstration models. The area also handles the refurbishment of 15,000 used cars (mostly from car-rental fleets) and 15,000 excavators per year.26 The value of this subcluster can be evident in Mazda’s contract with the Rotterdam Car Center. Every year, 50,000 Mazda cars destined for England actually sail past the UK coast to come to the wrong side of the North Sea for final processing before taking a second short trip back to sea and to the UK.
Rotterdam includes two other large subclusters dependent on the port’s extensive logistics. First, Rotterdam has a massive petroleum and petrochemical cluster associated with the eight Petroleumhaven ports that line the southern bank of the Maas from the port’s western entrance (see p. 62 in chapter 3). This subcluster goes far beyond the energy infrastructure required to support the carriers that call on Rotterdam. The area includes more than forty chemical and petrochemical companies and three industrial gas manufacturers, generating more than 600 chemical products derived from oil and other bulk materials brought to the port.27 A second major subcluster is Merwehaven (Fruitport) on the northeastern end of the port, which handles fruit, vegetables, and juices. The Fruitport subcluster includes thirty million square feet of conventional storage, 600,000 air-conditioned pallet spaces, and 250,000 cold-storage pallet spaces.28 Fruitport has some 200 importers and exporters that trade and distribute fruit, vegetables, and fruit juices. In total, Merwehaven handles about one million tons of produce annually.29
Shared Assets Cement Relations in a Subcluster
On the other side of the world, Singapore’s cement industry illustrates how tightly shared logistical assets can form the basis for an industrial subcluster. Large bulk carriers filled with clinker—nodules of the furnace-treated mineral amalgam that is the key ingredient in cement—arrive in Singapore’s Jurong Port and offload their cargo into a shared conveyor system that carries the clinker toward the storage silos of six of Singapore’s eight cement companies. “They’re all using a common user facility, comprised in silos, all linked up together with a common distribution system,” Lek Yuan Leng, vice president corporate development of Jurong Port told me. “It’s then centrally distributed and allocated to all the six different cement companies.” In total, the system handles about 3.5 million tons a year, which represents about 80 percent to 90 percent of the country’s cement supply.
This subcluster arose in the 1960s. Initially, Singapore’s cement companies dotted the island. But given Singapore’s limited land area, the Singaporean government’s Economic Development Board wanted to intensify land use. Instead of each cement maker having its own bulk carrier berth, the government offered to build a single berth at Jurong Port as well as a covered conveyor belt system to distribute the incoming clinker to the silos. The individual cement companies built and own their own storage silos. “There is a lot of efficiency being derived by having a model like what we have, in the long run,” said Robert Yap, chairman and CEO of the YCH Group, when we discussed the effects of logistics clusters in Singapore. The result is that “Jurong Port actually has one of the world’s largest common-user cement terminals,” Jurong’s Leng added. “Ultimately, it’s very clear that you get economies of scale, by clustering together, or by banding together, I think that’s why they do this,” concluded Yap.
A Logistics-Dependent Healthcare Cluster
As a cluster develops, it becomes known for particular types of logistics, be it air connections in Memphis and Louisville, rail hubs in Chicago and Kansas City, or international maritime in Rotterdam and Singapore. Because companies from the same industry tend to have similar logistics needs, they tend to be attracted to the same logistics clusters. The result is industrial subclusters within the logistics cluster. Dexter Muller, senior vice president of community development at the Memphis Chamber of Commerce, told me that Memphis is the second largest city in the country for manufacturing and distribution of orthopedic devices. The area provides a home for three of the leading OEMs of artificial joints: Medtronic’s Spinal and Biologics division, Smith & Nephew’s Orthopedics division, and Wright Medical. All three companies share a similar need for ultrafast airfreight (see also the discussion of flexibility on p. 105 in chapter 4). When I asked Rob Varner, senior director of US distribution operations at Medtronic, what he thought about having his competitors in his own backyard, he said he wasn’t bothered. In fact, he saw it as a positive factor because the presence of the three big companies attracted more of Medtronic’s suppliers to Memphis.
The logistical rationale for the location gets a much larger economic ball rolling. “More and more OEMs are setting up shop here because there’s economy of scale and enough volume here for them to do that,” Varner said. The Greater Memphis Chamber works with local medical device companies to attract other medical device companies and suppliers to come to Memphis. “They know the industry better than I do, so they can pinpoint companies that would make sense to have across the street from them versus across the country,” said Leigh Anne Downes, director of life science business development at the Memphis Chamber.30 While Memphis is a significant biomedical cluster, it’s a biomedical cluster because it’s a logistics cluster. Memphis’s central location, FedEx air hub, and other logistics services create the critical delivery time performance advantage needed by this industry.
A similar phenomenon occurred in Indianapolis. The region features some 1,500 logistics and related services companies, including FedEx, UPS, and CNH Logistics, as well as distribution centers for Amazon.com, Hewlett-Packard, CVS Caremark, Brightpoint, and many others. With four intersecting interstate highways, a central location in the US Midwest, good rail connections, and a leading airport, Indianapolis became a natural logistics cluster. Taking advantage of this connectivity and the logistics services available in Indianapolis was one of the attractions for many life science companies to move to the area, including industry giants like Eli Lilly and Co., WellPoint Inc., Dow AgroSciences LLC, Cook Group, Pfizer, and Roche Diagnostics. The cluster grew to $69 billion in total annual revenue31 and, just as important, attracted a $140 million venture capital initiative dedicated to Indiana’s life science companies.
New Nonlogistics Businesses
In addition to spawning new logistics companies (see chapter 9), logistics clusters also support the development of new companies in industrial subclusters that form in the logistics cluster. A case in point is the entrepreneurial activity in the biomedical cluster of surgical orthopedic implants and instruments in Memphis.32 These new companies extend the industrial subcluster within the logistics cluster in three directions: becoming new suppliers to the subcluster’s OEMs; offering products that complement the subcluster’s OEMs; and becoming new OEMs, too.
An example of a new supplier is Y&W Technologies LLC. Willis Yates was a twenty-seven-year veteran of Smith & Nephew Plc (a maker of hip and knee implants with a facility in Memphis), when he struck out on his own to form Y&W in 2000 in Memphis. Y&W specializes in plating medical instruments by applying an advanced chromium surface treatment that dramatically improves the performance and increases the longevity of surgical instruments. In addition, Y&W provides high-tech treatments such as electro-polishing, titanium anodizing, surface passivation, gold plating, and laser marking. In the decade since its founding, Y&W has expanded in scale and scope. Y&W works for all three of the big Memphis medical device makers: Medtronic Inc., Smith & Nephew Plc, and Wright Medical Group Inc.
Big River is another Memphis startup that supplies complementary instruments used to insert the OEM’s medical implants and devices during surgery. “These companies [OEMs] make their money off of implants, and with every implant, there’s a suite of instruments that facilitate the device,” said Tom Roehm, CEO of Big River. “Those have to be replenished and that’s what we do.”33 Like Y&W, Big River does business with all three major device companies in Memphis. The company had fifteen employees in 2010.
The presence of so many local suppliers enables the big three OEMs to shorten their supply chains. When Y&W’s Yates noticed that Smith & Nephew was sending its manufactured products to “four or five different places” for additional fabrication services, he decided to offer a one-stop shop for these services. Ted Davis, senior vice president of business development for Wright Medical, commented on the symbiotic relationships between big companies and entrepreneurial start-ups in the Memphis medical cluster. He noted that the more small suppliers form in Memphis, the more attractive the area is for any medical device company looking to relocate. At the same time, the larger companies in the area can contribute to the early and sustained growth of these smaller companies.34
The combination of recruited companies and start-ups pleases Medtronic. “Now we’re getting the benefit of having more local suppliers available to us which, if we were on our own, we wouldn’t have quite as much of that as we do,” Varner said.