Watching Platforma Logística de Zaragoza (PLAZA) in Spain transform from a quiet farmland to a bustling logistics park gave me an appreciation for all the different infrastructures required by logistics clusters. The large scale and sophistication of assets such as ports, airports, warehouses, roads, railroad tracks, and canals, implies the need for large investments, careful stewardship, and astute management.
Supply chain operations generally handle three types of flows: (i) the physical flow of products moving downstream from suppliers to manufacturers to retailers, as well as the reverse flow of unsold goods, returns, and reuse, (ii) information flow, including specifications and orders moving upstream and status messages flowing downstream, and (iii) the cash flow associated with supply chain transactions and operations. Consequently, logistics clusters rely on information and financial infrastructures in addition to the physical infrastructure. Because logistics clusters are typically also transportation hubs, they require a robust energy infrastructure, too, to power conveyances and cluster operations.
Physical infrastructure dominates logistics investments, amounting to trillions of dollars’ worth of capital assets worldwide for conveyances, buildings, land improvements, roads, ports, airports, and associated management and control infrastructure. Although logistics certainly leverages natural resources such as rivers, harbors, and oceans, even these natural capital assets require investment in development and improvements to handle high volumes of freight and massive conveyances.
To take just one example, UPS’s balance sheet1 includes $1 billion in land, $6 billion in buildings and improvements, $6.6 billion in plant equipment, and nearly $20 billion in the company’s 225 aircraft and nearly 100,000 delivery vehicles.2 Yet these assets represent a tiny fraction of the physical infrastructure used daily by UPS. UPS could not deliver freight at high speed and low cost without an expansive milieu of physical infrastructure including the roads traveled by its brown trucks, the hundreds of airports visited by its brown-tail airplanes, and the railroads that handle about 10 percent of UPS’s ground volume as intermodal shipments.
Several authors have developed a variety of accessibility metrics to capture the attractiveness of certain regions in terms of egress and ingress.3 Such metrics can be helpful for companies contemplating locations of distribution centers and regional authorities assessing either their competitive position vis-à-vis neighboring regions or the need for further network investment.
The AllianceTexas development4 illustrates many of the infrastructural features of a modern-day logistics park. Alliance is a 17,000-acre master-planned development, created by Hillwood Development Company LLC, a Perot company, just north of the Dallas–Ft. Worth Metroplex. As of 2011, companies and developers had invested $7.3 billion, and the park was only 40 percent complete.5 Much of the AllianceTexas development consists of a series of commercial parks anchored by the Alliance Global Logistics Hub, where distribution centers are operated by two types of shippers: (i) beneficial freight owners (BFOs), including manufacturers, distributors and retailers who are operating their own logistics facilities and (ii) logistics service providers who offer warehousing, distribution, transportation, and many value-added services to the their customers (who are BFOs). As of 2011, Alliance had 31.2 million square feet of commercial space in use by more than 260 companies.
To connect all the warehouses and distribution centers to both inbound and outbound product flows, Alliance offers multiple transportation modes for the park’s residents. The first is roadways. Interstate 35 bisects Alliance, giving park members ready access to the freeway. Other major east–west highways (Interstates 20, 30, and 40) intersect nearby to give the park good access to the entire south-central United States. Approximately forty-eight million people live within one day’s trucking from Alliance, and 111 million live within two days.6
Alliance’s second mode is embodied in BNSF’s Alliance Intermodal Facility, which covers several hundred acres with train tracks, an intermodal terminal, and acres upon acres of container storage yards. As described by Vann Cunningham of BNSF, the company’s double-track main line passes through the facility and fans out into 40 parallel tracks of classification yard. The intermodal terminal consists of four widely spaced, one-mile-long tracks on the eastern side of the facility, where trains are staged and containers are lifted from and onto the trains. BNSF handles about 600,000 lifts per year at Alliance, but it has the capacity to handle two million.7 A 1,600-acre section of Alliance, immediately west of the BNSF facility, is devoted to companies requiring direct access to rail via a rail spur.8 The Union Pacific Railroad also provides direct access to Alliance, giving park tenants the opportunity for using a second Class I railroad.
Third, Alliance has an airport dedicated to cargo operations. The developers put the airport in a central location in the Alliance Park, with direct access to the interstate, which minimizes drayage distances and times. The airport’s on-site cargo-handling building uses a cross-dock design that lets freight flow between aircraft—including the largest wide-body freighters—on one side and trucks on the other side. On-site US Customs clearance features a centralized examination station that minimizes delays for foreign air-cargo.9 Currently, FedEx uses Alliance as a regional sorting hub. Lee Roberts, a FedEx senior manager of the FedEx Southwest Regional Hub Operations, told me that Alliance is also used by FedEx as an overflow hub facility, backing up both the Memphis and the Indianapolis hubs.
“Professional Driver on Closed Course”
A standard twenty-foot ocean shipping container has a maximum permitted weight of as much as 24,000 kg (52,900 pounds), and a forty-foot container, which is the most common container size used in international trade, can weigh 30,480 kilograms (67,200 pounds).10 Ocean-going vessels and railroads can readily handle these maximum-weight containers, but trucking companies in most countries cannot, as a result of legal weight limits imposed in order to reduce road damage caused by heavy loads. To a first approximation, the maximum legal weight for a tractor trailer truck on US highways is 80,000 pounds, but that limit includes the tractor, chassis, and container shell, thus reducing the maximum permitted net cargo weight to about 39,000 to 44,000 pounds.11
These conflicting maximum limits for ocean and rail containers vs. trucking put shippers of heavy containers in a bind. A shipper can either subdivide the load across more shipping containers at the source, or it can transfer the load of a single container to two containers12 (“transload”) at the destination port or rail yard. Both options add costs in extra containers, handling, and drayage. They also introduce delays and possible damages. But there’s a third option: using private roads with higher weight limits to haul heavy containers from the rail yard to a distribution center.
Logistics park operators, such as CenterPoint,13 the largest industrial real estate developer in metropolitan Chicago, circumvent road weight restrictions to the benefit of the park’s tenants. In CenterPoint Intermodal Center (CIC), south of Chicago, the company designed and built the private roads in the park to higher standards than the public roadways, so they can take the heavy loads and not be subject to cargo weight restrictions. Consequently, a heavy container can be put onto a vessel in China, shipped to a US port, transferred to rail car, and delivered to the BNSF rail terminal in CIC. There, it can be drayed by truck directly to the floor of the Walmart distribution center, despite the fact that it exceeds the US public road weight limit. By comparison, a distribution center just outside the park may have to transload the container in the port or in the destination rail yard. Other parks, such as AllianceTexas,14 have similar goals yet somewhat different approaches. Alliance negotiated an agreement with the local government to maintain park-area public roadways used by heavy loads and repair any resulting damage.
Developers and park operators such as Hillwood, CenterPoint, Prologis, the Allen Group, and Watson play a crucial role in the development and operation of local infrastructure. In addition to the site selection, land acquisition, layout design, the initial government-permitting interface, and the extension of public utilities, some developers build warehouse or industrial space speculatively while others leave the land undeveloped until a customer (either a shipper or a logistics service provider) specifies a need. The developer operating the logistics park might have a quasi-governmental role in defining covenants within the park, managing an association of the park’s occupants, and adjudicating minor disputes.
Park operators also change the parks’ functionality to match changing demand. For example, when Watson Land Company began building industrial parks in the Los Angeles area in the 1960s, 75 percent of the park’s tenants were manufacturers. By the early twenty-first century, however, 90 percent of the tenants were logistics service providers and shippers conducting logistics and distribution-related operations. Starting in 2005, Watson renovated buildings and park facilities to support the changing patterns of use. The company changed to logistics-friendly rectangular building layouts with long walls of truck dock doors and increased the turning radius of entryways to improve maneuvering space for large trucks.
Rotterdam exemplifies the types of physical infrastructure needed by major seaport logistics clusters. Because water covers one-third of the 10,500 hectares of the port of Rotterdam, wet infrastructure comprises a large portion of the port.15 Although the Rhine and Maas Rivers were deep enough for the early ocean-going vessels in the era of sail, these natural waterways could never handle the massive ships of today. The largest container ships ride 15 meters (49 feet) deep in the water, and the largest supertankers and bulk freighters extend even further beneath the waves. To answer the challenge of increasing size and depth of vessels, the Dutch transformed a natural geography of shifting oxbowed river channels and ever-changing flooded landscapes into an artificial geographic infrastructure of straight deep channels, dry industrial parks, and flood-preventing dikes.
Some aspects of Rotterdam’s physical infrastructure serve to tame the forces of nature and secure the expensive physical assets of the port against storms and flooding. The Maeslant Barrier, for example, protects the main channel into Rotterdam from storm-surge—North Sea waters pushed inland by extreme winds and currents. The Barrier consists of two 240-meter-long curved doors that float in trenches on either side of the 360-meter-wide entrance to the port. Each door swings on a steel trusswork that is almost as long as the Eiffel Tower is tall.16 The 635 million euro Maeslant Barrier is just one of nine storm barriers and dams built by the Dutch over a thirty-year period to reduce the chance of flooding in key areas of the Rhine delta region.17
Nor does spending on wet infrastructure end with its construction. Restless ocean currents and river silt constantly threaten deep-water ports and channels such as Rotterdam’s. Maintenance dredging of Rotterdam’s approach channel and port totals some sixteen million cubic meters of Rhine river silt and shifting ocean sand per year.18 This annual volume of dredging is equivalent to a cube of earth, with each side equal to two and a half football fields in length. Other deepwater ports and canals have similar needs. For example, the US Army Corps of Engineers spends $10 million to $15 million every year dredging as much as three million cubic yards of material from Charleston Harbor. Port fees or taxes cover the costs of maintaining this maritime infrastructure.
The massive earth-moving efforts needed to create and maintain port infrastructure at large ports such as Rotterdam don’t stop at the sea. Whereas the seabed rises steadily to meet the sandy coast of the Netherlands, ultra-large ships need deep-water channels from the sea to reach the port. At Rotterdam, a 22-meter-deep artificial channel extends 31 nautical miles out into the ocean. Midway along this channel is a deep dredged basin almost two miles across that lets ships turn around. Other deepwater ports around the world have similar artificial undersea channels. With the inexorable increase in ship size comes the inevitable need to enhance natural harbors and channels to handle wider, longer, and deeper-draft vessels.
Similarly, the Panama Canal expansion project reflects this inevitable need to invest in larger infrastructure to serve larger ships. To ensure the canal’s continuing role in maritime commerce, the Panama Canal Authority is enlarging the waterway and building a new set of locks to enable ships larger than the 4,500 TEU capacity Panamax vessels to traverse the canal (see p. 73 in chapter 3). The expanded canal will be able to handle ships with capacity of up to about 12,000 TEUs. This expansion is crucial to the continuing central role of the Panama Canal because ship sizes have grown dramatically. (Dozens of container ships already in service and on order in 2012 are larger than this; yet the expansion will allow most of the world’s container fleet to use the canal.)
Port authorities are, in fact, logistics park operators. They develop the land-side infrastructure, typically in some form of partnership with local and national governments. They also manage the tenants of the port, the most important of which are the terminal operators who handle the vessel/port interface.
Port infrastructure consists of the quays and terminals where large ships dock to unload or load cargo. Over the centuries, the Dutch developed these quay walls to an engineering art form of interlocking plates, anchor pilings, lateral stabilizing anchors, and injected concrete grout. The result is vertical underwater walls as tall as seven-story buildings and able to withstand the slosh and wash from daily tidal currents as well as the gentle nudges of 350 meter (1,000 foot) long container ships and their 30-foot diameter, 50,000-horsepower propellers.
Rotterdam has over ninety privately operated terminals handling a wide range of cargo and ship types such as bulk liquids (35 terminals), general cargo (17 terminals), dry bulk (15 terminals), container ships (9 terminals), roll-on-roll-off ferries (7 terminals), and fruits and juices (5 terminals).19 Each of these terminals has corresponding handling equipment for transferring cargo to and from ships. For example, the nine container terminals have a total of 114 cranes for quickly unloading and loading containers.
Commercial sites fill almost half the area of the port of Rotterdam. The 5,000 hectares of development includes numerous storage areas such as container yards, tank farms, and warehouses, each with a distinct purpose and appearance. On the western end of the port, where the largest ships dock, container yards cover more than 200 hectares with tidy stacks of multicolored shipping containers. In the dry-bulk terminals, kilometer-long storage areas look like a dirty painter’s palette with the various colored piles of red iron ore, gray gravel, black coal, and other ores and raw materials.20 Large quantities of crude oil come to Rotterdam, and the port includes a substantial petrochemicals industry. Hundreds of tanks store a total of 28.4 million cubic meters of liquids.21 Several terminals offer specialized storage and handling, including forty-three warehouses with London Metals Exchange (LME) certification for the storage of metals and 750,000 square meters of cold storage for fruits and vegetables. The more than 200 privately owned and operated warehousing and storage areas create a critical inventory buffer between the multiple modes of transportation that serve the port.22
Finally, the port would not be complete without a land-based infrastructure of roadways, railways, and pipelines connecting it to the centers of the European economy. About 20 percent (2,000 hectares) of Rotterdam’s port is dedicated to roads/railways, service corridors, and residual greenways. A fractal network of capillary roads extends across the port and links each building or terminal to land-based modes of transportation. Once cargo reaches land, it travels south to the main road and rail lines, then turns east along the southern edge of the port, and exits the port area for destinations in the Netherlands, Germany, and the rest of Europe.
Zaragoza wouldn’t be the crossroads of Spain without high-capacity roads, an intermodal railroad yard, and a rail hub, as well as a cargo airport connecting it to the world’s trade flows. Similarly, clusters such as Chicago, Memphis, and the Los Angeles basin wouldn’t exist at their current scales without a branching network of multimodal connectivity. Roads, railroads, waterways, and air corridors form a crucial infrastructure network connecting logistics clusters to the diverse sources and destinations of goods.
In response to shippers’ need for high frequency service (see p. 95 in chapter 4), transportation movements often involve consolidation operations in hubs. In many cases, such hubs serve as a nucleus for the development of logistics clusters, further feeding the hubs’ growth, which, in turn, improves the transportation service into and out of the cluster. In particular, logistics clusters develop around the largest such hubs, involving major intermodal yards, ports, and airports, with large conveyance trips connecting these hubs/clusters (long trains, large vessels, and large planes).
The four million miles of roads and streets in the United States carry about 70 percent of all US inland freight (as measured by value of the freight transported) and just over 30 percent of the ton-miles hauled.23 The road transport fraction in Europe is higher, standing at 76 percent of all ton-kilometer freight movements within the EU.24
Logistics parks developers design both the parks’ roadways and their connections to outside infrastructure. For example, PLAZA’s designers laid out a grid of four-lane roadways with wide turnings so that trucks could freely move into, around, and out of the park. PLAZA’s designers also developed the connections to the local road network in addition to being instrumental in attracting an intermodal rail facility and upgrading the local airport.
Overall, US railroads invest almost $20 billion per year in capital expenditures.25 BNSF Railroad, which owns roughly one-fourth of US rail infrastructure, illustrates the scale of this investment. The railroad comprises 50,000 miles of track, 6,700 locomotives, 76,800 freight cars, and 7,700 chassis and containers.26 The company has forty intermodal facilities, including yards in large logistics parks in Chicago, Kansas City, Memphis, and Dallas/Ft. Worth. These intermodal yards attract distribution facilities of large retailers involved in international imports, as well as many other cargo interests.27
The role of rail transportation in logistics is expected to grow in the future, mainly as a result of its low cost of transportation and its lower carbon footprint, compared to trucking. US railroads have been investing in increased capacity during the last part of the twentieth century and into the twenty-first, by boosting the use of double-stacked containers, building double track routes, and even triple and quadruple tracking, allowing not only for bidirectional traffic but also enabling fast trains to pass slow ones. Based on these investments, as well as improved control systems, railroads are introducing higher-speed services that offer overnight shipping between selected points at speeds of 500 miles per day, which makes rail competitive with single-driver long-haul trucking.
Much of the growth for railroads is in intermodal services, hauling containers. To this end, their role as anchors of logistics clusters and even as coinvestors in such clusters is expected to increase.
Infrastructure for inland waters includes all the canals, harbors, and navigational aids required to allow for inland waterway shipping. The EU has some 37,000 km of navigable inland waters spanning twenty of the region’s twenty-seven nations.28 In total, some 12,600 inland freight vessels carry dry goods and bulk liquids on EU waterways.
The Netherlands and Germany alone account for 54 percent of inland cargo vessels and 77 percent of the freight moved on EU waterways, a large portion of which moves on the Rhine River and associated canals. The Dutch-German border sees 170,000 ship crossings a year carrying 160 million tons of freight.29 Both the Netherlands and Germany have infrastructure maintenance programs aimed at keeping the Rhine River, associated canals, and port estuaries in navigable condition.
Similarly, in the United States, 25,000 miles of waterways carry about 13 percent of US ton-miles.30 The US Army Corp of Engineers spends more than half of its $4.6 billion annual budget enhancing and maintaining 12,000 miles of commercially navigable channels; 257 locks; and 926 coastal, Great Lakes, and inland harbors. This includes dredging 255 million cubic yards per year to maintain the navigability of inland waters and ports.
Airports and Highways in the Sky
Fully loaded, a Boeing 747-400 freighter tops out at 875,000 pounds. Add the 180 mph take-off speed, crosswind forces, braking forces, deicing chemicals, and the slam of the occasional hard landing; and the runway surface must withstand severe punishment without cracking, buckling, spalling, sagging, or rutting. Runways for airports that handle “heavies” feature layers of high-strength concrete up to two feet thick with under-layers of clay and aggregate that spread the forces from thousands of weekly take-offs and landings. In fact, one of the main advantages of the Zaragoza freight airport was that it was built to handle the heavy B-52 strategic bombers during the Cold War (see p. 12 in chapter 1). The result was a long runway with thick pavement, able to handle the largest fully-loaded cargo planes.
The demands of logistics—24×7 reliability and capacity—mean that major airfreight carriers require multiple long runways designed to allow all-weather operation (given wind from any direction). Fred Smith moved FedEx from Little Rock to Memphis in the early days of the company, in part because of Memphis’s superior airport infrastructure. Memphis has four runways, each 9,000 to 11,000 feet long. Three runways are set in the North–South direction (36/18),31 in accordance with the prevailing winds; an additional runway, set in the East–West direction (27/09), is used when wind directions do not allow North–South operation. Advanced instrument navigation systems at the airport enable all-weather operation. Similarly, Louisville has two main North–South runways (35/17) and an additional East–West (29/11) runway.
Airports include more than just runways. Taxiways and tarmac for aircraft parking and hangar space mean millions of square feet of additional concrete and asphalt. Airfreight main sorting hubs, such as Memphis or Louisville, include multimillion square foot sorting facilities. UPS, for example, has invested more than $2.2 billion in its Louisville Worldport alone.32
As mentioned in the introduction to this chapter, supply chain management involves the movement of information and cash, in addition to physical goods. Consequently, logistics clusters are supported by sophisticated information technologies and financial services. In addition, these clusters need a robust energy infrastructure for refueling conveyances.
Supply chain operations involve the need to move money across continents, hedge for currency fluctuations, protect against default risks, and ensure that the dozens of parties involved in a single shipment all get compensated fairly and quickly. Inexpensive movement of goods requires inexpensive movement of money, too. Every delivery of physical goods may involve multiple financial transactions, in addition to the payment for the goods and services to the many parties involved. The additional transactions include tax accounting and payments; customs payments, including accounting for duty drawback and payments of countervailing duty; deductions for incomplete or damaged goods; and more. Many of these financial dealings involve foreign exchange transactions, exercising financial options, complex accounting, and other nontrivial financial activities. All of these transactions start with on-site physical movement or inspection of the goods and cannot be tracked in the virtual world unless first captured in the real world.
Local financial infrastructure and acumen support this business function. Consequently, trading activities and financial activities have grown hand-in-hand. For example, Chicago became a financial hub for commodities’ trading because it was a physical hub for commodities’ logistics.
Panama’s pools of capital and financial expertise came from its status as a tax haven. After WWII, the country enacted very strong banking secrecy laws that encouraged a multidecade influx of foreign investment. As described in chapter 7, pressure from the US government and the World Trade Organization caused Panama to weaken these laws in later years. Yet, the Panamanians retained their expertise in international financial transactions, which was an important factor in supporting the logistics activities in Panama.
The international dimension of global logistics adds a layer of financial complexity. Each trading transaction includes a multistage process by which, for example: a foreign supplier hands goods to a carrier at a foreign port; the carrier notifies the supplier’s bank that the goods are in the carrier’s hands (through the bill of lading); the supplier’s bank notifies the customer’s bank that shipment has occurred; the customer authorizes the payment through the banks to the supplier; and the carrier hands over the goods once they reach the customer’s local port. Each of these five stages involves dozens of transactional, financial, and legal details and a web of other participants such as freight forwarders, warehouse operators, and customs agents. Problems, errors, deductions, rebates, and exceptions complicate the process further. When researchers at Stanford University and TradeBeam mapped the basic process in detail, they identified 109 steps.33 Financial firms serving logistics clusters must be adept at handling these complexities. To this end, note that Singapore operates the world’s fourth largest foreign exchange trading center after London, New York, and Tokyo.34
Today’s information and communications technology contributed to the geographic decoupling of modern finance from the underlying physical business activities. Yet, many logistics clusters still include sophisticated financial services industry representation.
An information supply chain parallels each physical supply chain. Specifications, orders, required delivery dates, and various regulatory details move upstream in the supply chain—from retailers to distributors to manufacturers to suppliers and to the suppliers’ suppliers. As the items are shipped from supplier to manufacturer, or manufacturer to distributor or retailers, information about what was shipped, when it will arrive, who is transporting it, and so forth, is sent downstream. Furthermore, the transportation companies feed frequent data about current locations, times, and conditions to both the shipper and the consignee at every leg of the journey. As the shipments progress, other information elements are exchanged with customs and security authorities. Even once a shipment is delivered, the information flow continues regarding the conditions of delivery, payments, insurance claims, and more.
Companies involved in logistics and supply chain management use sophisticated information and communications technologies to plan and control their internal operations. For example, UPS Worldport in Louisville, Kentucky, processes over 400,000 packages per hour using advanced sensors and automatic computer-controlled conveyor belts (150 miles of them) while scheduling aircraft and delivery trucks in a nightly dance.35 And every FedEx package gets at least twelve scans en route from pick-up to delivery.36
To maintain its industrial strength and support its logistics cluster and its financial centers, as well as new industries such as digital media and biomedical sciences, Singapore has been undertaking major investment during the second decade of the 21st century. Its Next Generation National Infocomm Infrastructure (NGNII) plan calls for a nationwide ultra-high-speed fiber access infrastructure and a complementary pervasive wireless network creating anytime/anywhere connectivity.37 The NGNII is expected to be instrumental in enabling grid computing and accelerating its adoption in the business and commercial sector of Singapore. It will be important for many industries but particularly for the logistics industry, with its immense data flows, speed, and mobile information access requirements.
Singapore, with its multiple information and communications technology applications for managing its port and other logistics activities, is possibly the most advanced example of what a cluster can do to improve the operations of all its tenants and users. Another forward-looking example is Dinalog—the Dutch Institute for Advanced Logistics—which is funding several projects as part of its cross-chain control centers initiative.38 One demonstration project there merges the spare parts operations of multiple companies into a single coordinated activity.39 Another project focuses on coordinating home deliveries across Internet e-commerce sites to reduce the inefficiencies of independent deliveries.40 A third project seeks closed-loop coordination of forward and reverse logistics for better sustainability.41 By merging multiple supply chains, the projects can find greater economies and efficiencies than individual companies (especially smaller ones) could achieve on their own.
Other Dinalog projects seek to address more general large-scale logistics coordination challenges in a geographic context. For example, one cross-chain control center project seeks to improve distribution into cities.42 Another is looking at multimodal networks for efficiently connecting the main ports of Rotterdam and Amsterdam to the hinterlands.43 Both of these projects seek reductions in congestion and emissions.
Each project includes the collaboration of several shippers, carriers, or third-party logistics companies and one or more universities. By working with companies whose logistics operations are located in the Netherlands—ranging from Fujifilm to Marel Stork Poultry Processing—and by demonstrating innovations in cross-chain control centers, the leaders of the projects hope to prove the viability of the ideas and encourage early adopters of these innovations.44 Other aspects of Dinalog are described in chapter 8.
Logistics activities consume prodigious amounts of energy, principally in the form of fossil fuels for transportation. In a 2011 white paper, the World Economic Forum reports that about fifty-one million barrels of oil are used every day to power “the world’s cars, trucks, planes and other modes of transportation.”45 About a third of this oil is used for freight transportation.46
The largest Post-Panamax container ships burn on the order of one gallon of bunker fuel—the dark, viscous oil used to power ships—every second, or about two million gallons in a typical three-to-four week journey from Asia to Europe or America. Major ports, such as Singapore or Rotterdam, might refuel dozens of ships a day, which means delivering tens of millions of gallons of bunker fuel every day. Singapore, the biggest bunkering port in the world in terms of sales, sold an average of more than thirty-five million gallons of bunker fuel per day in 2010.47 On the other end of the speed spectrum, FedEx consumes about 3.5 million gallons of jet fuel each day48 to deliver some seven million packages.
Fill’er Up with Freight and Fuel
Efficient, large-scale energy infrastructures provide a competitive advantage for a logistics cluster. Carriers typically refuel at points where they stop to load/unload (and vice versa) because they can refuel while conducting terminal operations and avoid any added delays and costs of separate refueling stops. As a result, major logistics hubs sport significant energy infrastructure including pipelines, terminals for large crude carriers, and efficient refineries. In turn, the development of efficient fuel delivery at a hub makes that location attractive for logistics operations. For example, Anchorage and Dubai started as refueling points for airfreight but have since become logistics hubs in their own right.49
Crude Moves: The Logistics of Fuel
Pipelines provide the lowest cost per ton-mile shipped of all transportation modes and handle about one-third of the world’s oil trade (both crude oils and refined products). For example, crude oil comes to Memphis via pipelines running across the southern United States from oil fields in Texas and Oklahoma. At a riverside refinery, Valero Energy Corporation refines the oil into jet fuel, diesel, gasoline, and other petroleum products. A five-mile pipeline delivers millions of gallons of fresh jet fuel directly to the Memphis airport every week.
Although Rotterdam receives crude oil from supertankers, it distributes refined petroleum products and related chemicals via 1,500 kilometers of pipelines in the port area. Rotterdam’s massive petrochemical complex then supplies other major European pipeline systems, including the NATO-run 5,100-kilometer Central European Pipeline System (CEPS) that provides jet fuel to six international airports (Amsterdam, Liège, Brussels, Köln/Bonn, Frankfurt, and Luxembourg).
The port of Rotterdam operates an efficient network of pipelines to transport petrochemicals and gases among the companies in the port and the surrounding industrial area. One such network is operated as a joint venture between the port of Rotterdam and Vopak Chemicals EMEA B.V., called MultiCore. MultiCore operates a four-pipeline trunk system to which terminals and storage areas can connect and lease space for certain periods. By controlling various valves and pumps, MultiCore can move the material between facilities within Rotterdam. Once a shipment is complete, the origin and destination are disconnected from the main pipeline system; the used pipeline is cleaned and stands ready for the next shipment. 50
All of these pipelines represent significant amounts of investment in infrastructure. For example, a new 120-kilometer pipeline for sending petroleum products from Rotterdam to Antwerp is expected to cost in excess of €100 million.51 Private capital spending in Rotterdam by petrochemical companies averages one billion euros per year.52
As mentioned above, Singapore is the world’s largest port for buying bunker fuel. Even during the 2008–2009 recession, sales at the port of Singapore rose, attesting to its role in the global sales of bunker oil. Ship owners have been increasingly buying bunker in Singapore not only because of its efficient and inexpensive bunkering operations but also because of its reputation for integrity in the bunkering process both in terms of quality and quantity supplied. It is the only country that regulates bunkering barge operators and suppliers.
As ships stop over in Singapore for their bunker needs, they use Singapore for crew change and ship provisioning, serviced by a strong and efficient network of chandlers. According to Simon Neo, chairman of the International Bunker Industry Association, Singapore’s Maritime and Port Authority (MPA) encourages vessels to call on Singapore for refueling and ship services by minimizing and even eliminating port dues for such vessels.53
Kerosene with a Side of Ethylene
The energy infrastructure of a logistics cluster lends itself to the development of local energy-intensive and petrochemical industries. The principal logistics fuels—like bunker oil for ships, “jet A” kerosene for aircraft, or diesel fuel for trucks and trains—represent just one fraction of the components of crude oil. Crude oil consists of a mixture that spans light and heavy molecules of oil and can most economically produce many types of petroleum products simultaneously. The heaviest-weight fractions provide asphalt, tars, waxes, and lubricating oils. Medium-weight fractions provide diesel and kerosene for trucks and aircraft. Lightweight liquid fractions provide solvents and gasoline for cars. Crude oil and natural gas also provide the feedstock for industrial gases, ethylene (for plastics), butadiene (for rubber), and the like. Any of these fractions can be burned for energy for chemical or industrial processes such as those used to make products in the Rotterdam’s petrochemical cluster (see p. 143 in chapter 5).
Similarly, Singapore sports an Asian hub for oil and chemical products. In an ambitious land reclamation project completed in 2009, Singapore has connected seven of its islands to form Jurong Island as its petrochemicals hub. More than ninety-five companies invested more than SGD30 billion (about $24 billion) in Jurong, including heavyweights such as DuPont, Huntsman, BASF, Perstorp, Dainippon Ink & Chemicals (DIC), and Sumitomo Chemical.
The energy industry in Memphis supports the massive steel smelting furnaces at NUCOR and the boiling cauldrons of corn sweetener at Cargill, in addition to piping millions of gallons per week of jet fuel to the airport.
Memphis Light, Gas and Water Division provides necessary infrastructure for the Memphis airport. In turn, the Memphis airport provides necessary infrastructure for FedEx, UPS, Delta, and the other airlines there. The Merriam-Webster dictionary defines infrastructure as “the underlying foundation or basic framework” and “the resources ([such] as personnel, buildings or equipment) required for an activity.” In that sense, FedEx, UPS, and the entire logistics industry in a Memphis serve as infrastructure for the area’s manufacturers, retailers and distributors. Thus, for Medtronic in Memphis, logistics services such as FedEx, UPS, the airlines’ NFO services, the hundreds of trucking companies around Memphis as well as the trained logistics workforce in the area are all “infrastructure.” This infrastructure enables Medtronic in Memphis to send and receive products efficiently. The underlying complexities of getting its high-value, time-sensitive packages to any location in the country are invisible to Medtronic just like the complexities of electrical power generation are invisible to electricity users.
Carriers and third-party logistics service providers have progressively broadened their services to include more functions in their infrastructure-like service offerings. Global logistics service providers, such as UPS and DHL, leverage their vast worldwide IT and delivery infrastructures to create bundled services that combine offerings such as warehousing, transportation, forwarding, custom brokerage, factoring, and feet-on-the-street customer service. “We feel it’s one of the areas [where] there’s a significant opportunity to leverage the assets of UPS, including the small-package network, pickup capabilities and ability to manage supply-chain networks,” said Phil Corwin, former director of marketing at UPS Supply Chain Solutions.54 Third-party logistics service providers, or 3PLs—as central coordinators for logistics—become the front-ends of this extended infrastructure. 3PLs create a seamless service that insulates shippers from the complexities of logistics. Corwin added that the UPS SCS customers include “many smaller companies that don’t want to—or can’t—build and manage their own post-sales infrastructure.”55
The presence of an extended logistics infrastructure enables the rise of companies that implicitly depend on high-performance logistics infrastructure. For example, inexpensive, high-reliability overnight package delivery services provide a higher-order infrastructure for dot-com retailers such as Amazon.com, Germany’s Otto.de, or China’s Taobao.com. Public warehouse operators provide a convenient and cost-effective turnkey distribution infrastructure for companies who don’t want to invest in their own warehouse buildings, shelving, forklifts, and warehouse workforce. All these services are enhanced in logistics clusters because of the efficiency of logistics operations there, as explained in chapter 4.
Although logistics clusters enjoy clear scale and scope advantages, they cannot grow indefinitely. Cluster growth finds a proximate volume limit in the capacity of its existing infrastructure and an ultimate limit in the land area available for more infrastructures. A cluster’s economic success can also plant the seeds of its own suffocation when decades of urban development envelope the cluster. Faced with limited land, however, infrastructure operators can use a variety of productivity-enhancing strategies, such as leveraging information infrastructure or inland ports. As a last resort and a testament to the value of logistics, some ports like Singapore and Rotterdam are creating huge new additions by filing in the sea to make more land.
This section examines cluster size limits and congestion effects from the viewpoint of the logistics industry members, not the government or the broader society. (The societal impacts of congestion and other downsides of logistics clusters such as pollution are discussed chapter 7 in the context of regulations and mitigation activities as well as in chapter 10 in the context of sustainable clusters.)
Every logistics asset has some upper limit on capacity: standard shipping containers can be stacked no more than nine-high; two trains can’t occupy the same stretch of rail; a conveyer belt sorter can handle only so many packages per hour; a freight yard has only so many slots for containers, and so forth. Minimum distances between conveyances, maximum safe velocities, dwell times, and other operational details limit how much freight a given logistics asset can handle.
Infrastructure also has an upper-limit physical size for the passages of conveyances, such as the Panamax size limit, requiring the expansion of the canal. Similarly, the CSX Railroad had to enlarge a number of tunnels along its tracks to enable double-stacking of shipping containers. Another example is the Bayonne Bridge spanning the Kill Van Kull between Staten Island, New York, and Bayonne, New Jersey. While 12 percent of all US international containers pass under the bridge,56 it blocks the largest container ships from coming into the port of Newark, where 83 percent of the port’s container capacity resides. At high tide, the bridge provides only 151 feet of air draft clearance between the bridge and the water. When completed in 1931, it was the longest steel arch bridge in the world, with plenty of clearance for contemporary shipping. But now modern large container ships, such as the Emma Maersk, require over 200 feet of clearance—more if the ship is lightly loaded and riding high in the water. The Port Authority of New York and New Jersey is therefore planning to raise the bridge at an estimated cost of between $1 and $1.3 billion.57
A successful logistics cluster is a nexus for heavily utilized infrastructure. Whereas the volume of freight flowing on any given point-to-point lane might be modest, hub-and-spoke operations imply a significant concentration of activities. Large volumes of freight and conveyance activities in a small area lead to congestion. Frequent flyers know this well—some of the worst delays take place at hub airports.58 The same problem can occur in major freight hubs.
Infrastructure improvements in one part of a logistics system typically invite increased utilization, which may create a bottleneck elsewhere. For example, although Zaragoza’s PLAZA has spacious wide roads within the park, the park’s exits and highway on-ramps often clog with the large numbers of trucks leaving the park at certain times of day. On a larger scale, the much-anticipated expansion of the Panama Canal might bring larger container ships and freight volumes to ports on the East Coast of the United States. South Carolina State Ports Authority chief executive Jim Newsome is excited about the expansion, describing it as “a game-changer” and “the biggest development since the advent of stuffing cargo into containers.”59 Bigger ships, however, mean deeper drafts and larger quayside berths, cranes, harbors, and shipping lanes. As of 2011, Norfolk, Virginia, is the only port in the eastern United States that can handle the larger ships that will be transiting the expanded Panama Canal.
Other ports are scrambling to upgrade their infrastructure to capture some of the hoped-for traffic. For example, Charleston is dredging its harbor from 45 feet to 50 feet (at a cost of $300 million). Similarly, port officials in Miami are in the process of dredging their port to a depth of 50 feet and at the same time plan to complete the Port of Miami Tunnel project by 2014, providing trucks (and passengers) direct interstate access between the port of Miami and the I-395 freeway. This will enable Miami to double its capacity for truck movements.60 Port officials in Savannah, Georgia, want $588 million to deepen their harbor, and the port of New York/New Jersey is already spending $2.3 billion to dredge its harbor.61
In contrast, New York’s nineteenth-century Barge Canal system (an enlarged successor to the Erie Canal and other canals in New York) faded because of insufficient logistics terminal infrastructure and inadequate investment in developing it (see also the discussion of cluster mortality on p. 285 in chapter 10). Examples such as the inadequate terminals on the Barge Canal, inadequate air draft clearance of the Bayonne Bridge, and ongoing plans to deepen East Coast ports illustrate how capacities of conveyances, terminals, and routes interact. Failure to meet increasing capacity demands may lead a port to dry up economically, affecting all the capillary economic elements around it. Larger conveyances demand larger-capacity terminals and routes. And larger capacity terminals and routes support the development of larger conveyances.
Expanding the capacity of logistics infrastructure requires vast expanses of land. A single Post-Panamax vessel covers more than four acres of harbor. Add channel clearance, cranes, container storage yards, and drayage access, and a single added berth might require a dozen acres. Similarly, building a 500,000 square foot distribution center requires more than eleven acres of land just for the building and requires double that amount after adding in the employee parking, a truck yard, rail spur, connecting roads, and greenways. Adding a 10,000-foot runway to an existing airport, with taxiway and safe all-weather separations from adjacent runways and airport fence lines consumes at least 900 acres. In addition to land for ports, terminals, and hubs, adding capacity to a logistics cluster means adding capacity to the connecting infrastructure. A single mile of US Interstate highway—constructed to the minimal standard of two-lanes each way—consumes nearly twelve acres.
These land-consuming additions may be quite feasible for young greenfield developments, such as PLAZA, but the multidecade, even multicentury life spans of logistics clusters such as Rotterdam mean that capacity additions occur in the context of a long-term built environment. With the initial creation of a major logistics facility comes ancillary development of adjacent commercial facilities. In addition, housing, consumer retail outlets, office buildings, and government facilities grow around centers of economic activity. All these activities fill the area around the original development until the land zoned for a logistics cluster has no room for expansion.
Ports, especially, become pinned between the sea and the urban and industrial development that grows up around a busy seaport. Many historic ports, like Rotterdam, New York, and Singapore, started life as trading centers that quickly became the city’s original downtown business district. But as the city grew, these quaysides and docklands became too valuable for logistics use and were converted to retail arcades, high-rise ocean-view apartments, and skyscraper office buildings. Furthermore, as the city closed in, residents started resenting the truck, rail, and air traffic created by logistics operations.
Throughout Los Angeles, commuters compete with trucks hauling freight between the Los Angeles/Long Beach (LA/LB) ports and the myriad warehouses, rail yards, and other logistics facilities strewn throughout the Los Angeles basin. Similarly, commuters in the Chicago area have to share railway crossings with long freight railroads as well as numerous trucks distributing cargo in and out of Chicago’s logistics parks. And a night flight ban in Frankfurt airport, enacted in 2011 following complaints from residents, is expected to impose tens of millions of euros of additional costs on airfreight operators such as Lufthansa Cargo, Night Express, and Condor.
Logistics operators have numerous strategies for increasing the productivity of assets, thereby increasing the effective capacity of those assets. For example, the adjacent ports of Los Angeles and Long Beach are the busiest port complex in the United States. Trucks carrying containers from the port to the US hinterland have to cross the city of Los Angeles, which has the most congested roads of any city in the United States. Because of the lack of land for expansion, the port focused its growth effort on increasing its hours of operations to include nights and weekends, coupled with increased fees for daytime operations to encourage off-peak operations.
Another congestion-reducing initiative at LA/LB is the Alameda corridor rail project aimed at shifting more freight from truck to rail. This twenty-mile “rail expressway” connects the LA/LB ports to the transcontinental rail network terminus east of downtown Los Angeles. Each train replaces 250 to 285 trucks62 and takes less than half the time it took trucks to traverse LA.63 The corridor carries about one-third of the ports’ container volume.64 The builders submerged a triple-track infrastructure below grade to eliminate or avoid 200 railroad crossings that could interfere with LA’s traffic. Carrying freight by rail and reducing railroad crossings saves 15,000 hours per day in truck and vehicular traffic delays.65
Singapore’s solution relies on information technology: developing systems that both regulate the flow and accelerate the passage of trucks. For example, rather than let dray trucks circulate at will, Singapore schedules each truck within a narrow window, ensuring that trucks flow through the port in a manageable stream. The Port Authority also created what it calls a flow-through gate. The port installed scanners at the port gates that quickly check the identity of the driver, weigh the truck, scan the container, and check the data against manifests. Within twenty-five seconds, the driver gets clearance and instructions on where to take the container. In his office on the thirty-sixth floor of the Port Authority of Singapore (PSA) building overlooking the vast expanse of the port of Singapore, Oh Bee Lock, head of operations of Singapore Terminals (part of SPA Corporation) told me, “We do this not because of technology; we do this for a pure practical reason—we don’t have a lot of land for gates.”
Not only does scheduling of trucks prevent wasted idling, but it also makes the entire port system more predictable. The PSA has confidence that it can unload and load a ship within a narrow scheduled time slot because it has confidence that the dray trucks will arrive as expected. And by having confidence in the completion of loading and departure of the ship, the port operator can tighten the scheduled arrival of the next ship. The result is high productivity of capacity-limited assets such as the quaysides, container yards, and port road infrastructure. As a result of these and other information technology applications, Singapore handles on the order of twice the number of containers per unit of port asset (e.g., per acre of port, per crane, and per foot of port quay) as most other major ports in the world.66
Other ports, logistics parks, and terminals have similar systems. The ports of Los Angeles and Long Beach use appointment systems to avoid long queuing times for dray trucks.67 The advanced scheduling technology employed in the new (as of 2011) Union Pacific intermodal yard in Joliet Logistics Park coordinates all movement of rail cars, trucks, trailers, and containers throughout the facility. The system cut truck-processing time by an average of 75 percent.68 Most of the benefits of such scheduling systems are rooted in mitigating congestion through better scheduling.
As logistics clusters, particularly around seaports, become enveloped by urban development and reach their productivity limits, they can still grow by displacing some logistics activities to new greenfield facilities outside the immediate cluster area. Instead of clearing customs, deconsolidating, transloading, warehousing, and distributing freight from the immediate vicinity of the port, containers are moved (typically via rail) directly from the ship to an “inland port,” also known as a “dry port,” located well away from the congested port area. Inland ports typically exhibit lower land costs and lower labor costs.
For example, the Virginia Inland Port, which lies 220 miles inland in Front Royal, handles cargo from the three state-owned port terminals (in Norfolk, Portsmouth, and Newport News) and supports efficient distribution to southern Pennsylvania, Maryland, and Virginia. Other US inland ports include AllianceTexas in Fort Worth, Texas; CIC in Joliet, south of Chicago; and Kansas City. In all three cases, railroads bring ocean shipping containers from West Coast ports, contributing to the development of these areas as logistics clusters. As another example, consider that it was the lack of expansion capacity around the ports of Barcelona and Valencia that contributed to the success and growth of the Aragón logistics cluster, serving as a dry port extension to the port of Barcelona.
Displacement can also be more extreme than shifting a part of the activity to a new location. Over time, the entire port or cluster can migrate to a new location. For example, the port of New York originally developed around the current Battery Park on the southern tip of Manhattan Island. But as New York became a city and Manhattan developed, the logistics industry moved across the Hudson and East Rivers to nearby locations such as Newark, Elizabeth, Red Hook, and South Brooklyn.
Airports, too, can become besieged by suburban development and congestion. Cities such as Chicago, Washington, DC, Denver, Houston, Paris, and Shanghai started with airports like Midway, National, Stapleton, Hobby, Orly, and Hongqiao, respectively, at the edge of each city. Then significant growth enveloped the airport and forced the cities to construct new, larger airports (O’Hare, Dulles, Denver International, Houston Intercontinental, Paris Charles de Gaulle, and Pudong International, respectively) much further from the city. These airports, in turn, became major air hubs.
Whereas the port of Barcelona can displace activities to the inland dry port of Zaragoza, the island nation of Singapore has no place to go. Although Singapore’s ongoing investments in improved processes and information technology do increase the country’s ability to handle growing trade, the island simply needs more land. Thus, the Singapore Maritime Authority launched a S$2 billion land reclamation project in 2007 to increase the capacity of the Pasir Panjang Terminal by 40 percent.69
Nor is Singapore unique. The outer parts of the Rotterdam port are wholly artificial constructs. The current Maasvlakte complex is a 3,000-hectare industrial park and harbor complex built in the 1960s on reclaimed land. Maasvlakte 2, scheduled for completion by 2013, will add another 2,000 hectares to the port by bringing in 350 million cubic meters of sand dredged from the sea bottom. That’s twice the volume of earth moved to build the Panama Canal. To prevent Rotterdam’s new lands from slumping back into the ocean, the Dutch are importing almost 200,000 tons of basalt rock per month brought from a Norwegian quarry almost 1,000 kilometers away.70 When I asked Hans Smits, CEO of the port of Rotterdam, how far the Rotterdam expansion will continue, he quipped that “Rotterdam won’t stop expanding until we reach England.”
These expansions and many others seem to indicate that even if urban development constrains a logistics cluster, it can find ways to expand and sustain the positive feedback loop that fuels its growth. Rotterdam’s willingness to spend €3 billion on Maasvlakte 2 testifies to the huge economic opportunities embedded in logistics clusters. Rather than view congestion as a problem to be squashed by restricting activity, Rotterdam, Panama, and Singapore view congestion as evidence of the value of their locations, high demand for their services, and opportunities for growth. Instead of regulating economic activities to restrict use, they expand infrastructure and improve operating efficiencies to meet the challenge of growing demand. At a built cost of €1.5 million per hectare, the new land in Maasvlakte 2 is worth thirty-eight times the price of agricultural land in the Netherlands71 yet is less than one-tenth the price of land in Rotterdam’s city center.72
Large logistics clusters depend on extensive infrastructure comprising long-lived assets spread over large land areas. The Panama Canal will celebrate its 100th anniversary in 2014. The first bridge across the lower portion of the Mississippi River—the 1892 Frisco Bridge at Memphis—is still in use for rail freight today.73 The port of Singapore began its rise to prominence in the nineteenth century. Rotterdam has been a transshipment center for more than 650 years, since the completion of a shipping canal in 1350.
A logistics cluster requires several types of infrastructures to be able to offer sufficient capacity and interconnectivity without congestion. In discussing the nature of infrastructure development, Ricardo García-Becerril, PLAZA ‘s general manager, stressed to me “It’s great to analyze how appropriate or not it is to develop a logistics park in a certain location, but beware, because the surrounding infrastructure is crucial. This applies to electricity supply, water, waste, and communications—not just Internet and telephone lines, but also intermodal connections to fast highways and rail.”
The size of investment and the resulting long-lived assets required to launch and develop a logistics cluster mean not only that governments are likely to be involved, but that the planning process should be thorough. Indeed, the expansion of the Panama Canal was put to Panamanian voters in a 2006 referendum, following years of planning by the Panama Canal Authority. Similarly, the development of PLAZA in Zaragoza followed years of public debate and finally was supported by both the ruling party and the opposition in Aragón, as well as by the unions, the area’s businesses, the city of Zaragoza, and other elements of the local civil society. Thus, logistics clusters become de facto or de jure public-private partnerships.