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4. Operational Advantages

Published onMar 26, 2020
4. Operational Advantages
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I asked logistics and supply chain management executives around the world why their companies picked a particular region for their operations—“why Singapore?” or “why Memphis?” Many of the answers mentioned computerized network analysis. Using a database of supply and demand locations, integer-programming-based computer models fed with expected product flows and costs, as well as real estate rents, tax regimes, and other data, would spit out “optimal” regions for locations of distribution activities. Such models, though, are typically incapable of finding real business-optimal solutions because of both their mathematical shortcomings and the inherent forecasting challenges.1 Other answers noted a location’s natural geographic advantages, such as a central location, river accessibility, or port proximity, some of which would be identified by the network models while others would be “obvious.”2 Yet those weren’t the only reasons or the most interesting ones. Much of the rest of the book delves into the deeper reasons; they explain why logistics clusters can thrive and grow and therefore why certain locations are more attractive than others.

Just like industrial clusters, logistics clusters enjoy certain advantages deriving from the concentration of similar activities. In addition, however, these clusters enjoy unique operational advantages. Many of these advantages are rooted in the interchangeability of transportation and logistics assets. Unlike suppliers of most manufactured products, suppliers of transportation services offer nearly interchangeable services. The content of the packages going through the UPS Worldport, or loaded into a maritime container in a manufacturing plant in Shenzhen, are varied and not interchangeable. In contrast, the services performed on the package—such as the picking, sorting, loading, transporting, unloading, and delivery operations—are identical, regardless of what the package contains. Consequently, transportation and logistics assets can handle packages containing a large variety of goods in a standard manner. Furthermore, rail cars, containers, trailers, barges, and airplanes all come in standardized sizes and capacities, dictated by regulations, international standards, or prevailing conveyance designs. Thus capacities, reach, and velocities are similar regardless of the company logo on the tractor’s door, ocean shipping container side, or airplane tail.

There are two categories of operational advantages that logistics clusters can offer their tenants over logistics facilities not located within a cluster. First, when transportation carriers move freight between areas that generate or absorb large amounts of freight—read logistics clusters—the technology and cost structure of transportation movements can create lower costs and better service. Carriers can then offer these lower costs and better service to the shippers in the cluster, attracting even more shippers, causing the cluster to grow and making the carriers even more efficient. Second, when distribution operations are in close proximity to each other, as they are in logistics clusters, they can enhance each other’s performance as a result of the sharing of resources and the larger range of available warehouse space. These performance enhancements grow with the size of the cluster. Both of these factors create a positive feedback loop: a reciprocal reinforcing dynamic that makes the cluster more attractive as it grows, leading to further growth.

Transportation Economics

Some of the most important drivers of cluster growth arise from the economics of transportation. Transportation services can be classified into direct operations (DO) and consolidated operations (CO). In direct operations, a carrier takes a shipment directly from the pick-up location to the delivery location with one conveyance carrying only that one shipment between the two locations. In consolidated operations, a carrier picks up multiple shipments in a local region, consolidates them to share a larger conveyance for the trip toward the destination, and then makes multiple deliveries in the destination region. On the way, each consolidated shipment may be unloaded and loaded to different conveyances several times. With DO, the shipment travels the shortest possible distance between origin and destination with no intermediate stops; with CO the shipment takes a more circuitous route with intermediate stops and handling. With DO, the shipment bears the full cost of the conveyance mobement for that journey; with CO, the shipment shares the costs of the conveyances involved in the trip with other shipments.

A similar dichotomy exists with passenger transportation. A taxi cab is a DO carrier; it takes a “load” directly from origin to destination, and the passenger pays the full cost of the trip. In contrast, passengers of a mass transit system share the space in the bus, trolley, or subway car with each paying a small portion of the costs—the per passenger fare. Transit passengers may take multiple buses or trains with different groups of passengers as they transfer in hub stations one or more times on their journey from origin to destination. Note that transit passengers, like CO shipments, undergo two types of consolidation: in-vehicle, while sharing a conveyance with others, and geographical consolidation, changing conveyances in a terminal.

Most flyers are painfully familiar with the hub-and-spoke system by which airlines consolidate and deconsolidate people, giving rise to the saying about the busiest airport in the world: “When I die, I don’t know if I’ll go to heaven or hell, but I know I’ll change planes in Atlanta.”3

Both DO and CO operations in and out of logistics clusters are more efficient as the cluster grows, because of the economics of transportation.

Utilization: Empty Costs as Much as Full

Transportation assets cost almost the same to operate empty as they do to operate fully loaded. Carriers must cover a long list of costs that vary little with the amount of freight carried by the conveyance. Load-independent cost factors such as driver wages, equipment depreciation, financing, administration, compliance and insurance amount to 70 percent of the cost of driving a truck (fuel being most of the other 30 percent).4 Research on the energy efficiency of trucks shows that even the fuel costs don’t change much between empty and full trucks, as a result of cargo-independent factors such as aerodynamic drag, engine losses, and the mass of the empty truck. An empty truck trip still consumes about three-fourths of the fuel of a fully loaded one.5 Interestingly, tire wear—another important cost factor—is worse when a truck is driven empty.

Even toll payments are independent of load—and not only on highways. When crossing the Panama Canal, for example, vessels pay based on their container capacity, with ballast paying only 20 percent less than full containers and passenger vessels paying similarly 80 percent of the rate for an empty berth compared to an occupied one. Furthermore, on-deck containers on “other” vessels (not dedicated container vessels), pay the same toll per container whether empty or full. The minimal cost difference between partial and fully loaded conveyances motivates carriers to fill conveyances and prompts shippers to design operations that generate efficient full loads (or wait at origin points until they have a full load).

The Larger the Vessel, the Lower the Freight Cost

Regardless of the type of service, the cost of operating a transportation conveyance grows less than proportionally with the size of the vehicle. In other words, larger full vehicles have a lower cost per ton-mile hauled than do smaller full vehicles. For this reason, carriers have steadily shifted to larger conveyances over the years. For example, fifty years ago, truck trailers in the United States were 32 feet long. But over the ensuing decades, they grew to 35, 40, 42, 48, and, eventually, 53 feet long. At the same time, trucking companies developed “road trains” with one tractor towing two, three, or even as many as six trailers in some specialized road trains in Australia.6 These changes enable one driver and one tractor to pull ever-increasing amounts of freight for lower cost per ton-mile.

Similarly, the growing size of conveyances is evident in the history of rail cars, locomotives, and length of trains. The BNSF, for example, sends trains that are almost two miles long from the Los Angeles area (mostly originating at the Los Angeles and Long Beach ports) to Chicago’s logistics parks.

Airfreight exhibits the same pattern. FedEx made its first deliveries using the Dassault Falcon 20, an executive jet carrying a meager 6,500 pounds of airfreight—that’s the equivalent of about 1/7th of a standard full truckload. In 1977, FedEx made the jump to the much larger and more efficient Boeing 727s (carrying 42,000 pounds). Today, FedEx flies planes as large as the Boeing 777F lifting loads of up to 226,000 pounds. Similarly, UPS Airlines now owns nothing smaller than a Boeing 757 (holding up to 87,700 pounds) and also flies Boeing 747 freighters, carrying up to 270,000 pounds. At the Louisville airport, UPS’s air freighters tower over the small Embraer regional jets and Boeing 737s that bring people to and from the small city of Louisville.

In ocean shipping, the very first makeshift container ship in 1956 held only 58 containers. Size grew quickly with the first purpose-built container ship carrying 610 containers in 1960. Sizes further increased to about 1,500 containers in 1969, 3,000 containers in 19727 and 4,000 containers in 1981. Size growth slowed for a decade—container ships didn’t break the 4,500 containers barrier until 1988 as a result of the size limits of the Panama Canal.8 Ultimately, the volume of freight between pairs of major ports with no Panama Canal transits, such as Singapore to Rotterdam, or Shanghai to Los Angeles/Long Beach, justified building massive ships. A trans-Pacific journey on a fully loaded post-Panamax ship with capacity of 8,000 twenty-foot equivalent units (“TEUs”) containers costs about $200 a container less than it does on a 4,000-TEU, loaded canal-compatible Panamax vessel.9 In 2006, Denmark’s Maersk Line, the largest container shipping carrier in the world, put in service the Emma Maersk with a capacity of about 14,000 TEUs; as of 2010, almost 20 percent of the container fleet was post-Panamax size and 5 percent was larger than 8,000 TEU.10 In 2011, Maersk ordered new 18,000 TEU container ships,11 offering the lowest cost per container moved (see also p. 282 in chapter 10).

Container ships aren’t the only vessels creating economies of scale by growing to gargantuan proportions. The MS Vale Brasil, which is part of a fleet of the largest bulk carriers in the world, is 362 meters long and 65 meters wide, rides 14.5 meters deep, and can carry enough iron ore to make three Eiffel Towers.12 The ship is so large that, when fully loaded, it can dock at only a few ports in the world and then only during high tide.13 About ten times a year, the Vale Brasil picks up a massive load of iron ore at Ponta da Madeira in Brazil for delivery to Rotterdam. In Rotterdam, the ore is transshipped on barges to Germany’s Ruhr-region steel mills.

These cost-scaling factors hold across modes, too. High-capacity modes such as rail, barges, and ocean shipping cost progressively less per ton-mile than do small-capacity modes such as trucking. A gallon of fuel moves one ton of cargo about 60 miles by truck, 202 miles by rail, and 514 miles by barge.14 Larger capacity modes also offer labor cost advantages in terms of how much cargo a single driver, locomotive engineer, or ship’s crew can handle. But taking advantage of these cost savings requires filling much larger conveyances. A full truck can carry as much as 48,000 pounds in one trailer, a single rail car can carry 200,000 pounds, a single barge can hold 3.5 million pounds, and the largest ocean-going bulk freighters, the Vale Brasil and its sister ships (Vale China, Vale Italia, Vale Rio de Janeiro, and Vale Beijing) can carry nearly 800 million pounds each.

The cost advantages of larger conveyances motivate shippers to consolidate their activities in order to create shipping scale. Likewise, operators of these large conveyances gravitate to locations where they can find adequate volumes of freight to fill their behemoth conveyances. Both of these trends feed the growth of logistics clusters. Moreover, as discussed in chapter 6, such clusters can justify the investment in the development of the high-capacity infrastructure and handling equipment needed to service large conveyances.

Direct vs. Consolidated Transportation Operations

If a shipper has enough freight from a particular origin to a particular destination on a particular day to fill a conveyance, say a trailer, then the shipper will contract with a carrier to haul that full trailer directly from the origin to the destination in a DO operation using a single vehicle. Carriers that predominantly offer DO services include: truckload motor carriage, unit trains, and charter operations (in all modes of transportation). The shipper pays, in this case, the full cost for the movement of the conveyances regardless of how much the shipment weighs or what fraction of the conveyance is full.

If the shipper does not have enough freight going to a particular destination to fill the conveyance, does not wish to pay the full price for direct operations with a partially filled conveyance, and/or cannot wait for more orders to the same destination to materialize because of time commitments to the customer, then the shipper will use a CO carrier who consolidates other small shipments into full-conveyance loads. Examples of CO carriers include: less-than-truckload (LTL) motor carriers, parcel delivery carriers, postal services, freight airlines, ocean carriers, barge operators, and railroads.

In a typical LTL motor carrier operation (known as “groupage” operations in Europe), the carrier dispatches a truck from a local city terminal to collect shipments from shippers’ docks and bring them back to the local terminal. There, the carrier sorts the shipments by destination and consolidates multiple shipments bound for destinations in the same general direction. The carrier then hauls the consolidated shipments in full trucks through a system of main terminals (“hubs” or “break bulk terminals”) to the destination local terminal. At each hub, the carrier deconsolidates inbound loads and reconsolidates them into outbound loads. Finally, at the local destination terminal, the carrier sorts the incoming shipments and loads them onto local trucks for delivery to the various customers using routes that group together nearby customers.

In a typical freight train service, the railroad consolidates and deconsolidates rail cars into complete trains. Shippers load rail cars staged on sidings, and railroad locomotives then pull the cars to a local classification yard where the railroad groups cars heading in the same general direction to build a long train. Locomotives pull the train to the next classification yard on the way, where the railroad separates the individual cars and regroups them into subsequent trains. The operation repeats until the rail car reaches the local yard closest to the destination, where a locomotive will drop the car at the consignee’s yard. In contrast, the DO version of rail is the unit train, in which an entire train of cars moves from a single origin to a destination without any midway car classification operation.

Maritime carriers use a similar process of moving containers to ports on rail, truck, or barge and then loading them onto a container ship that will take them toward the destination. In many ports, short sea shipping and inland waterways bring containers to larger ports and take collections to smaller ports as part of consolidated operations. At the final destination port, carriers move containers by truck, rail, or barge to inland destinations. Maritime carriers also offer break bulk services for non-containerized freight; such movements are generally (but not always) conducted in DO mode due to the inefficiency involved in unloading and reloading non-containerized cargo.

Barges are also designed to operate in a CO mode. Along the Mississippi or the Ohio River one often sees 1,000-foot-long assemblies of 15 to 50 tightly lashed barges heaped with coal, gravel, and other bulk commodities trundling up and down the river. At the back of this block of barges, a 4,500 horsepower, triple-screw towboat churns the waters, pushing the consolidated shipment. The flotilla stops along river ports, drops some barges, and adds others to the flotilla as it travels up and down the river.

CO operations involve circuitous routing—going through the break bulk terminals—and the added cost of unloading the inbound conveyance, sorting shipments, and loading the outbound conveyance at these terminals. Yet, for small shipments, CO costs less than DO because the conveyance costs are shared across the shipments. Furthermore, typical CO services operate on a fixed schedule (mostly daily for LTL), offering frequent pickup and delivery options.

Advantages of Clusters for Consolidated Operations

CO carrier hubs offer natural locations for logistics clusters to develop. Such hubs may be anchored around the operations of specific carriers, such as the air hubs of FedEx in Memphis, UPS in Louisville, DHL in Leipzig/Halle, or TNT in Liège.15 They can also be anchored around large ports—such as Singapore, Hong Kong, Rotterdam, Antwerp, Hamburg, Dubai, New York/New Jersey, and Los Angeles/Long Beach—and around significant railroad hubs, such as Chicago and Kansas City in the United States, Duisburg in Germany, Saõ Paulo in Brazil, and Birmingham in the United Kingdom. Naturally, many central locations with good highway accessibility have large LTL break bulk terminals.

Tenants in logistics clusters located where no carrier has a hub operation or not at a major port or airport will also see benefits when using CO carriers. These benefits are rooted in frequency, the carrier’s load plan, and the pickup and delivery portions of the service.


Frequency Advantages for Shippers: The Sooner the Better

While DO services take place “on demand” (recall the taxi analogy), CO are, for the most part, scheduled (recall the city bus or passenger airline analogy). CO activities typically follow a schedule because the system depends on coordination between freight coming into a terminal and freight moving out. A familiar analogy here is the “bank” of inbound and outbound flights that passenger airlines operate at their hubs, ensuring that outbound flights leave shortly after inbound flights come in.

More freight originating from and destined to a location means higher frequency of transportation service. Such higher frequency implies higher levels of service, because shipments do not have to wait long for the next scheduled departure or arrival. Higher frequencies of transportation services are particularly evident around transportation hubs. While many origin-destination pairs may not have enough volume between them for frequent direct transportation service, a hub-and-spoke system consolidates many different point-to-point pairs to provide a high frequency through the hub. Consequently, many shippers are drawn to transportation carriers’ hub locations, contributing to the development of a logistics clusters there.

Advantages of Bypassing Intermediate Terminals

Shipping to and from large clusters by CO carriers can be more efficient than shipping between areas that do not have a lot of traffic. This is due to more direct routing of loads by the carrier. For example, instead of sending LTL shipments from the local terminal to the next main terminal in the network (and from there through the network of intermediate terminals to the destination—unloading, sorting and reloading at every terminal), large outbound volumes from a cluster allow greater aggregation and increased use of direct routes to more distant terminals in the system. In fact, if the volumes are large enough, shipments can be sent directly from the originating local terminal to the destination local terminal, bypassing several break bulk operations on the way.

This effect is not unique to LTL trucking but rather is applicable to all CO carriers. Unlike the usual train service, which requires moving the trains through classification yards for the car disassembly/assembly operation, movements between large logistics clusters such as the western ports in Los Angeles/Long Beach or Seattle/Tacoma, and the large logistics clusters in Chicago, Kansas City, Dallas, or Memphis can employ long trains assembled in a western port and traveling to the Midwest cluster without stopping for car classification at any intermediate railroad yard.

The same effect takes place with barges that can travel in large, unimpeded trips from origin to destination, when going from and to a logistics cluster. Places like Rotterdam and Memphis have sufficient scale not only to support local barge and tow operators, but to make direct barge flotillas to distant destinations.

Reducing the numbers of intermediate consolidation/deconsolidation steps for LTL, rail, and barge operations lowers the transportation cost. Moreover, it improves the service by: (i) shrinking the total time in transit from origin to destination (each break bulk operation in a main LTL terminal can add a day to the service time), and (ii) reducing the damage and sorting/routing errors associated with freight handling at terminals.

Density Advantages of Pickup/Delivery for Carriers

LTL carriers operate a system of local terminals that are responsible for picking up and delivering freight from and to shippers’ docks. From the local terminals, the freight enters the system of break bulk terminals that route and move each shipment to its destination. The pick-up and delivery operations are typically performed by small trucks running “milk runs”—tours through several shippers’ docks—starting and ending at the local terminals. In many ways, this “last mile” operation is the most expensive part of the service offered by CO carriers (per ton-mile).

Logistics clusters and parks contain many shippers and consignees in close proximity to each other. Consequently, distances between stops are shorter than they would be if shippers’ docks were spread out over a large nonclustered area, increasing the efficiency of pick-up and delivery tours.

This phenomenon is particularly evident in trucking operations, but it affects all modes because regardless of the “trunk” mode of CO services, the pick-up from and delivery to a shipper’s dock is typically made by a motor carrier.


Advantages of Clusters for Direct Operations

DO transportation is typically preferred by shippers because it offers shorter travel times, less chance of misrouting, and a lower chance of handling damage to the shipment. The challenge for shippers is to accumulate enough freight to fill a conveyance to make direct operations economical. It should be noted that because of the circuitous routing and extra handling involved in CO services, a conveyance does not need to be full in order to be cost effective in comparison to a CO service. For example, even shipments as small as 12,000 or 15,000 pounds sent in a truck that can hold 40,000 pounds may be less expensive to send using a truckload carrier, compared to using LTL. Such underutilization creates opportunities for collaboration between shippers in a cluster, sharing conveyances to reduce costs.

The Conveyance Cycle

Freight flows are not balanced, in the sense that some regions generate more outgoing flows by certain modes of transportation (e.g., mines and factories) while others absorb more incoming flows (e.g., major consumer population centers). Similarly, the trade imbalance between China and the United States means that cargo vessels laden with full containers move from Chinese ports to US ports while little freight moves from the United States to China. However, carriers must somehow get both vessels and containers back in order to reload them. The same phenomenon exists in every mode of transportation. For example, while there is freight that moves on trucks from the US Midwest into Florida, very little moves back on trucks, creating a flow imbalance. Yet the trucks have to get back to regions where they can be loaded again—thus after dropping one load, they travel empty to pick up the next load. As a result, trucks, rail cars, ships, airplanes, and containers keep moving in an endless sequence of loaded-empty-loaded-empty trips, as conveyances are repositioned for the next loaded move following each delivery.

Carriers naturally try to minimize the empty movements because those movements do not earn any revenue. Rather than move empty conveyances back to the point of origin, DO carriers look for the next load at a point close to the last delivery place in order to minimize the length of the empty move. While all carriers are affected by flow imbalance, this is less of an issue for CO carriers since they operate a fix network in which the vehicles are scheduled according to a predetermined plan.

In fact, the empty miles percentage is one of the metrics by which truckload companies are measured. For example, the empty miles percentage of Werner Enterprises, the fourth largest truckload carrier in the United States, ranged from 11.4 percent to 13.5 percent over the five-year period of 2006 to 2010, with the lowest figure for 2010 as the economy in the United States was coming out of the recession.16 The largest truckload carrier, Swift Transportation, reported 13.24 percent in 2009 and 12.1 percent in 2010, as the economy improved.17 Private fleets—those owned by shippers and typically dedicated to that shipper’s operations—report empty-miles figures that are typically twice those of common carriers such as Werner and Swift because private fleets only transport that single shipper’s loads and thus have fewer reloading opportunities.18

Empty miles for motor carriers in Europe are significantly higher. An estimated 25 percent of all freight vehicles in Europe run empty and over 50 percent run with only partial loads.19 Some of this is the result of structural flow imbalances, while the rest may be attributed to inefficient operations. The high percentage of empty miles in Europe is becoming a focus of green efforts to reduce the carbon footprint of trucking operations.

Of course, instead of moving empty, a conveyance can wait after delivery until another load materializes in the destination area. An idle conveyance, however, also costs money—a 747 freighter sitting on the ground can consume $1,500–$2,000 per hour in finance charges alone,20 and that doesn’t include the cost of a parking space at an airport or the various maintenance and inspection activities required to keep the aircraft in air-worthy condition. Idle trucks, trains, and ships also accumulate costs and represent lost opportunity for revenues.

To maximize the fraction of revenue (loaded) movements, carriers need to minimize the conveyances’ idle time and empty movements. Such objectives create an impetus for DO carriers to gravitate to logistics clusters. Delivering freight into a logistics cluster means that there is a high likelihood that there will be a follow-on load going out of the cluster. This is due both to the large number of logistics operators in such a cluster and to the interchangeable nature of freight flows described in the introduction to this chapter.

In addition, DO carriers, like truckload motor carriers, also need terminals, but unlike LTL carriers, these are not consolidation terminals but operational bases for maintenance and driver domiciles. Locating such bases in a logistics cluster, which is served frequently by the carrier’s vehicles, makes economic sense. Doing so, however, means that trucks have to be routed to the cluster location every so often, increasing the availability of trucks in the cluster and, in some cases, lowering inbound and outbound rates.

Horizontal Collaboration to Share a Conveyance

SC Johnson & Son Inc. is a manufacturer of home cleaning, pest control, air care, home storage, and auto care products, with annual sales of $9 billion. The Energizer Battery Company is the largest manufacturer of batteries in the United States, with more than $4 billion in sales. Michael Murphy, director of customer supply chain for SC Johnson, described during a 2011 conference in Atlanta, how colocation helps the two companies collaborate in more efficient distribution.

Both companies have distribution centers in Fairburn, Georgia, which is part of the Atlanta logistics cluster. Both companies sell to some of the same retail chain customers. One such shared customer is CVS Caremark Corporation, the giant health, beauty and household goods retailer. CVS has a distribution center in Vero Beach, Florida, a little over 500 miles from Fairburn. Both SC Johnson and Energizer approached CVS about trying to optimize their distribution operations through collaboration and coordination between the two of them and CVS. CVS, in turn, agreed to an experiment in the Vero Beach distribution center.

The essence of the collaborative effort was to consolidate loads for more efficient transportation using DO trucking. Prior to the project, SC Johnson shipped one trailer-load per week from its Fairburn distribution center to the Vero Beach CVS DC, averaging 20,000 pounds of freight per shipment with a truckload carrier. Energizer shipped an average of 9,000 pounds each week to the Vero Beach distribution center using an LTL carrier. Because both shipments could easily fit in one 40,000 lb-capacity trailer, the companies sought to consolidate their loads and share the costs of a single truckload shipment a week, keeping the same service frequency from Fairburn to Vero Beach.

CVS agreed to modify its order system so both SC Johnson and Energizer would get the order for shipping on the same day and have a single delivery appointment at the Vero Beach DC. Once CVS releases the order, a truckload carrier picks up at the SC Johnson facility, goes to the Energizer facility next door to pick up its shipment and drives the 500 miles to deliver the combined load to the CVS facility. Naturally, the proximity of SC Johnson and Energizer in the same location in Fairburn enabled the smooth planning and execution of the new process.

The results of this collaboration created multiple improvements. Both shippers reduced their transportation costs and improved their carbon footprint. Energizer improved its on-time delivery and reduced shortages and damage by avoiding break bulk LTL operations. SC Johnson reduced its transportation costs without affecting its customer service. CVS also enjoyed positive impacts including more predictable lead time and increased inbound dock efficiency resulting from the reduced number of inbound trucks.

The pilot program was so successful that SC Johnson then expanded the program to collaborate with other manufacturers located near its distribution centers in Georgia and Pennsylvania for deliveries to CVS distribution centers in the Southeast and Northeast of the United States. It was also expected to launch collaborative efforts with more manufacturers and more retailers.

Other companies in other clusters have similar initiatives. Over lunch in a garden restaurant in Rotterdam, Patrick Haex and Rene Buck of Buck Consultants International (BCI) shared with me the example of three Scandinavian companies in the forest and paper products business. StoraEnso, Norske Skog, and UPM consolidated their inbound flows on a single, dedicated, short sea-lane vessel. The vessel picks up inbound material in Sweden and Finland for delivery on a biweekly schedule into the Antwerp port and logistics cluster, where the three companies have distribution centers. By collaborating, the companies reduced their transportation and handling costs, and improved service through more frequent and reliable replenishments of the Antwerp distribution centers.

In another European example described by BCI, two tire manufacturers, Bridgestone and Continental, decided to comanage their outbound distribution in order to better compete with Michelin, the market leader. To this end, the companies built an “H-shaped” joint regional distribution center outside Orleans, France, with each company occupying one side of the H. They used the middle bar of the H to stage and handle the combined outbound shipments.21 The collaborative DC operation resulted in lower costs and more frequent service to the dealers than would have been possible with each company operating independently.

A small Belgian company called Tri-Vizor bills itself as “the world’s first orchestrator of horizontal collaboration.” Its value proposition is to facilitate such “car pools for cargo.” Its first project was to coordinate the shipments of two healthcare manufacturers: Baxter International and UCB Healthcare. In a fashion similar to the collaboration between SC Johnson and Energizer, the two pharmaceutical companies combined their TL and LTL shipments from Belgium to Romania into a single shipment to the Genk rail yard and from there onto a train to Oradea, Romania, from which the shipments were distributed to various Romanian cities.

The bigger a logistics cluster gets, with more shippers sending and receiving shipments to and from more places, the higher the likelihood and greater the ease of shipper-shipper (“horizontal”) collaborations.

Shipment Properties: Intermingling Heavy and Light

Look inside a shipping container, an air freighter, or a fully loaded truck operating in a DO mode, and you might be surprised to see that it’s half empty. As mentioned in chapter 1 (see p. 11), dense freight causes the conveyance to “weigh-out,” while light objects typically cause the conveyance to “cube-out.”

This dual definition of capacity creates another type of conveyance-sharing opportunity in a logistics cluster based on intermingling diverse types of cargo—some from distributors of dense goods and other cargo from distributors of light goods. Naturally, this can be economical only when the two types of freight share proximity of origins and proximity of destination, as is likely to happen in a movement from, to, and between logistics clusters.

This type of opportunity is more than theoretical. Patrick Haex and Rene Buck recounted several case studies concerning pairs of Dutch shippers that consolidate heavy bottles of canned goods with lightweight paper products. Specifically they mentioned Hero Netherland B.V.,22 a beverages and packaged food company, collaborating with SCA Packaging in joint transport. Hero has dense and heavy shipments, while SCA’s shipments are light and loose. Together, the combined shipments can simultaneously meet the weight and volume capacity of the conveyances for maximum efficiency.

The example in chapter 1 of Caladero mixing heavy pallets of fish with fluffy mohair yarn also falls into this category. As the diversity of customers increases in a cluster, the variety of cargos increases, too, leading to more opportunities like this.

The Advantage of Multiple Carriers

One of the advantages of any industrial cluster is that it induces suppliers to locate close to their customers. The availability of large volumes of freight in logistics clusters leads transportation carriers to serve the cluster and even locate operations centers and terminals there. The presence of 400 trucking companies in Memphis attests to carriers’ desire to locate operations where they can find freight. In Aragón, the number of commercial trucks registered increased from 7,529 in 2002 to 19,557 in 2007, as the PLAZA logistics park and the other, smaller parks developed and shippers moved into the Aragón cluster, attracting motor carriers to the area.

The presence of many transportation carriers in a cluster leads to a wide range of services, as well as to competitive and stable pricing. Both of these factors improve with the size of a cluster.

Increased Reach and Scope

As more shippers move into a cluster, more carriers join them to offer a variety of transportation services. In order to create some differentiation and serve their customers better, these transportation companies frequently offer new services as they come in, be it service to new destinations that were not served from the cluster before, nonstop service to destinations that formerly required going through a consolidation hub, or new types of services, such as temperature-controlled transportation and hazardous material transportation.

Every new service offered by logistics providers in a cluster immediately increases the range of services available to all existing shippers and logistics service providers in that cluster. Shippers can then leverage the new logistics services to offer new or improved service to their customers. A growing range of logistics services enables a growing range of shipper services and performance levels.

Competitive Transportation Offerings

Having a large number of transportation carriers serving a cluster increases competition among them, leading to lower prices to and from the cluster. Competition among transportation carriers in logistics clusters is stronger compared to competition among suppliers in other types of economic clusters, because of the minimal differentiation between transportation service providers.

But the competition is not limited to services offered between carriers of the same mode and similar types of services and equipment. It also takes place between modes of transportation. While walking me through his hot and noisy steel plant, its floors covered with fine steel dust, Thad Solomon, general manager of NUCOR’s plant in Memphis, explained the cost advantages of the Memphis cluster. These cost advantages arose, he said, because “we have options, we have competition, and it allows us to reach farther out there.” Both the multiple modes (barge, rail, and truck) and the very large number of carriers create a basis for cost-competitive transportation. “So that component of access to transportation and access to competitive logistics was absolutely key to our decision to come here,” Solomon said.

Similarly, Cargill’s international business development manager, Jon Thompson, and its commercial operations manager, Jeffrey Rott, explained the value of a multimodal location when they said that Cargill’s plant in Memphis was built there because of access to both rail and river transportation. Cargill brings in corn to its Memphis plant, about half by rail and half by barge, while shipping sweetener and other corn byproducts two-thirds by rail and one-third by truck, with a small amount sent on specially designed barges. These amounts fluctuate so that Cargill can achieve the best combination of cost and service under all conditions. “Sometimes the river is cheaper and sometimes the rail is cheaper. This plant cannot survive on 100 percent of either one,” Thompson told me.

A related argument comes into play with facilities and conveyances that are specialized in a certain type of operation but can also be used for another. Consider, for example “cold chains.” Whereas most freight tolerates a wide range of temperatures, some freight requires more careful handling. Caladero’s fish shipments that were described in chapter 1 exemplify cold chain operations: supply chain operations at low, carefully controlled temperatures. Specialized transportation and storage services can provide anything from controlled room temperatures (not-too-hot and not-too-cold), refrigerated (i.e., 2–8°C), frozen (−20 °C) to deep frozen (e.g., −80°C). Such cold chains are used for fresh foods, temperature-sensitive pharmaceuticals, flowers, deep-frozen foods, and even deep-frozen lab-grown human tissue. In the Netherlands, Venlo Fresh Park has 130 companies specializing in handling fruit, vegetables, and ornamental plants with nearby cold chain connections to highways, rail, airports, and the Rotterdam seaport.23 Both Singapore’s Air Logistics Park (ALPS) and UPS Supply Chain Solutions Inc. healthcare facilities in Louisville offer five temperature zones of handling.

The flexibility associated with cold chain logistics comes from being able to use some of the same assets and handling equipment found on the noncold chain side of logistics. For example, the same truckload carrier that brings in a refrigerated load of frozen food can leave with a load of computers, with the trailer’s refrigeration unit turned off. For the carrier, this is better than having to drive empty or wait for another frozen food load that may take a long time to materialize. From the shippers’ point of view, this increases the competition among carriers serving a logistics cluster even beyond the commonality of their equipment and technology to include related assets and operations.

Flexibility through Multimodal Operations

Logistics operations use more than a single mode of transportation, depending on service requirements, to optimize costs—and sometimes more than just costs. Consider, for example, Medtronic’s distribution operation in Memphis, outlined to me by Rob Varner, senior director of Medtronic’s North America distribution operations.

When a surgical team in Boston prepares for a prescheduled spine operation on Thursday, the hospital orders a spinal kit from Medtronic on Tuesday. Although CAT scans help the surgeon plan the surgery, the surgeon wants to be ready for whatever he or she finds during the operation. To get all the parts and tools needed, the surgeon needs a full kit filled with all manner of plates, rods, odd-shaped brackets, and screws in a range of sizes of parts. Because of the advanced materials and manufacturing technologies used to make these surgical supplies, each kit costs upward of $120,000, and most hospitals do not keep them on hand.

Instead, the hospital orders a kit and Medtronic puts it on a FedEx plane on Tuesday night. The kit arrives at the hospital on Wednesday morning, gets inspected, and is sent to the operating theater. Once the operation is over, the hospital repackages the kit and airfreights it back to Memphis the same day or the next day. Medtronic inspects the kit, cleans it, replenishes the used parts and sterilizes the kit for the next use. Furthermore, in the event of an emergency surgery, Medtronic sends the kit using next-flight-out (NFO) service, mostly via Delta Airlines, which has a passenger hub in Memphis. With NFO service, a courier delivers the kit to the airline counter in Memphis, and the airline then takes the kit onto the next flight to the destination city, where the courier delivers it directly to the hospital. Depending on flight schedules, such shipments can take only a few hours from order to delivery.

Thus the availability of both FedEx and Delta Airlines hub operations in Memphis allows Medtronic to offer both standard and emergency service from its Memphis distribution center. The significant presence of competing carriers in Memphis, such as UPS and other passenger airlines, means that the dominant transportation service providers have to keep their rates and services competitive.

As a cluster grows, it attracts carriers from different modes of transportation and different service levels. Each mode and service offers a different combination of cost, hauling capacity, travel time, service reliability, and reach. Having several modes of transportation increases the flexibility of shippers in the logistics cluster to adjust to various requirements and economic conditions. It also allows them to serve customers efficiently with different service requirements and different price sensitivities. Time-sensitive goods (such as critical repair parts, emergency medical supplies, documents, and high-value goods) often go by air while less time-sensitive shipments may go by truck or even rail—depending on the distance and shipment size involved.

All logistics parks as well as regional and national economic development agencies have brochures that promote the benefits of multimodal operations by citing distances to major highways, rail terminals, ports, and airports. Clusters offering three colocated modes (air, truck, and rail) include Zaragoza in Spain and AllianceTexas. Memphis prides itself on being quadramodal (air, truck, rail, and barge). Rotterdam offers five modes (ocean, barge, rail, truck, and pipelines) and a sixth mode of air if you count the large air cargo hub in Amsterdam’s Schiphol only 20 miles to the north. A cluster might be renowned for one mode (e.g., air express in Memphis or Louisville), but the presence of other modes provides added options and economies for shippers.

At their Memphis headquarters, I interviewed Neely Mallory, president of Mallory Alexander International Logistics, and fourth generation of the Mallory family heading the company. He told me, “My theory on it is they come here because of FedEx, because they can go anywhere absolutely positively overnight. Once they get here, everything doesn’t need to be there overnight so they may use [LTL motor carrier] American Freightways, they may use [parcel carrier] UPS Ground, or they may use [TL carrier] Swift.”

Liquidity Leads to Price Stability

During a group discussion in the futuristic Accenture office in Singapore, Eelco Hoekstra, president of Royal Vopak, described a cluster’s ability to smooth volatility in terms of liquidity in the local logistics market. Liquidity in this context is defined by the ready availability of conveyances for shippers and the ready availability of freight for carriers. As with any market, liquidity helps bring price stability. “With this liquidity, which is important, you get price-setting, because the more volume you bring into a market, the better supply and demand work, the more stable the price,” explained Hoekstra. Noncluster locations and small hubs will have higher volatility in freight volumes and conveyance availability, which leads to prices volatility. In contrast, a large hub with many diverse flows of freight and many competing carriers will, in general, offer more stable prices as a result of the so-called “risk pooling” effect—while some shippers’ requirements maybe high on a particular day, others’ may be lower, with the highs and the lows canceling each other.

Naturally, liquidity is driven, in part, from the commodities traded.“Singapore has developed as a price center for oil product,” Hoekstra added, and he then summed it up: “I think that’s why Singapore works—you see that once it has liquidity, it attracts more because of price setting.” The same holds true for oil in Rotterdam and Houston as well as other commodities in certain locations around the world—the price setting attracts flow, bringing in both demand and supply for transportation.

While certain commodity flow leads to liquidity both in the underlying commodity price and the resulting transportation demand/supply balance, large clusters enjoy transportation liquidity even without a serving as a hub for specific commodity trading. The ubiquitous nature of transportation means that the size of the transportation activity alone is likely to lead to liquidity in the demand for and supply of transportation services, and therefore to price stability. Such stability allows both shippers and carriers to plan their activities with more certainty.

Timeliness: Bigger and Faster

In their influential book, Competing against Time,24 Stalk and Hout outline the strategic value of speed. While their book focused on time to market and strategic responsiveness, operations managers also understand the advantages of fast and timely transportation service.

In addition, a particular set of logistics activities geared to time-sensitive shipments has developed around major overnight shipping hubs, such as Memphis (FedEx), Louisville (UPS), Liège (TNT), and Leipzig (DHL). The advantages of Memphis for Medtronic in responding to hospitals’ needs all over the United States were described earlier in this chapter. The focus in that section was on the availability of multiple modes. This section focuses on the timing of airfreight movements in such hubs, which create unique opportunities for time-sensitive services that make such hubs attractive to logistics cluster development.

Inventory Considerations Drive Centralization

Shippers use safety stocks to buffer between unpredictable changes in demand and preplanned production schedules that are difficult to change “on the fly.” Yet keeping inventory incurs various costs, including the cost of capital tied up in inventory; the cost of obsolescence; and the cost required to store, secure, insure, and service the inventory. To keep enough safety stock and yet minimize the amount of inventory held, companies hold large stocks in centralized locations. The reason is the same “risk pooling” phenomenon mentioned earlier with regard to truck availability and liquidity. While requirements of some customers may be high at some point, the requirements of others may be low and thus the highs and the lows tend to cancel each other. The result is that the total amount of inventory required to provide timely service to customers grows less than linearly with the number of customers served.

Thus, inventory tends to be centralized, and distribution centers tend to hold large amounts of inventory, which, maybe paradoxically, tends to minimize the total inventory required in the supply chain. Consequently, such distribution centers require both large shipments of inbound freight—which is best served by large conveyances—and frequent outbound services, because customers keep low inventories. Logistics clusters offer advantages on both fronts.

Timing Advantages: Shipping Late-Orders

The flipside of higher frequency is tighter timing. Cluster locations offer timing advantages for certain activities. During any evening in any location in the United States, you can decide to send flowers to a loved one or a sick friend. Even if you decide late in the evening, you can call 1-800-Flowers or go online and choose from an array of bouquets that will be delivered the next morning by FedEx.

The 1-800-Flowers.com fulfillment center in Memphis is operated by Mallory Alexander International Logistics. When I asked Neely Mallory how they do next-day delivery so late at night, he explained, “We take orders over the internet on these flowers until midnight Eastern Time, and then we still need to build the bouquets.” 1-800-Flowers.com manages to ship flowers long after the normal express-delivery pick-up times by locating their fulfillment centers next to the FedEx airfreight hub in Memphis. The key is Mallory’s ability to dovetail into FedEx’s flight schedule. Recall the nightly cycle for next-day air delivery operations described in chapter 3: from around the nation, the express carrier’s planes come in late at night laden with packages, the hub sorts the packages after midnight, and then, in the wee hours of the morning, the planes depart back to their nationwide locations for delivery later than morning. Mallory can bring shipments of flowers to the hub after midnight while the express carrier’s planes are landing and unloading, putting Mallory’s shipments into the stream of packages being sorted and loaded into outbound planes. “We have to be there by 2 a.m. during peak season shipping schedules,” said Mallory.

Similar opportunities are available to shippers located in and around Louisville. If your Christmas shopping includes shoes from Zappos.com, you can place your order by December 23rd and, as long as the order was placed before 4:00 p.m. Eastern time, it will arrive on December 24th anywhere in the United States. In that case, the gift will arrive by UPS because Zappos has its fulfillment centers in Shepherdsville, Kentucky, near the UPS Worldport in Louisville.

In both Memphis and Louisville, many companies use a similar late shipping cutoff model as 1-800-Flowers.com and Zappos. The Web site of Future Electronics, the giant Canadian distributor, states: “Thanks to the location of our Global Distribution Center in Memphis, Future Electronics is able to extend the cut-off times for next day delivery all the way to midnight Eastern Standard Time.” Many large technology retailers and distributors with distribution centers in Louisville make similar claims. Other companies use the same model to ship emergency repair parts to field technicians or to restock retail stores with fast-moving high-tech products. Jason Vaughn of UPS Supply Chain Solutions explained that “in order to serve their customers, a company like Silicon Graphics had to strategically locate their [critical parts distribution] centers near their customers. So if there was a 24 [hour] service requirement, they would put those things at the ‘end of the runway’ in a location such as Louisville or Memphis.” Such critical parts distribution centers allow customers of Dell, GE, or Siemens to order a part until the cutoff time, which would be late in the evening, and get the part at 8:30 the next morning, avoiding long down time of expensive machinery.

Duration-Advantages: Working Two Days per Day

The timing advantages of clusters located around air transportation hubs also provide added time for fast-turnaround activities such as emergency repairs. When an executive’s laptop breaks, time and speed matter. And if time and speed matter, then the location of the repair depot matters. Toshiba contracted with UPS Supply Chain Solutions Inc. (SCS) to create a repair center in Louisville near the UPS Worldport air hub. By locating in Louisville, the repair center receives the laptops sooner and can work on them longer before they ship out than if the repair center were not situated at an express carrier hub. Rather than the usual 10 a.m. delivery, the laptops arrive in the early hours of the morning and repair technicians can start to work on them immediately. Toshiba also has a parts distribution center in Louisville, so technicians can quickly get replacement parts during the day. The technicians have all day and late into the night to find the problem, fix the computer, test the repaired machine, and take it back to the UPS air hub so it can make the plane’s 2 a.m. departure that will deliver the laptop in the early morning to its user.

In essence, with early inbound receiving and late outbound shipping, the repair technicians have time for two days of labor (up to 20 hours in two 10-hour shifts) crammed into one calendar day. A Toshiba customer can ship her laptop on Monday night for a repair and get it back by Wednesday morning. Similar operations take place in Memphis and Singapore. For example, Denise Jack of Flextronics Global Services in Memphis told me, “users send their laptops to our facility, we repair them same day and ship them out same day, that night, through FedEx.”

Resource Sharing

Most of this chapter discussed how transportation services into and out of a cluster exhibit lower cost and improved service as the cluster grows, leading to the relocation of more logistics activities to the cluster and even lower costs and better service. Logistics clusters, however, offer even more benefits, beyond those tied to transportation. For all the fierce competition between logistics service providers, these companies cooperate on many dimensions to ensure that their customers experience a high level of service. And these cooperative instances are especially easy when the service providers reside in close proximity to each other.

The unspecialized, interchangeable nature of many facets of logistics operations is a double-edged sword. On one hand, interchangeable assets and freight handling capabilities create a crucible of cost competition that limits the profit margins of transportation and logistics service providers. On the other hand, interchangeability also means that transportation and logistics providers can share resources in a way that improves their respective operational performances.

Sharing Physical Resources

When UPS fills its daily flight out of Singapore to its Asia-Pacific hub in Shenzhen, the carrier does not turn away any overflow packages, ask the customers to wait 24 hours for the next flight, or charter another aircraft for those few extra packages. Instead, UPS sometimes utilizes common carrier airlift capacity (typically belly freight in passenger airliners) from Singapore to move a few overflow shipments—sometimes directly to their final destination. Having multiple carriers located within the Airport Logistics Park of Singapore (ALPS) makes it easy to arrange for such cross-carrier shipments.

Sharing of physical resources takes place on a larger scale as well, in response to the ebb and flow of freight volumes for different industries at different times. The last time I visited the UPS Worldport, in Louisville, it handled about one million packages, which was normal for a chilly Monday night at the end of January. But just a month earlier the facility handled 2.5 million packages per night for the holiday rush.

What’s helping cluster operations is that many shippers have different peaks and lulls. For online retailers, the days before Christmas create the biggest surge, while the distribution centers of brick-and-mortar retailers experience the surge weeks earlier as they replenish the stores in preparation for the holiday rush. For 1-800-Flowers.com, the peak is Mother’s Day, and for the Vermont Teddy Bear Company it is Valentine’s Day that brings big volume. Companies of all stripes experience end-of-month or end-of-quarter surges when salespeople try to make their quotas. In addition to these patterns, which can be forecasted and planned for, many shippers face unexpected surges—when launching a new product, when a competitor falters, or when handling a product recall.

To accommodate the flow variability, warehouse operators in a cluster can shift excess flow to other nearby warehouses when one warehouse temporarily runs out of space and another has space to lease. They also share equipment such as forklifts when a sudden surge requires it.

When a single entity (which may be a real estate company, a port authority, a government agency, etc.) manages a logistics park, the park manager may facilitate such arrangements. Furthermore, in many logistics parks, a single logistics service provider may serve multiple customers in a logistics campus environment, such as in the UPS Supply Chain Solutions in Louisville or Exel in AllianceTexas (see below). In these cases, the logistics service provider can share management, administration, forklifts, and processes across its local customer base. This can be particularly important when an unplanned surge takes place.

Sharing Human Resources

The AllianceTexas Logistics Park north of Fort Worth supports a different kind of sharing—human resource sharing. Exel, a leading contract logistics services provider,25 operates eight distribution centers in and around AllianceTexas on behalf of major consumer packaged goods (CPG) and technology companies. As its customers’ needs fluctuate, Exel shifts its trained warehouse workers from one facility to the next. Because all of the workers have well-defined skill sets and know Exel’s systems for operating distribution centers, these workers can be shifted between the customers’ operations and go right to work. I discussed this aspect of their operation with Gregory Kadesch, Exel’s senior director of operations, contract logistics—Americas. “When you walk into one operation versus another, they all look the same. And the expectations are very similar, so that’s yet another advantage of having everything very close,” he told me. “A worker might be picking toys one day and mobile phones the next day,” he added.

Exel shares labor so often that it devised an online software tool to automate the process and make it easy. Kadesch explained how a general manager in one warehouse can request extra labor, and general managers in other Exel-run warehouses with spare labor can lend out workers to keep workers on the payroll. Specifically, general managers can use the software tool to determine how many people are needed elsewhere, what skill sets they need, and for which shifts they are needed. Any general manager can reassign his or her spare workers, and the requesting manager receives a list of who’s coming in to help. The tool even tracks labor hours shared across the Exel network and, coupled with the networked payroll system, ensures that each customer pays only for the labor it used.

Other logistics firms have similar practices. ATC Logistics and Electronics, in the same AllianceTexas Park, uses local temporary staffing agencies to move workers not only between its own facilities and customers, but, in fact, sharing the pool of trained workers with other logistics service providers in the park and even outside the AllianceTexas Park—with the many logistics companies that comprise the Dallas/Fort Worth logistics cluster. UPS Supply Chain Solutions in Louisville can shift skilled workers from customer to customer as needed, even down to the level of moving people in the middle of a shift. If UPS’s warehouse workers finish packing the orders for one customer early in their shift, they can go help another.

Get Set … Ready … Recall: Unexpected Reverse Surges

Changing peak shipping periods across clients in a logistics cluster or a logistics park can be handled with certain advance preparation through resource swapping, as mentioned in the last section. Distribution operations in a logistics campus environment offer the ability to tackle unexpected requirements as well, thereby providing a significant value-added level of service.

Product recalls are the sort of events that keep upper management awake at night. A recall can be voluntary—when the company recognizes a defect in the product, or involuntary, when a regulatory agency orders a recall. In 2010, the Consumer Product Safety Commission in the United States issued 433 recall orders, while recently the Federal Drug Administration has been pulling more than 250 drugs off the market every year. The number of recalls reached 229 in the United Kingdom in 2010. And the number of recalls in the United States and Europe is expected to grow as regulation and enforcement are tightened.

Steffen Frankenberg, vice president DHL Solutions & Innovations said that “When it happens, the first thought is about brand protection and liability. The last thing being considered is the logistics capability in handling a product recall.”26

The stakes are, of course, substantial. In 2009, Maclaren recalled a million strollers after twelve children suffered fingertip amputations.27 Not being fully prepared led to chaos, the company’s CEO admitted: “We immediately realized we would need more of everything.” A well-handled recall can limit the damage to the brand and occasionally can actually enhance it. A 2010 study suggested that “87 percent of the 1,000 respondents agreed they are more willing to purchase from, and remain loyal to, a company that handles its product recall in an honest and responsible way.”28

Communications are of the utmost importance in recall situations, but the next most important thing is speed—replacing or repairing the defective product quickly. Getting ready ahead of time and having a plan for the logistics of handling the surge of reverse product flow can make the difference between a successful recall and a problem. To this end, large logistics service providers, such as UPS Supply Chain Solutions and DHL Solutions, can offer instant “ramp up” capabilities by reassigning warehouse belts, reallocating equipment, and shifting workers to a temporary short-term operation. Such flexibility exists only in the largest logistics campuses and parks. Another case of a logistics campus handling an unplanned surge caused by a regulatory edict is described on p. 130 in chapter 5.

Emergency Response

The resources available in a logistics park allow for many kinds of emergency responses, not only a product recall. Advanced BioHealing Inc. (ABH) is a San Diego–based manufacturer of Dermagraft, a bioengineered skin substitute made of living tissue. Once the complex manufacturing process is complete, the product is cryopreserved at minus 75°C (minus 103°F). In 2011, ABH contracted with UPS SCS for warehousing and distribution of Dermagraft. The decision proved to be prescient.29

On the evening of September 8, 2011, a major power outage knocked out electricity for up to five million people in Southern California, Arizona and Mexico. Two nuclear reactors were offline after losing electricity, and San Diego was brought to a standstill; all outgoing flights from San Diego’s Lindbergh Field were grounded.30 Mike Whitmore, ABH’s logistics manager, said, “We knew that with traffic congestion caused by the blackout and the airport’s inactivity, we had to rely on UPS to ship that day’s supply.” The looming problem resulted from the fact that ABH’s shipments are often synchronized with an appointment for a patient awaiting treatment. Patients—who may have mobility issues or other health problems—see their doctors for treatment on the same day that the Dermagraft arrives. But during the power outage, ABH could not ship anything out of the San Diego airport.

It was late in Louisville already, and UPS’s ABH operations team had left for the day. However, UPS was able to call them back and bring other qualified workers to the temperature-controlled warehouse. “There are a lot of requirements concerning how Dermagraft is handled, and all of those have to be followed or the product is no longer viable,” said Whitmore.31 For example, while UPS’s pharmaceutical-grade freezers in Louisville are maintained at the proper temperature, Rich Shaver, division manager at UPS Global Logistics and Distribution, Health Care added that “the freezer doors can be opened for just two minutes at a time when removing product and then they have to be kept closed for at least two hours before reopening them.” Yet, the UPS team was able to fulfill 100 percent of the day’s orders.

Sharing Knowledge When Contracts Change

The same interchangeability of assets that gives logistics providers flexibility brings with it a difficulty in keeping customers long term. If the trucks, ships, and aircraft of different carriers are all much the same, then customers can readily switch between competing service providers to gain the lowest cost and best service. Such customers routinely use bidding processes to find the current best cost/service combination, resulting in relatively frequent shifts of logistics contracts from one provider to another. When this is done by a multinational company operating a global logistics network, the logistics providers’ outposts throughout the world have to move the business to the other provider. Such a change affects the way the customers’ shipments are collected, routed, delivered, tracked, and paid for, throughout the world.

I witnessed one of these transfers while visiting the Air Logistics Park Singapore (ALPS), next to Changi Airport, where several logistics companies’ representatives talked candidly about these gyrations—one carrier’s loss was another’s gain. While I was there, DHL and UPS were in the middle of transferring a contract from DHL to UPS to handle regional freight for Phillips Health Care. When I interviewed Sing Kiew, solutions manager at Asia Pacific UPS Supply Chain Solutions, I was struck by the professionalism and customer orientation of both companies during the contract transfer process. “Our team and the DHL team, plus the customer—we were all involved in the meetings and talking about how to scale the transfer, with no baggage, no emotional hiccups, no rivalry,” said Kiew. These comments were echoed by Mary Yeo, UPS vice president supply chain operations South Asia Pacific, while describing the cluster operations in Singapore.

The uninitiated may be surprised that the “losing” company would support the change and cooperate fully with the “winner.” The reason for such magnanimous behavior is that everyone knows that the winner in this round of bidding might be the loser in the next round. Although the two carriers might be bitter rivals on the business front, the workers behind the scenes know that traffic ebbs and flows. The best strategy for everyone is to help ease the transfer for the benefit of the customer. “The customer is ultimately who we are going to support, or who we are going to serve, so that’s important for us and for our competitors as well,” added UPS’s Lai Sing Kiew. The same “customer-first” attitude was also evident when I visited the DHL offices in Singapore, discussing the issue with Stephan Muench, head of DHL In-house Consulting, Asia Pacific.

Clusters aid this transfer process. When a manufacturer or distributor changes logistics providers, the new provider needs to quickly learn the shipper’s processes, facilities, hours of operation, personnel, and various special requirements. When the logistics providers reside in the same location, it’s easy for them to coordinate the handover and provide the customer with a smooth transition.

Room for Growth

In addition to changes in demand caused by seasonal variations and economic conditions in various markets, the flows in a company’s logistics network might see large shifts as a result of new product launches, mergers, acquisitions, spin-offs, and strategic realignments. Such shifts may require the acquisition of new assets or divesting existing distribution center space.

Large logistics clusters include many companies operating in different industries and subject to different economic forces. The constant changes in business volume mean some growing companies need to lease more distribution space, and others may be downsizing by moving to smaller spaces or subleasing portions of their space. Unlike industrial infrastructure, such as manufacturing plants, warehouses can share equipment (e.g., floor space, shelves, conveyors, and forklifts) across industries, thus allowing the movements into and out of adjacent distribution space with relative ease.

Chicago, for example, has more than 1.1 billion square feet of developed warehouse and industrial space. With typical vacancy rates of about 6 to 9 percent, Chicago has 70 to 100 million square feet of space available at any given moment (and, unfortunately, 140 million square feet vacant during the 2009 downturn).32 Companies seeking spaces or selecting locations with an eye for future expansion will gravitate toward locations that have plenty of possible sites in a wide range of sizes.

When LEGO Systems Inc. needed to expand its distribution center in AllianceTexas by about 50 percent, Hillwood Development Company, the park developer and operator, was able to move LEGO from its 402,500 square foot facility to a 596,000 square foot facility down the street. The deal demonstrated the park operator’s ability to accommodate a customer’s growth.33

Such flexibility obviates the immediate need to move to a new geographical location, which may be costly because of the need to alter the logistics network. A new location may also require new procurement of transportation services and renegotiation of transportation service contracts, as well as potentially changing service commitments to customers and renegotiating supplier service agreements. In addition, it may require a new labor force, labor agreements, and potentially using a new logistics service provider. In clusters, the availability of larger and smaller nearby spaces enables the shipper or distributor to maintain a stable network even as volume grows or shrinks.

Cost and Service

Shippers and logistics service providers impose multiple requirements on their transportation carriers regardless of the product shipped. These include low and predictable price; short and consistent travel times; high departure and arrival frequency; high equipment availability; accurate and damage-free delivery; and ease of doing business with the carriers.

No single carrier can usually achieve all of these performance dimensions simultaneously for all types of cargo and all destinations, so shippers may have to trade off, say, low cost against fast service. For example, overnight air service is fast yet expensive, while truck service may take longer but costs less. This is clear to anybody who orders online from Amazon.com or other online retailers who offer a portfolio of shipping options: generally, the faster the delivery the more expensive the shipping.

Clusters bring improvements on each of these dimensions. A large concentration of logistics operations means large flows of goods. Carriers can lower their costs (and, in turn, their prices) by using larger conveyances, getting high utilization, using efficient pickup and delivery tours, and getting follow-on loads. Shippers’ costs can also be lowered by the ability of companies in a cluster to adjust the mode of transportation based on changing business conditions. Service is improved as a cluster grows because large clusters enjoy higher frequency service and more direct connections to more destinations.

The size of the cluster smoothes out freight flow fluctuations, creating predictable costs for carriers and predictable prices for shippers. Many of these advantages are rooted in the attraction of logistics clusters to multiple carriers, which creates a competitive environment. In addition, the large number of diverse products handled in a logistics cluster means that one company’s peak can be another company’s slack, allowing for shared distribution assets. It also offers long-term adjustment opportunities as the business environment changes.

All these factors contribute to companies’ location decisions and their ability to take advantage of collaboration opportunities. As Les Woch of Mars Incorporated commented in a telephone interview discussing companies’ location decisions (see p. 86 in chapter 3), “the collaboration point is absolutely something that we’re looking to optimize or maximize.”

The positive feedback loops discussed in this chapter are important mechanisms that help explain the growth of logistics clusters. These, however, are only partial explanations. Other factors contribute to both the launch and the growth of logistics clusters. Later chapters examine the role of infrastructure and government in enabling and nurturing logistics clusters. The next chapter shows the significant degree to which logistics service companies add value to the goods they handle and do more for themselves and their customers than just logistics, with clusters being the natural location for such activities.


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Copyright © 2012 Massachusetts Institute of Technology. (All rights reserved.)
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