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3. Geography of Logistics Clusters

Published onMar 26, 2020
3. Geography of Logistics Clusters
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Basic logistics services—transportation and storage—enable trade. By the seventeenth and eighteenth centuries, the prevailing strategy of trade-based economic growth was mercantilism, which called for maximizing exports through subsidies while minimizing imports through tariffs. Adam Smith, the father of modern economics, realized that mercantilism could not create economic growth for all nations at the same time because one nation’s export is another nation’s import. In 1776, he published the concept of absolute advantage, using labor productivity to explain that all nations can simultaneously get rich if they focus on their absolute advantages and practice free trade.1 To follow his argument, assume that the United States can produce more wheat per worker-hour than can the United Kingdom and that the UK can produce more yards of cloth per worker-hour. If the labor wages are the same in both countries, then the US should produce wheat, the UK cloth, and they should trade them freely, causing both nations to be better off compared to each producing everything. Of course, export-import trade grows naturally when there are no local substitutes. Japan buys oil from Saudi Arabia, and China buys Chilean copper because Japan does not have local sources of oil and China doesn’t have enough local copper ore to meet local demand. Ditto aluminum, steel, gold, wheat, fruit, and so on.

This, however, is only half the story of trade, because some nations may have no absolute advantage in anything. The notion of comparative advantage explains how trade across geographies can create value for both trading parties, even if one party can produce all goods with fewer resources than can the other. Comparative advantage means that one party can manufacture a product with the highest efficiency relative to all other products that it could manufacture. The notion of comparative advantage is attributed to the English political economist David Ricardo, who used England and Portugal as representative examples in his 1817 book.2 Ricardo supposed that Portugal could produce both wine and cloth cheaper than could England, but the relative costs of production are different in the two countries. In Ricardo’s example, the English could produce cloth at moderate cost and wine only at a very high cost. In contrast, the Portuguese could make both wine and cloth very inexpensively. With these relative production cost structures, Portugal would benefit from producing more wine for export to England, even if it meant sacrificing local cloth production in favor of importing the more expensive English cloth. That is, the Portuguese economy would do better to convert fields of flax and cotton and sheep farms to highly profitable export-oriented vineyards. Therefore, while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine and trade that for English cloth. England will also benefit, because while its costs of producing cloth have not changed, it can now get wine at a lower price, closer to the cost of cloth. Thus, each country gains by specializing in the goods in which it has comparative advantage and trading that batch of goods for the other. A succinct numerical example of the same argument was recently outlined by Krugman in his New York Times column.3

Interestingly, neither Smith nor Ricardo included logistics costs in their analysis. Trade requires two basic logistics functions: transportation and storage, the costs of which must be carried by the price of the goods. First, goods must be moved from the place of production to the place of consumption. Second, goods may need to be stored for reasons that include: (i) differences between the rates of production and consumption; (ii) the use of large, discrete shipments favored by the technology and economics of transportation; (iii) uncertainties of supply and demand; and (iv) opportunities to take advantage of temporal and spatial price fluctuations. Obviously, if the costs of transportation (and the warehousing associated with it) are high relative to the price of the goods, there will be no trade.4

The technology and economics of transportation often favor movements through central consolidation facilities rather than directly between origin and destination (see chapter 4). These transportation consolidation hubs have naturally been associated with important transportation infrastructure facilities, such as ports and crossroads. Given the flow of goods through the hubs, many other logistics-related services, including warehousing and distribution, naturally migrated to these hubs, causing them to develop, in many cases, into full-fledged logistics clusters. As the need for logistics activities grew over the centuries and accelerated with rising globalization at the end of the twentieth century, these logistics clusters grew in size, importance, and economic impact. The growth in globalization is, in significant part, the result of the efficiency of the global logistics system. Thus, logistics clusters have contributed to the efficiency of the global systems of shipping and storage and therefore to outsourcing, international trade, and globalization, which in turn caused more global trade flows, leading to larger and more efficient logistics clusters.

This chapter introduces four key logistics clusters (The Netherlands, Singapore, Panama, and Memphis) to illustrate the interplay of logistics principles, geographic features, and historical events leading to the co-development of high-performance logistics and regional economies.

The Netherlands: Natural Routes, Ports, and Traders

Two thousand years ago, Julius Caesar recognized Holland’s importance for logistics when he brought his legions down the Maas River and across the Rhine River to extend the reign of the Roman empire into northern Europe in the 50s BCE. The pattern of Roman activities illustrates how geography influences the development of logistics hubs. River ports, such as those along the Rhine, and seaports, such as those along Europe’s northern shores, made for natural nodes in a supply chain in both ancient and modern times.

Minimizing the Cost of Pax Romana

In order to control and impose their will on an empire stretching from today’s England, most of Europe, northern Africa, and the Middle East, the Romans stationed troops throughout their vast empire. Keeping large armies in remote hinterlands required significant logistics prowess; a single Roman legion spanned a force of 4,000 to 5,000 men with associated war horses and draft animals that, in turn, required tons of food, water, and animal forage every day. Inducing Roman soldiers and their leaders to spend years in cold northern European postings also meant supplying some familiar southern European creature comforts such as olive oil, wine, and garum (a Roman condiment made from fermented fish).

The unit costs of transportation—typically measured as the cost of moving one unit of weight across a unit of distance, such as dollars per ton-mile—varied across transportation modes in Roman times, as they do in modern times. Seaborne freight was the least expensive; river barges cost about five times more than ocean freight, and land-based freight was probably twenty to sixty times as expensive as ocean freight.5 But the unit cost of each mode does not tell the whole story, because the constraints of geography mean that different modes require different distances to move between any two given points. Although ocean freight might be the least expensive unit cost, the long ocean distances from Rome around the Iberian peninsula and into the rough Atlantic made the sea no panacea, especially for supplying inland locations like Colonia Claudia Ara Agrippinensium (now Cologne, Germany), which was the Roman provincial capital of Germania.

The 1,232-kilometer-long Rhine River, with its north/northeasterly flow, made a natural choice for moving the Roman supplies around the northern limits of the empire. The Romans’ string of dozens of forts, camps, and river ports testifies to the empire’s use of the Rhine and affiliated rivers as natural arteries for moving the Roman legions and supplies from south-central Europe into the Gallic and Germanic parts of Europe. As an illustration of the scale of the Roman logistics operations, consider that a single tax collection expedition in 16 CE involved constructing and sending 1,000 vessels of various types down the Rhine.6

Changing Modes Leads to Logistics Nodes

During Roman times, the main flow of the Rhine entered the North Sea at the Roman naval base of Lugdunum (now Katwijk, the Netherlands).7 This settlement at the boundary between river and sea exemplifies a common type of transportation network node: a terminal facility dedicated to the interface between two modes of transportation. In many cases, because of the different characteristics of the modes involved, timing issues, and other considerations, such transportation nodes were also used for warehousing and distribution activities, making them important logistics hubs.

The Romans also used the mouth of the Rhine River for crossings to Britain in the first century CE, according to the contemporaneous historian Strabo.8 At Lugdunum, the Romans would off-load supplies from the small flat-bottomed river barges coming down the Rhine and then reload them onto larger, deeper-bellied ocean-going vessels for the channel crossing to Britain, feeding the Roman legions conducting campaigns there. Lugdunum was also used for inbound shipments—ocean freight, such as wine from Gaul (now France), came to Lugdunum, where it would be transferred from ocean freighter to river barge and distributed to the Roman facilities along the Rhine. Because of the mismatch of schedules and capacities of the various vessels and the need for holding supplies that might be distributed to various garrisons up the Rhine or other local rivers, Lugdunum would have held stockpiles of many goods, as evidenced by the large granaries in Roman ruins near Katwijk. Although Rome would fall, this region at the end of the Rhine would continue as a node in the global logistics network, handling the flow of goods between inland Europe and global trade by sea.

Dutch East India Company

The rise of modern-day Holland as a logistics cluster came with growing global trade in the fifteenth and sixteenth centuries, especially with new opportunities for trade in luxury goods such as South Asian spices (pepper, cloves, cinnamon, cardamom, nutmeg, etc.), Chinese crafts (porcelain and silks), Indian textiles, and Japanese lacquerware. The promised riches of the spice trade encouraged a frenzy of investment and new expeditions in the late 1500s by seafaring European countries, including the Dutch. The Dutch government saw, as early as 1598, the undesirability of intra-Dutch competition for Asian trade and nudged the major players to pool their capital and fleets to form a single trading company. In return, the government promised to give the combined entity a twenty-one-year monopoly on the spice trade and trade relations with Asia.9 In 1602, traders and investment pools from six Dutch cities merged to form the governing board of the Dutch East India Company—Vereenigde Oost-Indische Compagnie (VOC) (literally meaning United East India Company).10 Of these six cities, Middelburg, Rotterdam, and Amsterdam grew to be major logistics nodes in the global commerce of the era.

The Dutch East India Company was the first major multinational company, with immense, even quasi-governmental powers. It had its own armed forces, conquered lands, established colonies, negotiated treaties, coined money, and imprisoned and executed convicts. During the sixteenth and seventeenth centuries, it employed, in total, almost 5,000 ships in Asia-Europe and inter-Asia trade.11

In One Pier and Out the Other: Transshipment Nodes

Logistic terminals are geographic locations—nodes in the logistics network—where the shipments that flow through the network from multiple origins to multiple destinations transfer from one conveyance to another. The purposes of such transfer include consolidation (and deconsolidation), changing modes of transportation, or forwarding from one carrier to another. In airports, for instance, shipments move from airplanes to trucks or to other airplanes, or from trucks to airplanes; in seaports, shipments move between ships or between ships and railroad or trucks; in rail intermodal yards, shipments move from rail to trucks or trucks to rail, and so forth. Many terminal operations also store shipments as they wait for the next leg of their journey.

One measure of the importance—as well as of the performance—of a transportation hub is the fraction of transshipments—goods transiting the terminal (e.g., imported and then immediately exported) rather than remaining in the local area. High transshipment volumes reflect a terminal’s importance and efficiency because they represent goods coming to a place for no other reason other than to perform logistical functions there. Given the significant costs of route deviation, stopping, unloading, storing, and reloading goods, transshipment through a hub would not occur unless that hub could offer significantly reduced transportation costs, improved transportation service, or the availability of other services. For example, Dubai has developed into a logistics hub; while it imports $17 billion annually, it is a gateway to an estimated (in 2009) $150 billion export/import market every year.12 In contrast, ports such as Shanghai and Tianjin in China or Los Angeles/Long Beach (LA/LB) are important for a different reason: they serve as departure or entry points for cargo leaving/entering China and cargo entering/leaving the United States, respectively. These ports, however, also serve important transshipment functions since the goods are not originated from or destined to the local area (such as the LA basin or the city of Shanghai) but rather used to ship goods from/to the entire United States and China, respectively.

Major logistics nodes in the global supply and distribution network tend to have high percentages of transshipment. Such transshipment-dominated nodes are known as entrepôt (from the French for “warehouse”). The advantages of transshipments are the reason for the structure of many transportation systems as hub-and-spoke networks, with a transshipment node at the network’s hub. Even as early as 1567, more than 30 percent of Dutch port operations were re-exports. This percentage grew to 50 percent in 1650 and nearly 70 percent in 1770. Today, transit and re-export shipments constitute over 50 percent of the Dutch ports’ freight volume.

Rotterdam: Rise of a Modern Port

The culture, geography, and expertise developed during centuries of trade enabled the Netherlands to continue to be a trading center even after the demise of the Dutch East India Company in 1796. The Dutch invested continuously in transportation infrastructure to remain competitive in logistics operations. To this end, they built more and larger canals; Amsterdam, for example, built large new canals in 1825, 1876, and 1952. Some canals created new routes or shortcuts, such as the Amsterdam canals to the Rhine River and North Sea. Other canals, such as those around Rotterdam, replaced or enhanced pre-existing natural water courses that had silted up over the years. Through the centuries, other modes of transportation (rail, truck, and air) arose and the Dutch adopted them, too. The country became crisscrossed by a network of freeways and rail lines connecting to major European networks. A network of 1,500 kilometers of pipelines buried underground throughout Holland, Belgium, and Germany handles the petrochemical products refined at Rotterdam. Amsterdam’s Schiphol airport handled over 1.5 million (metric) tons of cargo in 2010, making it the fourth largest airport in Europe in terms of freight movement.13

For nearly forty years, the largest port in Holland—in fact, the largest port in the Western hemisphere—has been Rotterdam.14 What began in the 1200s as a small fishing village a few dozen kilometers up the Maas River from the sea expanded to cover both banks of the Maas and extend all the way out into the sea. The Dutch use the comforting term of “haven” as their word for a ship’s harbor, and Rotterdam has dozens of these havens nestled along both banks of the Maas. Starting from the sea, a tour of the 40-kilometer-long massive port complex finds all manner of named havens from the quixotic Tennesseehaven, the aspirational Europahaven, the honorary Princess Beatrixrhaven, and the depressingly functional Petroleumhavens 1E through 8E. Each one of these “havens” includes one or more terminals, where maritime logistics operations—unloading, storing, sorting, and loading—between ships, river barges, rail cars, and trucks take place. As one travels up the Maas River, the large ocean-going ships thin out and narrow river barges take their place. At any given time, more than 300 vessels might be in Rotterdam and, over the course of a year, some 34,000 seagoing vessels and 133,000 inland vessels call at Rotterdam.15

What happens off the water matters even more because of all the logistics activities that occur on land. These include storage, customs processing, distribution, and value-added activities. Next to Rotterdam’s havens stand warehouses, factories, petrochemical tanks, refineries, power plants, and container yards. For example, the energy and petrochemical industry sector of the Rotterdam port comprises over 100 sites and attracts new investments of over one billion euros per year. Throughout the port, roadways and railways ramify like capillaries to both nourish and draw nourishment from the hundreds of port facilities lining the route to the sea. Modern trains shuttle freight on dedicated cargo rail lines between the port of Rotterdam and the German industrial regions. In total, the port employs about 86,000 people directly. Another 200,000 workers depend on the port’s activities for their jobs.16

Rotterdam’s rise came from a long-running series of infrastructure projects that cemented the city’s role as a logistics hub. For example, in the mid 1300s, a canal connected Rotterdam to the larger industrial towns of the north, including Delft. This spurred Rotterdam’s rise as a transshipment port for three directions of trade: North Holland via the canal, Germany via the Rhine, and the rest of the world via the sea. Vessel-to-vessel transshipments still account for more than 35 percent of Rotterdam’s traffic. Of the rest, about 50 percent is transit volume that moves through the port to the rest of Europe, including 60 percent of containers.17 Today, the port covers 105 square kilometers (40.5 square miles) and extends into land reclaimed from the sea. What began in medieval Europe now finds itself in a logistical geographic center of Europe, with 150 million consumers within a 500-kilometer radius.

Cosmopolitan Community

Daniel Defoe, the English writer best known for his novel Robinson Crusoe, commented on the Dutch character in 1728: “The Dutch must be understood as they really are, the Carryers of the World, the middle Persons in Trade, the Factors and Brokers of Europe: . . . They buy to sell again, take in to send out: and the greatest part of their vast commerce consists in being supply’d from all parts of the world that they may supply all the world again.”18 The Dutch propensity for world trade comes, in part, from a high degree of cultural tolerance that enables trade. By definition, global trade means dealing with outsiders. This implies both a citizenry that tolerates foreigners and immigration policies that enable foreign traders (e.g., ex-pats) to live and work in a trading country. Whether a cultural predilection for tolerance led the Dutch to be traders or whether being traders led the Dutch toward greater tolerance isn’t clear.

Regardless of the original cause, centuries of Dutch history include examples of immigrants fleeing religious persecution or seeking better livelihoods in the Netherlands. Anne Frank’s experience in Amsterdam in World War II as a Jew hidden from the German police wasn’t the first example of the Dutch penchant for accepting and sheltering refugees from persecution. During the Inquisition, on the Iberian Peninsula in the fifteenth and sixteenth centuries, Jews fled to the Netherlands; during the Protestant Reformation in the sixteenth century and leading up to the English Civil War in the seventeenth century, English Protestants came to the Netherlands. Similarly, Protestant Huguenots fled Catholic persecution in France and came to the Netherlands in the sixteenth and seventeenth centuries. Even the American Pilgrims, who founded Plymouth Colony in Massachusetts in the United States, first spent about a decade living in Holland on their long journey to escape English religious persecution.

Nor was the influx of foreigners without tangible economic benefits. Iberian Jews not prohibited by creed from lending or borrowing money helped establish Amsterdam as a major financial center. Flemish printers, fleeing Catholic restrictions on publishing, made Holland a major center for knowledge and book printing. As a result of centuries of immigration, the Netherlands has an extremely cosmopolitan demographic. Ethnic Dutch are almost a minority in Rotterdam, and this inclusiveness continues—in 2009, Ahmed Aboutaleb, a Moroccan-born son of an Islamic preacher, became the mayor of the city.

Singapore: A Trading Hub

On the southern tip of the Malaysian peninsula sits the island of Singapore. Less than one-quarter the size of Rhode Island, Singapore is home to five million people and an economy that provides a standard of living higher than that of the United States. Yet Singapore has almost no natural resources. Its wealth derives from its location and its people. Like Rotterdam, Singapore thrives on transshipment; it transships a full fifth of the world’s maritime containers.19 In fact, Singapore is the world’s busiest transshipment port; about 85 percent of the containers that come to the port of Singapore never officially enter the country and over half of the remaining 15 percent eventually leave Singapore as re-export.20 A significant part of the nation’s economy comes from the logistics activities built around its port and airport, through which more than $500 billion in goods flow every year. Goods don’t “go to Singapore” as much as they “flow through Singapore.” Singapore became a major node in global trading networks for four reasons: geography, weather, culture, and continuous investments by the government.

Geography: Meet You at the Corner of East and West

First, the Malacca strait between the Malaysian peninsula and the large island of Sumatra represents a natural meeting place between the East Asian economies on the Pacific Ocean (China, Japan, Korea, Taiwan, and Vietnam) and the South Asian and Western nations (e.g., India, the Middle East, and Europe via the Suez Canal). Sea-borne goods between the two regions traverse the Strait and turn the corner at Singapore. In historical times, Chinese junks (boats) were laden with silks, damasks, porcelain, pottery, and iron. Indian and Arab ships brought cotton textiles, Venetian glass, incense, and metal. Finally, the Malaysian peninsula provided its own products for trade, such as pepper, gambier (a dye for silk and leather), and tin. Written records of Singapore, then known as Temasek, date back to 1349, although sketchier records suggest trade in the area going back to the second century CE. In 1819, when Sir Thomas Stamford Raffles chose Singapore as a British base for trade, he picked it for crucial logistic qualities including location, the depth of the port, ample fresh water, and abundant timber for repairing ships.

Weather: Enabling Reliable Trade

Second, Singapore’s equatorial location brings another advantage to reliable transportation—almost no extreme weather. Large cyclonic storms such as typhoons and hurricanes arise from the interaction of tropical low-pressure systems and the Coriolis effects of the Earth’s rotation. These rotation effects mean that storms in the Northern hemisphere spin counterclockwise, those in the Southern hemisphere spin clockwise, and storms on the equator don’t spin at all. This lack of spin in equatorial storms means they never organize and grow into the destructive behemoths found in higher and lower latitudes. Singapore’s climate can best be described as monotonous, with lows around 75°F (24°C) and highs near 90°F (32°C) all year round. In the past hundred years, Singapore has not seen temperatures colder than 67°F (19°C) or hotter than 97°F (36°C).

What does vary are Singapore’s prevailing winds, and they played a crucial role in the early history of the region as a trading node in the global transportation network. From June to September, the prevailing winds enabled Arab and Indian traders to sail to Singapore. From December to March, the prevailing winds enabled Chinese traders to sail to Singapore. The winds that brought the Chinese junks also enabled the Indian and Arab ships to sail home and vice versa. Each group sold its products at the trading center and bought back wares brought by the other traders. Thus, Indian and Arab goods moved to the Malacca straits and then to China and other East Asian markets while Chinese and East Asian goods flowed in the opposite direction. This pattern of trade also made Singapore a multicultural society.

Culture: A True Nation of Traders

Third, Singapore is even more cosmopolitan than Rotterdam. From the beginning, the city’s only reason for existence was international trade, which brought a massive influx of Chinese, Indian, Arab, British, Dutch, and Indonesian traders to the island. Although culturally diverse, the immigrants to Singapore shared a culture of trade and an understanding of the associated economic gain. Ethnic Malays may be the nominal natives of Singapore, yet they, too are mostly immigrants from other areas and comprise a scant 13 percent of Singaporeans. Raffles’ original city plan for Singapore divided the city into ethnic quarters. Although these divisions survive as quaint ethnic tourist areas, the descendants have moved into largely integrated, modern high-rise apartment buildings. To this day, Singapore remains multiethnic with four official languages: English, Malay, Chinese, and Tamil.

Investment: The Literal Growth of an Island

Finally, like Rotterdam, Singapore isn’t satisfied with its natural geography. While the Singapore River and surrounding waters provided a natural harbor for servicing nineteenth-century sailing vessels, growing trade and growing vessel sizes soon stretched the limits of the natural harbor. The advent of bigger ships changed the definition of “deep water” for harbors. In 1849, Singapore identified Keppel Harbor (then known as New Harbor) for expansion, which led to the development of thousands of feet of new piers and wharves. As trade expanded, Singapore undertook various infrastructure projects, such as filling in beachfront space to create a main road between various port facilities. Singaporeans also built breakwaters, replaced wooden piers with earth and concrete quays, dredged deep channels and ports for larger ships, and filled in the sea between small outlying islands to create larger, more functional land. To do this, Singaporeans leveled local mountains and imported sand from neighboring countries. Since the 1960s, the island’s land mass has grown 21 percent (581.5 km2 in the 1960s to 712 km2 in mid-2010).21

Ultimately, the very geography of the Malacca Strait may limit Singapore’s growth as a maritime hub and therefore the future of its logistics cluster. The 25m depth of the strait at its shallowest places an upper limit on the size of ships (called Malaccamax) that can take that route. Already, some of the largest crude oil carriers exceed this specification and must take other routes between Middle East oil sources and Asian oil customers. As a result, Singapore and surrounding nations might dredge deeper channels in the strait to permit the passage of ever-larger vessels.

Panama Canal: A Man-Made Shortcut

The North and South American continents stretch over 8,700 miles from the often-frozen Arctic north to the ever-stormy Cape Horn in the south, separating the Pacific Ocean from the Atlantic Ocean. In the early days of American civilization, crossing from the east coast to the west coast of the Americas required either a long, arduous overland journey or an even longer, arduous sea voyage. The quest for the fabled Northwest Passage, the Louis and Clark expedition, and the lives of many explorers testify to the extreme interest in finding a path between the seas. Fortunately, halfway between the top and the tail of the Americas sits the conveniently narrow Isthmus of Panama, which in its natural form is but a swampy stretch of tropical forest.

Developing this isthmus into the Panama Canal and establishing a logistics cluster around the canal illustrates a somewhat different type of cluster than either Rotterdam or Singapore. Rotterdam represents a mode-changing node where most goods move from ocean-going vessels to and from smaller ships, barges, rail cars, trucks, and pipelines, for distribution to Germany and the rest of Europe’s hinterland. Because cargo must be unloaded, sorted, stored, and loaded, its handling involves many logistics-related operations and an opportunity for even more value-added activities. Singapore represents a central consolidation/deconsolidation hub focused on transshipments between ocean going vessels.

In contrast to Rotterdam and Singapore, the Panama Canal was conceived as a link—a connector—in the international maritime trade network; it was developed neither as a consolidation node nor as a mode-change terminal node. It is an artificial conduit of maritime traffic (think of it as a toll road) between the Pacific and Atlantic Oceans. To make sure that it leverages the canal’s traffic, and especially the increased traffic expected to follow the latest expansion, Panama focused its 2010–2014 strategic plan in large measure on logistics, with a vision to become “hub of the Americas” and specifically on “leveraging the [canal’s] traffic to generate incomes by providing services with added value to the products which go through Panama.”22 In other words, Panama is investing in the conditions for logistics clusters development around its canal. Panama’s goal is to provide more value to the passing traffic than just a shortcut, becoming a hub of distribution and logistics operations between East and West.

The history of Panama is the history of three increasingly costly investments in transportation infrastructure—a road, a railroad, and a canal. These investments in this geographically propitious location created a new route, and new midpoint in many East–West journeys, and thus led to the development of a logistics cluster in Panama.

The First Path between the Seas

The first significant man-made path between the seas was the Camino Real—literally, the King’s Road. In 1519, 4,000 native slaves built a 50-mile-long isthmus-spanning wagon road that was wide enough for two carts. Slaves and mule trains carried cargo on multiday treks between the Atlantic and Pacific sides of Panama. Incan gold and silver from Peru crossed from the Pacific side to the Atlantic seaport of Portobello to await pickup by an annual arrival of a small fleet of ships from Spain. European goods, brought annually by the Spanish fleet, traveled from the Atlantic to the Pacific side to support Spanish aristocrats, merchants, and clergy operating on the western coasts of both North and South America.

Later, the Spanish developed a second crossing—Camino de las Cruces—that cut the overland part of the trek in half, using the Chagres River for the Atlantic-side half of the journey across the isthmus.23 Most merchandise followed this combined river and land route, but the Spanish avoided using that route for precious metals because the short coastal leg from the mouth of the Chagres to the Caribbean seaport of Portobelo was too exposed to pirate attacks.24 These land and river crossings would suffice for more than three centuries until the collapse of Spain’s New World ambitions reduced the volume of trade flowing through Panama in the early 1800s. Trade declined so much that the jungle had reclaimed all the wagon roads across the isthmus by the 1940s.25

The Second Path between the Seas

The second path between the seas came in the mid-1800s. Although Spain’s New World Empire had collapsed, new developments in the Western Hemisphere brought new trade flows. With the steady development of the western frontier of the United States, people and goods began to go west to places such as California and the Oregon territories. In the mid-1800s, westbound settlers traveling from, say, New York to San Francisco had only three ways to reach the Pacific side of the United States: a 3,000 mile trip, much of it by horse and wagon across 1,700 miles of wilderness and high mountains inhabited by sometimes-hostile Indians; by a long 13,000 mile sea journey around Cape Horn; or by a two-legged 5,000 mile sea journey that included a trek across Central America in Panama, Nicaragua, or Mexico.

Although crossing Panama by foot or cart took only a few days under good conditions, the journey was beset by profiteers, bandits, pestilence, and mud. In 1847, one year before gold was discovered in California, a group of New York financiers founded the Panama Railroad Company. They planned to build a railroad following the now unused Camino de las Cruces route. Construction of just 47 miles of railroad (and 300 bridges) cost the investors $7.5 million (over $200 million in 2012 dollars) and cost 12,000 workers their lives as a result of poor sanitation, malaria, yellow fever, and Chagres fever.26 Per mile, this was the most expensive railroad in the world to use—a one-way ticket for the three-hour journey cost $25 in gold (about $650 in 2012 dollars).27

Despite the cost, the Panama Railroad offered a major improvement in transcontinental transportation. Rail could move more goods, heavier loads, and at higher speeds than could mules. Rail also had higher immunity to weather and the sticky blue-black mud of the Panamanian jungles. Completed in January 1855, the railroad earned back its lavish costs by 1862 as traffic surged during the California gold rush. At one point, Panama Railroad shares became the highest-priced stock on the New York Stock Exchange.28

Sometimes even a great shortcut, like the Panama Railroad, can be trumped by an even better route. In 1869, the Panama Railroad lost traffic when the Union Pacific Railroad completed its transcontinental line directly from Omaha, Nebraska, to Sacramento, California. The new railroad meant that US transcontinental traffic could take the train 3,000 miles directly between the coasts and totally avoid the 5,000 miles of sea journey involved in the Panama route.

The Third Path between the Seas29

The third path between the seas would be the most ambitious and most expensive. A canal would enable large ships to pass directly between the Atlantic and Pacific with no unloading, land-based transport, and reloading of goods. The US Government had, since 1804, been interested in a canal across Central America, in part because it would allow the US Navy to move warships more quickly between the Atlantic and Pacific sides of the Western Hemisphere. To this end, President Ulysses S. Grant sent seven expeditions to Central America between 1870 and 1875.

Meanwhile, after Ferdinand De Lesseps and the French successfully completed the 105-mile Suez Canal in 1869, De Lesseps turned his attention to Panama. Backed by as many as half a million French citizen-investors, he planned to copy his Suez design by creating a sea-level canal at a projected cost of $120 million (about $2.4 billion in 2012 dollars) over a three-year period. The French started their efforts by purchasing the Panama Railroad Company for $20 million. They would use this existing transportation mode to support construction of the new mode. The canal would parallel the railroad and the railroad would move supplies to the canal construction site and carry millions of tons of earth away from the canal diggings.

De Lesseps’s efforts were doomed by disease, corruption, ineptitude, and the magnitude of the project. The terrain of Panama was unlike that of the flat Suez region, and De Lesseps’s sea-level canal plan called for moving mountains, literally. After five years of work, the company went bankrupt in 1889. A new French company attempted to restart the work, but it failed, too. In total, the French spent some $287 million (in 1893 dollars, equaling over $7.5 billion in 2012 dollars) on the failed effort,30 which was more than three times what they spent on the Suez Canal. In addition, some twenty to twenty-two thousand men lost their lives in the French effort. The scandal of the misadventure led to the trials and convictions of Ferdinand De Lesseps, Charles De Lesseps (his son), Gustave Eiffel (creator of the eponymous tower), and a number of others involved in the project.

In 1902, the US Congress agreed, conditionally, to buy the assets of the failed French canal efforts for $40 million. Following complex negotiations with Colombia, Panama, and France—and after helping the Panamanian independence movement secede from Colombia—the US government completed the transaction in 1904. The United States agreed to pay the French, pay Panama, and pay for the completion of the canal but only under the condition that the United States retain control of the canal, and had certain rights (and obligations) to the newly formed government of Panama. Most important, the United States was given control of a 10-mile swath through Panama on both sides of the canal, an arrangement cemented in the Hay–Bunau–Varilla Treaty in 1903.

The American attempt to complete a canal would use some of De Lesseps’s channels but not the original sea-level crossing. Instead, the new design would raise and lower ships by 85 feet to accommodate the terrain through a system of locks. The Americans also widened the canal at the request the US Navy, which wanted ample width for the largest future American battleships.31 Each lock chamber would be 110 feet wide and 1,000 feet long. The system consists of twelve lock chambers (three double-chambered locks on each end of the canal) and 92 swinging lock gate doors weighing an average of 650 tons each.

Finally, in August 1914, the Panama Canal opened the third, and largest, path between the seas. In total, some $352 million (in 1914 dollars, equaling more than $8.5 billion in 2012 dollars) were spent, and as many as 5,600 additional lives were lost during the American completion.32

The canal opened in the same month that fighting in World War I began in Europe. In World War II, the canal proved its military value when the United States quickly moved warships from the Atlantic Ocean in order to restore the decimated Pacific Fleet after the Pearl Harbor attack. Owing to the original US Navy requirements, the United States could move its Essex Class carriers back and forth through the canal, as well as the largest battle ships, such as the Missouri, which transited the canal in October 1945 after hosting the Japanese surrender ceremony on Tokyo Bay.

Following rising tensions between the United States and Panama, President Carter signed the Torrijos–Carter Treaty, transferring the canal back to Panama at the end of 1999. Commercially, the canal thrived under Panamanian rule. Led by its capable chief executive Alberto Aleman Zubieta, the Panama Canal Authority (Autoridad del Canal de Panamá or ACP) improved service and installed a sophisticated pricing system based on reservations, auctions and yield management, increasing from 230 million Panama Canal tons in fiscal year 2000 to 322 million Panama Canal tons in fiscal year 2011.

Since its transfer to Panama on December 31, 1999, the Panama Canal Authority has contributed to the National Treasury B/.6,577 million in direct contributions, compared to B/.1,877 million delivered during 86 years of U.S. administration, mainly attributed to the strategically designed business model to ensure increased and sustainable financial results.

Building a Logistics Cluster

For many years, shipbuilders limited the size of most military and commercial vessels to fit the canal’s dimensions—designated as Panamax vessels. Larger vessels built later were designated as Post Panamax. As the numbers of Post Panamax vessels grew, taking a large portion of international trade, Panama became concerned about the future relevance of the canal. In 2006, Panamanian voters approved an expansion project to add a new set of larger locks and double the capacity of the canal. It is scheduled for completion in 2014, 100 years after the inauguration of the original canal.33

Aleman and the Panamanian government understood that just charging tolls would shortchange the potential impact of the expansion, as reflected in the Panamanian 2010–2014 strategic plan. He outlined his vision to me during two conversations: the first in his ACP office in the canal administration building, an imposing 1914 structure with a breathtaking rotunda, and the other in Kuala Lumpur while keynoting an MIT conference there. In both cases, Aleman stressed that while Colón, at the Atlantic end of the canal, is already a significant transshipment port, Panama has to maximize the canal’s potential by providing more services, becoming a center of logistics and related maritime value-added activities. In fact, Panama aims at nothing less than becoming the logistics hub of the continent. It is therefore investing in the development of new logistics parks as well as new terminal facilities along the canal—in particular at its Pacific and Atlantic mouths.

The Panamanian government also enacted several laws to enhance the attractiveness of Panama to companies moving their logistics operations (as well as administrative and headquarters functions) to Panama. In her Spartan office in Panama Pacifico, the developing logistics park on the canal’s Pacific side, Angelica Bertoli, the lead counsel for the park’s master developer, London & Regional, outlined for me several elements of the government’s regulatory efforts.

For example, a 2007 law exempts foreign companies from the cap on the number of expats employed; eliminates income tax on provision of service to affiliates abroad (Panama has no tax anyway on operations outside Panama); and facilitates work permits for workers coming into Panama. Earlier, a 2004 law34 gave companies operating in certain “special economic areas” benefits such as streamlined coordination of all government functions and licenses; no indirect taxes and waiver of most direct taxes; and longer-term work visas, including family visas. Most important, the 2004 law eased labor rules, letting companies choose their own weekly day of rest for employees, capping overtime charges, and easing the termination of labor contracts. Most logistics parks in Panama have been classified as special economic areas, including Panama Pacifico and the port of Colón, on the canal’s Atlantic side.

Such efforts have borne fruit. By 2009, several multinational companies had anchored their Latin America logistics and related operations in Panama Pacifico. These companies include the 3M Company, Panamericana S.A. (the largest logistics company in Venezuela), BASF SE, Caterpillar Inc., and Dell Inc.

Memphis: A Cluster in the Heartland

As with the Rhine River, the Mississippi River offers both logistical opportunities and perils. The fourth longest river in the world, the Mississippi provides access to a vast swath of the central United States. The tributaries of the Mississippi river system underlie a water transportation network that spans from Nebraska in the west to Pennsylvania in the east to northern cities such as Minneapolis and Chicago (via portage or canal). The river provides a natural channel for bulky commodities such as petroleum, corn, wheat, soybeans, cotton, wood, coal, and iron carried to and from the port of New Orleans on the Gulf of Mexico. In 1819, John Overton, James Winchester, and Andrew Jackson (who later became president of the US) founded the city of Memphis on flood-resistant bluffs above a bend in the river.35 The founders named the city Memphis, after the ancient Egyptian capital and overseer of the mighty Nile.

A Slave to Cotton

As a result of its flood-resistant central location on the Mississippi river, Memphis became a center for cotton trading in the 1800s. Because the cotton economy of the antebellum South depended on the forced labor of large numbers of African-American slaves, Memphis also became the largest slave market in the mid-south.36 As the town grew, so did its connections. A steamship line connected Memphis to New Orleans in 1834 and a railroad line linked Memphis to the Atlantic Ocean at Charleston, South Carolina, in 1857. In the 1850s, the city’s population quintupled to 33,000 people. After the Civil War and the end of slavery, Memphis continued to trade in cotton and cotton byproducts as well as hardwood lumber and hardwood byproducts. In 1892, Memphis got its first bridge across the Mississippi, the southernmost bridge at the time. A total of eleven trunk railroad lines connected the city in all directions.37

Memphis’s role as a barge and rail logistic hub continues to this day. It is the second largest inland port on the Mississippi and handles nineteen million tons of cargo annually. Five Class I US railroads38 connect Memphis to 60 percent of the US population by overnight rail.39 When trucking grew as a mode for freight transportation, Memphis became home to 400 trucking terminals. But the biggest change was the rise of a new mode of transportation: time-definite airfreight, which attracted a new breed of logistics operations to Memphis.

Fred Smith’s Crazy Idea40

In 1965, a dashing young southern heir to a regional bus company wrote a college term paper at Yale on a new idea for a reliable nationwide airfreight package delivery service. Fred Smith proposed that the company would use a hub-and-spoke system by flying all the parcels to one location in the evening, sorting them quickly, and sending them on to their destinations in the wee hours of the morning. Smith’s professor was not impressed by the paper’s idea, and legend has it that he commented that “in order to have a better than a C grade, the idea has to be feasible.”

In the summer of 1969, after two years with the Marine Corps in Vietnam, the 25-year-old Captain Fred Smith returned home to a hero’s welcome, a new baby daughter on the way, and the tatters of his stepfather’s failing aviation services business in Little Rock, Arkansas. Smith took over management of the company and looked for new opportunities, such as executive jet spare part sales and brokerage of the small executive jets that were then coming into fashion. Smith also began to think about his old term paper in response to his own experiences with horribly unreliable airfreight shipments. A shipment of airplane parts sent by the “fastest” airfreight service might arrive days or even a week late. That experience and market research showed Smith that existing airfreight companies weren’t satisfying customers’ needs.

Smith realized that consolidation of freight at a central hub was the way to create needed economies of scale. Any added delays in flying packages to a central hub and back were irrelevant as long as FedEx Corporation (or Federal Express, as it was known then) could meet the delivery deadline (e.g., next day 10 a.m. delivery or afternoon delivery). During an evening at the Memphis zoo, while hosting a group of supply chain management executives in April 2010, Smith mentioned that the idea of central consolidation was based on the process of check clearing by banks through a central clearing house.

In 1971, Smith started purchasing a fleet of more than two dozen Dassault Falcon business jets; working to change federal air-taxi regulations to permit the use of the Falcon; modifying Falcon jets for freight use; and seeking financing for his venture. Although Smith started Federal Express in Little Rock, Arkansas, he soon moved the young company to Memphis in 1973 when, as legend has it, the Little Rock airport authorities refused to expand the airport because they thought neither Smith nor airfreight had any future. Memphis was also geographically better for FedEx because it was 500 miles closer to the population centers of the East Coast and would thus save fuel and time.

After several near-bankruptcy experiences, which Smith overcame by leveraging his name, his family’s trust, and his shares in the company, FedEx earned a profit in July 1975. In 1978, the company went public, the stock doubled in price in four months, and the company grew. As of 2011, the Memphis FedEx super-hub spanned 500 acres of the Memphis airport, used 300 miles of internal conveyers, had 15,000 employees in the hub alone, and handled 1.5 million packages per day.41

Getting in the (Time) Zone

Memphis was a good choice for two key geographical reasons. First, Memphis’s east-central location optimizes the distances and flight schedules from and to the East and West coasts. FedEx choreographs the flight patterns to match both the needs of customers (e.g., end-of-day pick-up and beginning-of-day delivery) and the limits of conveyances and infrastructure (e.g., speed of aircraft and airspace congestion). Airfreight from the East Coast leaves in the evening and arrives in Memphis in the early part of the night, Memphis time. In contrast, West Coast airfreight leaves in their evening and arrives much later at night. Staggered arrivals avoid congestion around the Memphis airport. The time between the last inbound arrival from the West Coast and the first outbound departures gives FedEx just enough time to sort all the packages without clogging the sorting hub.

The time zones of the United States mean that the population centers of the East Coast start their business day one hour earlier than does Memphis, while the West Coast rises two hours later. Yet Memphis is closer to the East Coast. Thus, a flight from Memphis to Washington, DC, may leave Memphis at 3:00 a.m. and get to Washington, DC, at 6:00 a.m. local time following a two-hour flight. A San Francisco-bound flight can leave Memphis also at 3:00 a.m. and arrive at 6:00 a.m. local time following a five-hour flight, because of the time zone difference. The fact that FedEx flies mostly at night means it uses the underutilized capacity of the airport during off-hours, when few passenger airliners fly.

Weather Permitting

Second, Memphis’s south-central location optimizes the various threats from weather. For FedEx to live up to the company’s old slogan of “When It Absolutely, Positively Has to Be There Overnight,” it needs a location that rarely has severe weather. Memphis is far enough south to avoid severe winter weather, far enough north from the Gulf coast to avoid the brunt of hurricanes, and far enough east to avoid the tornado alley of the US plains. “It’s one of the most weatherproof areas in the United States, untroubled by hurricanes, blizzards, or prolonged periods of icy weather,” explained Tom Schmitt, chief executive officer of FedEx Global Supply Chain Services in his office on Hacks Cross Road at FedEx’s headquarters in Memphis.42

What’s in a Name: Clusters, Parks, and Hubs

So far, we’ve examined five logistics clusters: Zaragoza, the Netherlands, Panama, Singapore, and Memphis. These clusters exemplify a broader phenomenon appearing in the economies of a wider range of communities. Later chapters explore these five clusters in greater depth and include insights gleaned from other logistics clusters such as Duisburg in Germany, Saõ Paulo in Brazil, Chongqing in China, and Chicago, Louisville, Dallas/Fort Worth, New York/New Jersey, Miami, Kansas City, and Los Angeles in the United States. Other logistics clusters not described in this book but whose lessons are used include Busan in Korea; Tianjin, Shanghai and Shenzhen in China; Dubai in the UAE; Frankfurt in Germany; and several other locations throughout the world.

Note that in some cases logistics clusters are inexorably tied to clusters of heavy industry. Thus, Detroit is an automotive cluster, but it also includes a significant number of logistics service operations, making it a logistics cluster as well. Logistics service companies locate operations in an industrial cluster in order to serve manufacturers, but in the process they make the region more attractive to other manufacturers, being part of a positive feedback loop that feeds regional growth. In other cases, the logistics cluster comes first and attracts value-added activities and manufacturing sites, as described in chapter 5.

A Fuzzy Definition

So what, exactly, is a logistics cluster? Clearly, the massive logistics complexes in Rotterdam, Singapore, and Shanghai are clusters by sheer force of their high rankings in freight traffic figures as well as the number and density of distribution centers, warehouses, logistics companies, and the logistics-related operations of manufacturers and retailers. Economists and regional scientists have long discussed the definition of what distinguishes and delineates a cluster. Different authors use different terms—such as clusters, hubs, or centers—to describe regions characterized by intensive logistics activities. Terms used by businesses around the world may be adding to the confusion. They include logistics parks in the United States and China, transport centers in Denmark, logistics platforms in Spain, freight villages in Germany (“GVZ,” or Güterverkehrszentren in German), distriparks in India, and logistics centers in other places. For example, the term “Aerotropolis”43 refers to an economic region comprising aviation-intensive businesses clustered around a major airport. Such Aerotropolis regions can be found around the Memphis Airport, Schiphol in Amsterdam, Hong Kong International Airport, Frankfurt am Main Airport, Shanghai Pudong Airport, Inchon International in Seoul, Jaipur Airport in India, Indianapolis International Airport, Louisville Airport in Kentucky, and many others.44

Logistics per Capita or per GDP

This book defines a cluster as a region with a very high concentration of logistics activities relative to the local population or economy. For example, Memphis, Tennessee, with only 1.3 million people, handles an astounding 3.69 million tons of airfreight per year (nearly 3 tons of airfreight per person per year). In population terms, the Memphis MSA (metropolitan statistical area) ranks around 43rd in the United States. In logistics terms, Memphis ranks number 1 in airfreight, number 3 in rail shipment, and number 4 in inland barge freight,45 making this smallish city on the Mississippi a significant logistics cluster. Economists use more technical measures of the concentration of logistics activities. For example, de Langen46 used a modified logistics quotient (LQ—see p. 53 in chapter 2) to map out logistics “hot spots” in Brabant in the Netherlands, based on a register of local companies. In my own work with Rivera,47 aimed at identifying the important logistics clusters in the United States and their development path, we used a two factor criterion based first on a modified LQ criterion, known as Horizontal Cluster Logistics Quotient (HCLQ),48 and second on an index capturing the number of logistics establishments in the region under study. This type of work identifies the locations of logistics clusters in the area of interest—be it a Dutch county or the entire United States—allowing for various analyses and insights.

Logistics clusters vary markedly in size. In some cases, a logistics cluster might be fairly compact, such the Aragón cluster with its flagship PLAZA in Zaragoza. In other cases, a logistics cluster might span a much larger, more diffuse, region. For example, logistics activities in Panama span the width of the country, extending along the canal and including ports on both the Pacific and Atlantic Oceans. Or consider the “Dutch Logistics Corridor,” which stretches 150 kilometers from Rotterdam to the German border. This corridor includes, naturally, the port of Rotterdam with its terminals and concentration of logistics service providers; Brabant with its focus on sustainable logistics; Breda, along the main highways connecting the hinterlands of Amsterdam, Rotterdam, and Antwerp; and Fresh Park Venlo on the German border, which sports around 130 companies providing trading, transport, warehousing, and value-added services dealing with fresh products. A similar massive logistics cluster in southern California stretches from the Los Angeles/Long Beach Ports and the surrounding logistics infrastructure; to southeast Los Angeles in the north; Orange County and John Wayne Airport to the south; and Anaheim, and the Inland Empire to the east, including Riverside, Ontario (with its airport), and San Bernardino.

Logistics Campuses, Parks, and Clusters

To help sharpen the definition of logistics agglomerations, this book distinguishes between logistics clusters, logistics parks, and logistics campuses. Whereas a cluster is an amorphous agglomeration of companies and facilities with logistics-intensive operations with fuzzy borders and no central management, logistics parks are clearly defined by their ownership and geographic property boundaries. A logistics park is developed by an agency which can be a real estate investment trust (REIT), such as publicly traded ProLogis, Cache Logistics, and DCT Industrial; or by private companies such as CenterPoint Properties, Hillwood, and Watson Land Company; it can be a port/airport authority, such as the Panama Canal Authority (ACP) or the Schiphol Area Development Company (SADC); or it can be a government agency, such as Dubai Holding.

A logistics campus is a special type of a logistics park with even more tightly coordinated operations, where not only the land and the buildings are operated by a single entity, but this same entity handles all the logistics and distribution activity in the park. An example is the logistics campus of United Parcel Service Inc. (UPS) in Louisville, Kentucky, housing many customers for whom the UPS Supply Chain Solutions division manages transportation, distribution, inventory, forwarding, customs brokerage, and multiple value-added activities. Some large, multidivision enterprises may create their own campus. Steve Carter, director of transportation planning and strategy at the Target Corporation mentioned that Target sometimes colocates its own food distribution center, regional DC (for general merchandise), dot-com DC, and an import warehouse next to each other to get some campus advantages.

Thus, logistics clusters, as extended regions, often contain more than one park as well as a range of other logistics-related facilities. A cluster might have multiple logistics parks. For example, Singapore’s Air Logistics Park (ALPS) next to Changi airport and Singapore’s large Pasir-Panjang seaport operated by PSA International are both logistics parks within the logistics cluster of Singapore. Similarly, while PLAZA in Zaragoza is a logistics park, the broader logistics cluster in the state of Aragón includes logistics parks in the nearby towns of Teruel, Huesca, and Fraga, as well as private logistics facilities elsewhere in the region (see p. 22 in chapter 1).

What matters to managers more than neat lines on a map are the relative costs and performance levels of logistics in, near, or far from a notional cluster of logistics facilities and infrastructure. Inside a logistics park, companies enjoy easy access to freight capacity, a choice of modes, and a range of special services. Companies sited near the park in the broader environs of the cluster also enjoy many of these advantages and probably pay less for the land, but they may experience more delays and may pay more for drayage (drayage is the short-distance movement of freight from a storage area to a long-distance conveyance). For example, inside CenterPoint Intermodal Center south of Chicago, Walmart pays on the order of $25 for draying a 40-foot container from the co-located BNSF Railway Company’s intermodal yard to its warehouse. In contrast, draying that container to locations outside the park might cost $150. Parks might also offer special amenities within their boundaries, such as roads that can handle over-weight cargo (see also the discussion of terminal infrastructure on p. 148 in chapter 6), and various shared services (e.g., employee training).

Clusters can also transcend political or jurisdictional boundaries. For example, Memphis’s Logistics Council oversees a region of some sixteen counties spanning three states in its planning efforts. This multicounty, multistate agglomeration defines the Memphis cluster in terms of critical infrastructure, the span of logistics companies, and the regional labor force that works in logistics. Thus, the boundaries of most clusters remain fuzzy.

Natural Advantages

The histories of these logistics clusters illustrate the strong contribution of natural geographic and climatic factors to the development of logistics. Such factors have led, over the years, to a culture and expertise in trading and logistics. Four natural geographic factors contribute to logistics cluster formation.

The Middle Ground

Places such as Memphis, Singapore, Chicago, and Zaragoza sit in the geographic middle between major regions of supply and major regions of demand and become, in turn, major centers for logistics activity. When a high volume of goods transships through a certain region, that region becomes a natural location for warehouses, consolidation/deconsolidation terminals, and transportation carrier operations. Naturally, the geography of population centers, placement of natural resources, and geography-influenced routing of transportation all affect what constitutes the middle.

Geographic Cost Cuts and Shortcuts

Managers in manufacturing, retail, and distribution typically consider logistics costs as a necessary evil. While all corporate functions are subject to cost pressures, functions such as engineering and manufacturing contribute to a product’s form and function; marketing and sales contribute to branding and revenue; and finance helps with raising funds and managing money. While logistics management contributes directly to customer service and sales, its importance has not traditionally been recognized, and many senior executives see transportation and logistics as a cost to be minimized. Some geographic locations, such as the port of Rotterdam and navigable rivers like the Rhine and the Mississippi, offer transportation cost advantages. Chicago sits at the edge of the Great Lakes, which allows water transportation to the East Coast and Europe from America’s hinterland. Natural or artificial geographic shortcuts, like the Malacca Straits or the Panama Canal, respectively, attract a high volume of shipments. Places situated along the shortest route, such as Singapore or Panama City, represent natural locations to consolidate shipments, change between regional carriers, locate warehouses, or have refueling and repair depots.

Natural Geographic Boundaries between Modes

Trucks and rail can carry goods only so far. Long-distance global trade requires crossing the oceans by ship or aircraft. Seaports such as Singapore, Rotterdam, and Los Angeles/Long Beach create a natural nexus where continent-crossing transportation (such as truck and rail) terminates and ocean-crossing transportation begins. The modal exchange at airports is typically from airplanes to trucks and vice versa. While some airports serve as transshipment hubs, the first and last leg of any air shipment requires a truck to haul the cargo between the plant or warehouse and the airport. Similarly, intermodal yards are terminals where truck and rail transportation systems interchange loads. One of the roles of distribution centers and freight yards at terminals is to match load sizes across different conveyances. In addition, many of these terminals involve export/import and therefore include government agencies to handle the formalities of international trade, including export controls, import inspections, customs payments, and free trade zones.

Weather Advantages = Reliability Advantages

Modern-day logistics depends on the absence of adverse weather conditions, especially extreme weather. Locations such as Memphis, Los Angeles, and Singapore derive some advantage by being out of reach of most major types of dangerous weather like hurricanes, tornados, and snowstorms. Weather delays aren’t acceptable in a world that depends on just-in-time deliveries for manufacturers, retailers, and distributors. Thus, logistics hubs located in good weather locations offer one of the performance elements shippers need most—reliability. (The shippers in a cluster include both beneficial freight owners [BFOs] such as manufacturers, distributors, and retailers running their own logistics operations, as well as third party logistics providers, who manage logistics on behalf of their customers, who are BFOs.)

Nature vs. Nurture

Geography plays a significant role in cluster formation, but the histories of these clusters show that natural factors alone can’t explain everything. Many of the clusters discussed in this book have geographic advantages that apply to a broad region, rather than to a specific town or unique point on the map. Rotterdam wasn’t the only Dutch city between the Rhine and the North Sea. Memphis wasn’t the only town on the Mississippi that’s beyond the normal reach of snowstorms and hurricanes. Similarly, Singapore might easily have lost to other Malaysian trading centers in the Malacca Straits, such as Melaka or Penang.49 The Panama Canal might have been the Nicaragua Canal. Although a region’s natural attributes (land forms, waterways, and climate) might make an area attractive for logistics operations, the specific town, county, or country that takes the lead in logistics is not preordained. Visionary investments in ports, canals, terminals, roads, and new businesses can turn a particular locale in a logistically favorable region into a thriving cluster. For example, FedEx’s move to Memphis and UPS’s establishment of its hub in Louisville, Kentucky, helped these locales grow as clusters of logistics activity.

Nor do geographic advantages ensure a logistic cluster’s success in perpetuity. To this day, a Nicaraguan canal remains under serious consideration. Such a canal would reduce the distance between Los Angeles and New York City by about 500 miles, or one day of vessel travel. Similarly, Thailand might build a canal across the Kra Isthmus, attracting much of the ship traffic that now goes to Singapore. And the expansion of the Panama Canal, mentioned above, threatens US West Coast ports as the enlarged canal would enable more containers to travel on larger, more efficient ocean freighters directly to the East Coast. Such changes may create new logistics clusters on the East Coast and partially reduce the logistics intensity of activities in the western US ports and on the railroads carrying containers from the West Coast to the large clusters in Chicago, Kansas City, Memphis, and Dallas/Ft. Worth.

Natural geographic features might explain why some areas have more logistics activities than others, and why they may be initially attractive for transportation and logistics developments. But someone must still make investments in infrastructure, train the workers, lobby for favorable regulations, and attract companies to the area to support cluster formation. In a conference call organized by Bill Marrin, managing director of the World 50 Organization, several senior logistics executives responded to my questions regarding joint lobbying efforts. Randy Eck, director of global transportation and logistics outsourcing at Intel Corporation, gave an example, “We’re spending a significant amount of time [with the government] on how to get products in and out of Vietnam as quickly and at as low cost as possible.” Eck added, “[We collaborate] with anybody in the area that we can get to come out. I mean we’ll pull in all our suppliers and work with them as much as we possibly can because there’s strength in numbers.” His comments were echoed by Howard Smith, senior vice president of global supply chain operations of the Ralph Lauren Corporation and Les Woch, director of global logistics at Mars Chocolate, who added more examples of joint lobbying of regional and national governments throughout the world.

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