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In Focus: Are You Tapping Into the Benefits of Logistics Clusters?

Logistics clusters — communities of companies that share logistics expertise and know-how — have become key links in global supply chains and can be found in almost every region of the world. These agglomerations of firms have enjoyed significant growth because they deliver unique benefits to both companies and economies.

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One of the motivations for writing my new book, Logistics Clusters: Delivering Value and Driving Growth (MIT Press, October 2012), is to help companies understand the potential benefits of these communities. Usually located near consumer markets or within ports and airports, logistics clusters host various enterprises, including the logistics arms of enterprises, third-party logistics services providers, distribution companies, and freight carriers.

One of the main reasons for their success is the self-reinforcing nature of the logistics cluster model. The large volumes of freight traffic they generate make it possible to capture economies of scale and scope. For example, companies can reduce freight costs by using larger vehicles to move their goods, and carriers find it easier to identify follow-on loads and minimize the number of empty backhauls. The reduced costs and service improvements are then passed to shippers.

In addition, companies can share transportation and logistics assets as well as expertise in these communities. Pooling resources in this way helps to buffer the incumbents against fluctuations in market demand.

Gains like these attract more companies to the cluster, and the expanded base brings further efficiencies within reach, creating a positive feedback loop. Further, clusters promote global trade, which increases the demand for cluster-based services and stimulates even more growth.

Clusters Drive Employment
Logistics clusters also create employment opportunities. In the United States, for example, Los Angeles County supports more than 360,000 jobs in logistics, and the Memphis International Airport is responsible for 220,000 jobs in the local economy. More than one in three jobs in the Memphis area is linked to the airport.

Cluster-based employment typically includes blue-collar jobs in areas such as warehousing; white-collar positions in IT, customer service, and management; and work linked to value-add activities including light manufacturing and repairs. For instance, in its Louisville Worldport hub, UPS employs hardware technicians to repair Toshiba laptops.

Job creation is important for companies on a number of levels. It establishes a pool of talent that enterprises can draw on as they expand and respond to shifts in demand; it attracts carriers, creating a competitive marketplace that leads to the low cost and high service levels mentioned above; and it gives companies leverage with local governments that invest in training and education infrastructure. The latter can be a huge plus for employers that must continuously update the skills of their employees.

Moreover, these communities are not only centers of excellence for logistics. Many are using their experience in the freight business to develop more environmentally sustainable supply chains — an area of expertise that is in demand.

Despite these many benefits logistics clusters are not well understood or researched compared to similar entities in other industries such as Silicon Valley (high-tech expertise) or Hollywood (the entertainment business). A greater recognition of the benefits in multiple areas — including cost, service, employment, regulations, and infrastructure — will lead more companies to reside within them.

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