Fueling Trade: Logistics Clusters Redraw the Transportation Map

on 1st Mar 2013

Interview by Alison Buckholtz

Yossi Sheffi is director of MIT’s Center for Transportation and Logistics, director and founder of MIT’s Master of Engineering in Logistics program, and Elisha Gray II Professor of Engineering Systems. He is an expert in systems optimization, risk analysis, and supply chain management, which are the subjects he teaches and researches at MIT. He is also an active entrepreneur and has founded or cofounded five companies since 1987. His new book, Logistics Clusters: Delivering Value and Driving Growth, was published by MIT Press in October 2012.

AB: In your new book, you write that governments can support logistics clusters through investment, regulation, and trade policy. Is this true in every case?

YS: The role of government, most of all, is development of the infrastructure. Then there’s a question of attracting businesses, and the theory is that to get this flywheel moving they provide tax and regulatory relief. Of course, there are all kinds of logistics clusters, and some of them just need government to get out of the way. But in general, governments that have a more accommodating trade policy, governments that don’t raise all kinds of tariff and non tariff barriers, will promote and support trade. Everything governments do to support trade will in turn impact the flow of goods in and out of the country. And once the cluster starts growing, it feeds on itself. This is true of every kind of cluster, but it’s especially true for logistics clusters. It’s an ecosystem based on a positive feedback loop: The more it grows, the more it’s beneficial to all of its residents, and as a result it grows even more.

Image: World Financial Review

AB: How important are public-private partnerships?

YS: These partnerships are at the crux of a logistics cluster. The main difference between a cluster that’s successful and a cluster that’s not is this alignment of the public and private sectors. We’re not talking about just one public sector: I’m referring to city, county, state, and regional governments, labor unions, chambers of commerce, etc. When interests are aligned, logistics clusters flourish. For example, in Memphis, the mayor and the governor will drop everything to help FedEx bring new business in. Zaragosa, Spain, is an even more striking example. It started as a brownfield and is now the largest logistics park in Europe. It was extremely successful because the government got everybody involved: national, state, and city government, opposition parties, labor unions, and all elements of civil society. This is a striking case of everybody working together and it’s a huge success.

AB: Are logistics clusters always, necessarily, transportation hubs?

YS: Yes, because a lot of freight is coming in and out of the cluster. As the cluster grows, transportation companies have high utilization of the equipment, and they can use bigger trucks, or long trains that are very efficient. This is due to two phenomena in the economics of transportation. The cost of moving a conveyance, say, a truck, really depends on how much the truck is loaded, so of course if it’s fully loaded and the utilization is high, it costs less per pound to move the freight. That’s true in almost every mode of transportation. In addition, the cost of moving a conveyance does not grow linearly with the conveyance size. If the truck is twice as big, it doesn’t cost twice as much to move it. So it is a lot more efficient to move larger conveyances. The result is that the more flow that comes in and out of a cluster, the lower the transportation costs.

Image: © Dominic Sansoni / World Bank

AB: How does this affect service?

YS: Service improves tremendously with efficient transportation because you get more frequent departures and arrivals, and no one has to wait as long. Since the costs are lower, and the service is better, this attracts even more companies. Furthermore, as more freight is available in the clusters, more destinations are serviced directly, improving the service even more. This is part of the positive feedback loop that’s unique to the growth of logistics clusters.

AB: What else makes logistics clusters different from industrial clusters?

Now, some of the most promising trends in environmental sustainability are coming from the logistics clusters.

YS: In general, logistics clusters exist in mode-changing places: when you go from ship to airport, rail or ship to truck, airplane to truck. So intermodal yards are very important for logistics clusters. Intermodal yards exist in almost all the big logistics clusters. This has to do with the economics of transportation: when you move long distances, you want to move in very large conveyances like a mile-long train or a huge ship. But then you have to distribute the shipments. You can’t bring a mile-long train into the heart of a city—you need trucks, sometimes small trucks. So you want to position your distribution centers as close to the urban areas and the retail stores as much as you can. Intermodal yards can get the full container from the ship to the heartland, close to urban centers. If your intermodal yard is located strategically like this, then within one day of trucking from some of the U.S. logistics clusters in the South and Midwest you can get to tens of millions of consumers. Within two days you can get to more than 100 million consumers from most of these clusters.

AB: How are logistics clusters mitigating their environmental impact?

YS: Some of the best logistics clusters, like Los Angeles, Singapore, and Rotterdam, have become hubs of environmental sustainability and innovation. They use hybrid and electric trucks and all kinds of other means to reduce the impact of logistics activity on the environment around them. Singapore and Rotterdam are centers for alternative fuel. Precisely because these areas have a concentration of possible pollutants from noise and congestion, they have become hubs for environmental innovation. Now, some of the most promising trends in environmental sustainability are coming from the logistics clusters. After all, one of the challenges for a logistics cluster is to be a good neighbor, to do all it can to reduce the carbon footprint of the operation.

AB: Which areas are on the cusp of becoming successful logistics clusters?

YS: China is investing mightily in logistics clusters as well as lots of transportation infrastructure, and in Asia, Singapore has always invested in logistics clusters. In Europe, Holland, Belgium, and the Ruhr area of northern Germany near the Dutch border are all significant logistics clusters. In fact, the German government is now investing in logistics clusters alongside the usual high profile areas such as biotechnology and nanotechnology. Germany wants to be a center of logistics for all of Europe, so the German government put logistics at the same level of all these new, sexy industries. The important point here is that logistics clusters, by offering low transportation and distribution costs as well as a high level of service, are becoming crucial nodes in the global supply chain.

This article originally appeared in Handshake: Road & Rail PPPs. Handshake is IFC’s quarterly journal on public-private partnerships, exploring innovative and successful approaches by governments that are tapping the private sector to improve basic public services. Copyright © IFC, a member of the World Bank Group.

About Handshake

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Handshake, IFC's quarterly online journal on public-private partnerships (PPPs), explores innovative approaches by governments to work with the private sector to improve infrastructure, health, education, and other public services in emerging economies. IFC, a member of the World Bank Group, is...

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