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ILP Institute Insider

March 3, 2014

Logistics Clusters: An Alternative Path
to Economic Success

Yossi Sheffi explores the potential of "logistics clusters" to spur economic growth and innovation.

Eric Brown

Regions and countries around the world are competing fiercely to hold on to factories while incubating new, high-tech industries. Yet, for many, there may be a more sustainable path to success: becoming a logistics center for transportation and distribution.

Yossi Sheffi
Director, MIT Center
for Transportation & Logistics
In Logistics Clusters: Delivering Value and Driving Growth (MIT Press, 2012), MIT Engineering Professor Yossi Sheffi explains how distribution centers are becoming much more than a place where goods are unloaded from boats and planes onto trucks and trains. With some government help, they often evolve into thriving sources of innovation.

"Like other clusters, logistics clusters enable tacit information exchange between companies, and attract specialized labor and supplies, thereby improving efficiency and competition, and making it easier to start new companies," says Sheffi, Director of MIT's Center for Transportation & Logistics (CTL). "Yet logistics clusters have many additional benefits." These include low transportation costs and high transportation service level, as well as a broad-based, stable and non-offshoreable regional jobs, says Sheffi. The clusters also tend to create a wide variety of complementary economic activity in repairs, maintenance, packaging, and manufacturing, he adds.

Sheffi is known primarily for his best-selling book The Resilient Enterprise (MIT Press, 2005) which offered strategies for responding to major disruptions to industrial operations and supply chains. He's now working on a major update that offers more insights into the proper role of government in responding to disruption, as well as the risk management lessons from natural disasters like Hurricanes Katrina and Sandy. Other recent projects include research into sustainable supply chains, and the challenge of estimating carbon footprint across the supply chain.

Broad-based Job Creation
Logistics operations agglomerate in certain cities or regions to take advantage of geography, but also to enjoy the benefits that quickly arise from consolidation. "With clusters, transportation companies can deploy larger airplanes, trucks, and trains, thereby bringing down costs," says Sheffi. "As more companies join the cluster, the level of service provided by the transportation carriers goes up. There's a higher frequency of service and more service to further locations."

As Sheffi expected when he began his research, all this adds up to company and job creation. Yet he also discovered that logistics clusters improve economic growth over a broader economic spectrum than in innovation and high-tech clusters like Wall Street, Hollywood, and Silicon Valley. "The average salaries in the logistics industry are similar to those in manufacturing, and they help people at the bottom of the ladder, not just highly trained experts and engineers," says Sheffi. "In logistics, it is common for people to start out by moving boxes, and driving trucks and forklifts, and end up in senior management."

The working class make-up of the industry is reflected in the executive suite. "In distribution companies like UPS, the lion's share of top executives started on the floor," says Sheffi. "People tend to stay within the industry, so it has an element of moving people out of menial jobs to the middle class."

Logistics jobs have the further advantage of stability, says Sheffi. They are not being replaced by automation as quickly as manufacturing jobs, and they are far less likely to move overseas. "Logistics jobs are not offshorable," says Sheffi. "These clusters have to be placed close to the last mile to the retailers."

Another benefit of logistics clusters is that they generate new jobs beyond logistics. As freight is distributed through these hubs, "you have people handling repair, maintenance, tagging, packaging -- a whole range of activities," says Sheffi. For example, in order to speed laptop repairs, Flextronics places its repair center right outside Memphis International and the FedEx SuperHub.

Other jobs emerge that are even farther afield. "For processing incoming medical supplies, you'll need pharmacists on site," says Sheffi. "And Zappos has dozens of videographers in their Louisville cluster because they need a high-impact video of every shoe that comes through their center."

In many cases, manufacturers set up operations near logistics clusters to exploit reduced time and high transportation level of service, says Sheffi. He cites Indianapolis as a case of a logistics cluster that evolved into a manufacturing sub-cluster.

In the U.S. right now, the move toward siting some manufacturing facilities near logistics clusters is encouraged by relatively lower energy costs. The trend should continue, thanks to emerging trends like 3D printing and product customization, all of which favor placing manufacturing closer to the edges of the distribution network. (These issues are detailed by CTL Executive Director Chris Caplice in a recent ILP Industry Insider profile, which also provides an overview of CTL activities.)

Beyond Geography: the Keys to a Thriving Cluster
Geography is important in establishing a successful logistics cluster, but it's not the whole story. "Most logistics clusters are located at the intersection of a number of different shipping routes, but geography itself does not make it preordained," says Sheffi. "There are places that should have become logistics clusters, but did not. Port Said, at the mouth of the Suez Canal, sees thousands of ships pass by every year, but they don't stop. Port Said could have been the major point of distribution for much of Europe, but the Egyptians didn't get their act together."

On the other hand, says Sheffi, Zaragoza, Spain, has one of the largest logistics centers in Europe, despite mediocre geographical attributes. The city of Zaragoza hosts the largest logistics park in Europe, yet it is “a small city, with no big airport, and it doesn't even lie next to a port," says Sheffi.

Despite these handicaps, the city was on its way to becoming a logistics success a little over a decade ago when Sheffi first visited to give a major speech. Under Sheffi's direction, MIT's Center for Transportation & Logistics chose Zaragoza as the location for the first of three international scale networks for CTL supply chain research, which has helped to further Zaragoza's logistics success.

Intrigued by how this relative backwater rose to the top of the supply chain, Sheffi set about exploring what Zaragoza and other successful "super clusters" such as Rotterdam, Singapore, Miami, Memphis, and Los Angeles, had in common. Although most of the successful clusters enjoyed geographical benefits, he found they also had other advantages, such as a strong communications infrastructure, capable financial services, and a stable, supportive government. In particular, a strong public/private partnership was a key to the Zaragoza story.

"Government investment in physical infrastructure, free trade zones, trade policies, land zoning, and a general good business climate are common to all the best clusters," says Sheffi. "The regions also need the right culture. A history and culture of trading is helpful; for example, it's very hard to be a logistics cluster in a place that does not accept immigration. Logistics involves people from around the world."