MIT’s Yossi Sheffi: Understanding Logistics Clusters
Are governments and communities properly valuing shipping and distribution centers’ ability to drive economic growth? FedEx Access speaks to MIT professor Yossi Sheffi, an expert on logistics clusters, to learn more.
Why is Memphis home to hundreds of distribution centers and several major medical device suppliers? Why does the tiny island-nation of Singapore handle a fifth of the world’s maritime containers and half the world’s annual supply of crude oil? Which jobs can replace lost manufacturing jobs in advanced economies?
Some of the answers to these questions are rooted in understanding “logistics clusters.” Access sat down with MIT professor Yossi Sheffi to discuss this phenomenon and his new book, Logistics Clusters: Delivery Value and Driving Growth.
Dr. Sheffi is the Elisha Gray II professor of Engineering Systems at MIT, where he serves as Director of the MIT Center for Transportation and Logistics (CTL). He is an expert in systems optimization, risk analysis and supply chain management.
Access: What is a logistics cluster?
Yossi Sheffi: It’s an agglomeration of logistics activities in one geographical location. It includes transportation carriers of all kinds — as well as warehousing, distribution, third-party logistics services, manufacturers’ operations, retailers and distributers who may have their own distribution centers.
Access: Why are logistics clusters important today?
Sheffi: They’re huge employment engines. People underestimate the degree to which logistics itself provides jobs since it is accomplished on three levels. The first is in the “classic” supply chain management activities: blue-collar jobs, like running warehouses and driving trucks. But logistics activities also include information technology Jobs, operating global supply chains, tracking everything and optimizing freight movements globally, in addition to jobs in customer service and management.
The second level of job creation in logistics clusters is the value added activities. It makes sense to perform activities like preparing promotional tagging for a retail display or repackaging inside a distribution center for efficiency’s sake. The reason is that the product is already “there” — on the shelf in the distribution center.
Distribution centers are also the ideal place to do so-called postponement operations, because that’s the point [in the supply chain] when you know what customer demand is. You know if the white shirt should go to Kansas and the blue shirt should go to Chicago or the other way around.
The third level of job creation in logistics clusters is the attraction to manufacturing. Since these clusters enjoy low transportation costs coupled with high level of service, manufacturing plants located in the area can enjoy efficient movement of inbound material and parts as well as distribution of the finished product.
Access: What is an example of a company that uses a logistics cluster to its competitive advantage?
Sheffi: Flextronics has a large computer repair facility in Memphis. Let’s say you send them your laptop via FedEx and it arrives in Memphis by midnight on Monday. It goes into the Flextronics facility almost immediately. They have a shift of technical repair specialists ready to work on it. And it’s even available for work by a second shift, if necessary. By Tuesday night, 20–22 hours later, the repaired laptop is loaded, and by Wednesday first thing in the morning you have your computer back. They can do this so quickly because they’re basically at the end of the runway, enjoying the available high level of air transportation service in Memphis.
Medtronic does the same thing. If you go in for back surgery, the surgeons often don’t know what equipment they’re going to need for your back until they open you up. So the hospital orders a kit that costs about $120,000. It has every screw and tool that they might need. If an operation is scheduled for Wednesday, the hospital orders the kit from Medtronic on Tuesday. Tuesday at midnight Medtronic puts the kit on a FedEx plane. By 8:30, it gets to the hospital. In the afternoon, the surgery takes place. The surgery team uses less than 1 percent of the screws and tools in the kit, and when the operation is over they repack it and put it back on the FedEx plane that evening. Later that night, it’s back at Medtronic, who cleans it up, ready for the next procedure.
These activities can happen only in a big hub like Memphis.
Access: But it takes more for a city like Memphis to become a logistics cluster than just air access, right?
Sheffi: What’s interesting about logistics clusters like Memphis is they have multiple modes of transportation involved. Memphis has the river, the airport, access to all U.S. Class I railroads and 400 trucking companies that have terminals there.
Access: This trend of service businesses partnering with logistics providers: Is this something you foresee growing as more businesses and entrepreneurs realize there are opportunities in near-instant access?
Sheffi: Yes. More companies are going to be taking closer looks at logistics clusters. And increasingly there are going to be public-private partnerships to make this happen, whether it’s through tax incentives or just overall competence of government.
Success begets success. For example, there’s a subcluster of medical device suppliers in Memphis — startups that started in Memphis largely because of the access to suppliers and customers that Medtronic created. And Medtronic welcomes their competitors setting up shop in Memphis. Their suppliers, who also supply their competitors’ suppliers, are more likely to locate there; Medtronic supply costs go down; they gain access to even more skilled labor; etc.
Access: How is global trade policy either supporting or not supporting the growth of logistics clusters?
Sheffi: You are talking to somebody who thinks many people in Washington don’t understand that trade can raise the standard of living everywhere. Logistics cluster growth can feed itself. There’s a positive feedback loop. Because, as the cluster grows, transportation in and out becomes more efficient thanks to ever larger airplanes, ships and trucks. So transportation costs go down even as the level of service and shipping frequency goes up. So more companies join the cluster, services and costs improve even further, and so on.
The other self-reinforcing mechanism is global supply chain and trade. The biggest nodes in the global supply chain — Singapore, Rotterdam, L.A., Memphis, Panama, Chicago — are so efficient that they make globalization and trade easier virtually everywhere around the world. Growing trade volume feed these clusters which are becoming more efficient, in turn, and grow even further.
Unless, of course, government gets in the way. When government starts coming in and calling for trade barriers, it slows down the growth process.
Access: What is the one thing about logistics clusters that excites you most?
Sheffi: The huge potential for job creation. And if you look at logistics clusters in the U.S. and elsewhere, they are hubs of innovation of environmental sustainability. This is where you see development of hybrid trucks, electric trucks and hybrid cranes. In L.A., Singapore, Rotterdam — the big clusters — this is where you see rapid environmental innovation.