All of us are familiar with the concept of similar businesses clustered together in the same geographic area. Of course, the silicon valley comes to mind being the most visible and famous! But there are other lesser known clusters that exhibit the same phenomena: Digital Media City (DMC), a 135 acre complex, outside Seoul’s central business district in the Sangam-dong district in Korea, and SEEPZ (Santacruz Electronics Export Processing Zone) in Mumbai, India are some other examples. Automobile industry around Detroit, steel mills in Indiana, and apparel in North Carolina have all been examples of similar clustering phenomena before the changing business conditions moved them elsewhere.
In his new book, Yossi Sheffi discusses the logistics clusters. Logistics clusters are unique to an extent since they essentially provide a service as against a physical product. Moreover, as Sheffi points out, the logistics services are quite interchangeable and can be offered equally to any industry! Think of it this way: While the “things” in the boxes may greatly differ from pens to bicycles, the logistics services performed on these boxes in terms of stacking, stocking, staging, loading, shipping, unloading, and so on remain essentially the same.
Sheffi takes various examples from around the world from Zaragoza (Spain) to Panama to Singapore focusing on the phenomena of logistics clusters and show how they form, why they matter, and how they create value. In doing so, he answers a key question: Why do these clusters form? Summarizing from his book:
- Trust. Since clusters are geographically cohesive, they naturally include people with similar backgrounds and cultures. This makes it easier to develop trust and enables better collaboration among organizations leading to lower transactions costs and better working partnerships.
- Tacit knowledge exchange. Clusters make it easy to have physical interactions that enable tacit knowledge exchange. Sheffi claims that such exchanges create rich interactions through interchange of information that is otherwise hard to exchange/appreciate. As examples, he provides parts specifications, benchmarking information, etc.
- Collaboration. Similar industries in a cluster have common needs and concerns which may give rise to joint undertakings such as lobbying, cluster development activities and even commerce activities such as procurement.
- Research and education. Companies in a cluster may invest collaboratively on research and development or may collectively leverage such investments from common sources such as universities and other research establishments.
- Supply base. Due to consolidated demand of materials and services common to cluster residents, clusters attract suppliers that co-locate next to their largest demand centers. This creates economic efficiencies for both the suppliers and the companies located in a cluster.
Sheffi writes with easy to understand examples, using stories to make his points. The book covers the reasons for the formation of clusters, the role of governments, economics and technological reasons, operational advantages and even the impacts of clustering on human capital. It covers points that are obvious to a casual observer and then other points that most of us will be oblivious to such as impact of clusters on education. It analyzes real-life example to establish the underlying reasons for clusters to form, grow, and deteriorate. All in all, a good read with a little-known facts and stories!
- Yossi Sheffi, Logistics Clusters: Delivering Value and Driving Growth, The MIT Press, Cambridge, MA, 2012.