B.11- Freight Distribution Clusters (Logistics Zones)

Author: Dr. Jean-Paul Rodrigue

Logistic zones are a grouping of activities related to freight distribution such as distribution centers, transportation, and supporting services within a defined and often planned area.

1. The Clustering of Logistics

Logistics tend to agglomerate (cluster) at specific locations, mainly because of the accessibility they confer, the availability of land, as well as the benefits logistics activities derive from being close to one another. There is a wide array of benefits derived from improved logistics capabilities, such as increased integration to global trade and supply chains, better utilization of national transport assets, more competitive exports, lower costs for imports, and employment opportunities. The development of logistics has been an important component of globalization since the growth in international trade and the related material flows require activities supporting their consolidation, deconsolidation, transloading, and light transformation. There is a general lack of consensus about the definition that an area containing logistics activities can have. A wide variety of terms have been put forward, including freight distribution clusters, logistics zones, logistics activity centers, distribution hubs, or logistics parks. Such variety is the outcome of the geographical contexts, the functions, the actors, the governance and ownership models, and even the marketing strategies advocated. Here the term logistics zone is retained.

The range of functions of logistics zones is wide, from simple cargo consolidation to advanced logistics services. Many locations have assumed a significant number of traditional cargo handling functions and services. They have attracted many related services, such as distribution centers, shipping agents, trucking companies, forwarders, container repair facilities, and packing firms. Two drivers have been particularly prevalent in the emergence of logistics zones:

  • Complexity of freight distribution. Due to the long distances over which supply chain management is being carried, intermodal and distribution strategies must be accommodated at strategic locations. Also, due to complex supply chain practices, additional operations need to be performed on the cargo and the loads while in transit.
  • Massification. The quantity of cargo being handled as well as a level of concentration at specific gateways and along corridors has favored the emergence of large logistic zone complexes at strategic locations that are able to provide the necessary infrastructures to insure large scale operations as well as future traffic expectations.

The evolution and taxonomy of logistics zones are ambiguous since they relate to various economic, political, and even geographical contexts. The concept of logistics zones is well-advanced in Europe. In the late 1960s and 1970s, logistics zones appeared in France, Italy, and Germany by following the concept of extended inland intermodal terminals. In the 1980s and 1990s, the number of such zones multiplied. Logistics zones are usually created within the framework of regional development policies as joint initiatives by firms, intermodal operators, regional and local authorities, central governments, or chambers of commerce.

In North America, the emergence of planned logistics zones came later as governments rarely placed much attention on these activities outside zoning regulations at the municipal level. The general availability of land and the private nature of rail and truck operations involved a freight distribution industry that was self-regulated in its locational choices. Cluster formation was mainly a ‘natural’ process strongly conditioned by national and regional market accessibility. A variety of private real estate promoters, often in partnership with local or state governments, built logistics or industrial parks on an ad hoc basis where land was available, inexpensive, and in proximity to a major highway. Although such a speculative strategy of providing warehousing space can help attract customers since their entry costs are lower, it also comes at a risk that the landlord must bear if the expected customer base does not materialize or if some customers decide to move elsewhere.

In developing countries, the concept of logistics zones was initially associated with transnationalism as the setting of foreign trade and export-oriented zones often had a locational criteria related to proximity to international terminal port and airport facilities. With the growing level of involvement of developing countries in international trade as well as the ongoing growth of internal demand, the development of logistics zones is taking a form more in line with developed countries.

2. Typology of Logistics Zones

Managed large distribution centers tend to develop on the principle of internal economies of agglomeration (within the distribution center). The larger the distribution center, the lower their operational costs, particularly if accessible, low-cost land is available. Logistic zones (or Freight distribution clusters; FDC) expand these advantages through external economies of agglomeration, implying that the concentration of distribution centers within the cluster, even if they concern different supply chains, has the potential to reduce an array of costs. Logistics zones can be classified according to their modal orientation, their geographical scope, or their function. A modal taxonomy of logistic zones suggests four major forms; port-centric logistics zones, inland ports, logistics zones, and freight villages.

A port-centric logistics zone has been planned in co-location or in proximity to a port terminal facility. It supports freight distribution activities directly related to maritime shipping and has a dominant international trade orientation. The common value proposition of port-centric logistics zones is land availability next to a port terminal and the convenience to tap the labor pool that is generally available in a port-city. From a freight distribution perspective, inventory management tends is improved since containers can be easily picked up or dropped at the terminal facility. Empties can immediately be brought back at the terminal, improving container utilization levels. Container weights are not bound to national road restrictions, implying higher container load factors and their related shipping economies. The added security a port-centric logistics zone offers is also a positive factor, particularly in developing countries. Port-centric logistics zones also have some drawbacks, particularly since they involve higher land costs with potentially more restrictive labor regulations if they are within the jurisdiction of dock workers. They also lock the shipping options of its customers to the port, which may not be the most suitable if shipping lines revise their service network configurations.

Port authorities tend to be proactive in developing port-centric logistics since it supports added value to port activities and allows them to diversify their involvement in regional freight distribution. Satellite terminals supporting port activities can also be developed, such as off-dock rail facilities and empty container depots. Still, these activities tend to be more transport than freight distribution intensive. Port-centric logistics zones can be export-oriented or import-oriented depending on the trade structure they are embedded with. Intermediary locations, namely transshipment hubs, aim to develop port-centric logistics zones, but rather unsuccessfully as the transshipment role is difficult to reconcile with a logistics function where a container needs to be unloaded, de-stuffed, and reloaded. Most of China’s special economic zones can be considered as export-oriented port-centric logistics zones. Savannah, Georgia, is a notable example of a gateway that has experienced significant development in import-oriented port-centric logistical activities with the growth of all-water services between Pacific Asia and the East Coast through the Panama Canal. Airport-centric logistics zones work on a similar principle where logistics activities are co-located and often directly accessible to runways.

An inland port is an intermodal terminal (commonly rail) built or updated concomitantly with the development of adjacent logistical and service activities (inland ports are covered more extensively in this section). An inland port can also be serviced by trucks, which often occurs in developing countries, but this does not represent an efficient strategy as massification cannot be implemented. The inland terminal is directly integrated into co-located distribution activities, which is one of the main advantages of such facilities as they become their respective customers. The term “dry port” is often used to label them since it refers to a facility that performs a similar intermodal function than a port, is not directly serviced by deepsea maritime services, is a factor of agglomeration, but is not linked with a maritime function (except for fluvial ports). The inland port is conceivably the most advanced form of a logistics zone since it links co-located freight distribution activities to a gateway through a rail (or fluvial) corridor. In North America, ChicagoKansas City, and Columbus have large inland port complexes.

A logistics park is a planned zone composed of distribution centers and light manufacturing activities. It provides geographical advantages in terms of accessibility, land availability, and infrastructures as well as operational advantages in terms of favorable regulations and economies of agglomeration. However, the degree of accessibility varies depending on the array of intermodal terminals available in the vicinity. Logistics parks in proximity to an intermodal rail terminal are often labeled as intermodal logistics park. Logistics parks are often independently planned, and it is common to see them emerge after the construction of an intermodal terminal (or other logistics zones) as a promoter seizes an opportunity to provide land for logistics. A common type of logistics park is only serviced by road and does not require significant planning, but simply a change in zoning and some basic amenities (e.g. road access to a lot and utilities). They also tend to appear “spontaneously” at locations with good accessibility levels and where promoters can secure land for development.

A freight village is an integrated cluster of support activities for freight distribution such as office space, fueling stations, hotels, and restaurants. A freight village mostly focuses on the service and transactional dimensions of freight distribution and could exist in a context where limited freight distribution occurs. It does not require an adjacent intermodal terminal, but this terminal is commonly in the vicinity. A freight village can also be linked with an airport terminal since this type of high-value freight is intensive in transactions. The definition of a freight village is subject to different interpretations as, in some cases, logistics parks are labeled as freight villages. The term should still be applied where a high intensity of freight-related services has clustered within a logistics zone. It can be said that a freight village is a cluster of supporting services activities within a cluster of distribution activities. Raritan Center in New Jersey includes one of the oldest freight villages in North America since extensive service activities have emerged within a standard logistics park.

The level of functional integration between the distribution activities located within a cluster varies from small, where they simply share a location and its accessibility, to significant where activities have a high level of integration.

3. Site Selection and Location Dynamics

Because of their characteristics, logistic zones have an array of requirements for site selection. First, the site offers a number of geographical advantages:

  • Labor. Labor costs are usually considered the most important site selection criteria since distribution centers tend to be labor-intensive, many reliant on relatively low skilled workers. However, labor is a multidimensional factor since several managerial and operational tasks require a skilled workforce, particularly as distribution centers tend to be increasingly automated. Thus, proximity to a large labor pool is an added advantage since it enables to tap on the whole labor spectrum.
  • Accessibility. Transportation costs are a dominant factor in total logistics costs, with accessibility a standard factor based upon the proximity of the FDC to terminals (rail and port) and customers. For logistic zones attempting to fulfill an inland port role, co-location with an intermodal rail terminal is a crucial factor. The notion of accessibility tends to vary based upon if the FDC is mainly import or export-oriented. Import-oriented FDCs tend to be at intermediary locations along corridors towards main consumption markets. Export-oriented FDCs tend to be in proximity of major transport terminals, particularly ports. An important factor is that the region must be an important market in itself from a production and consumption perspective. A logistic zone with a limited local market presents a higher risk since it services a much more contestable market. In the context of higher energy prices, accessibility has become even more important as final distribution costs (“last mile”) tend to increase exponentially with distance because of empty backhauls. Another important criteria in site accessibility concerns its temporal accessibility implying that a logistic zone is open around the clock, enabling to match the flexibility of supply chain management better.
  • Land. One important aspect behind a managed distribution cluster is the availability of land that has already been zoned for such use. Logistic firms are very sensitive to the availability and the cost of land because they consume a large amount of space, implying that land is one of the highest costs in their operations. For a user, land acquisition (or renting) costs are thus reduced, particularly in relation to a standalone initiative. A careful analysis of the demand can lead to the provision of a mix of functional parcel sizes, reflecting the needs of the industry. Local and regional governments can also establish preferential taxation procedures if a logistical cluster fits regional development policies.
  • Infrastructures. Another common factor is the provision of utilities (electricity, water, sewage, etc.) as well as roads, such as a dedicated highway ramp, as a locational incentive. FDCs also offer developers the opportunity to provide warehousing space available for various term leases (known as spec developments) and equipment supporting logistics and distribution activities. LEED (Leadership in Energy & Environmental Design) certification is becoming mandatory for buildings in logistics zones, implying that logistics zones are increasingly compliant with environmental standards.
  • Anchor tenants. The presence of large logistic firms or the distribution branch of a large firm such as a retailer is fundamental. A large firm brings a substantial capital investment, expertise, and, more importantly, a cargo volume. It shows to other potential users the commitment of an industry leader and that the logistic zone thus has a value proposition. It can also go the other way around as a site selection by a large distributor such as a “big box” retailer can incite the development of a logistic zone.

Second, the site of a logistic zone offers operational advantages:

  • Planning and regulations. A managed FDC has the advantage of being able to provide a “fast track” process for the construction and operation of freight distribution activities. It thus has the support of various levels of government. Procedures granting permits are already in place in addition to ensuring compliance to safety, security, and environmental regulations. Since the FDC is part of a planning process (commonly a public-private partnership), there are provisions for expansions and additional infrastructures as it develops and expands. One important attribute that can assist FDC in attracting added value activities and consolidate their role and function is the status of a foreign trade zone (FTZ). This can include customs clearance and flexibility for importers and exporters about which added value can be performed.
  • Economies of agglomeration. The principle of economies of agglomeration for an FDC implies a variety of cost reduction because a critical mass is attained. Because of the volume of freight being handled within a specific area, there is a potential for consolidation of loads from various users into shuttles, particularly between the FDC and major transport terminals. There are thus more full truckloads (FTL), improving the efficiency of distribution. Thus, the FDC can become a logistical market in itself with a variety of service providers bidding for contracts that are “outsourced”. This can include shared services such a labor, transloading or information technologies, and telecommunications.
  • Internal multiplying effects. The proximity effect involving several logistical firms within an FDC also leads to the diffusion of best practices related to management, information technologies (e.g. software), and efficient compliances to rules and regulations. This promotes the training of a pool of labor leading to an array of productivity gains.

With these location factors in mind, three major forms of logistic cluster dynamics have emerged:

  • Near gateways where logistic zones are strongly conditioned by warehousing parks in the vicinity of container port terminals as well as in suburban settings nearby ring roads. This is prone to the usage of port-centric logistic zones and satellite terminals.
  • Around inland rail terminals, which took place at the same time that new facilities were being designed in a suburban setting, away from the more traditional locations nearby central business districts. This reinforces the emergence of load centers.
  • Along major highway corridors that can service a large metropolitan area or a group of metropolitan areas.

4. Functions and Added Value

The concept of added value is often based on the capitalization of inefficiencies within transportation and distribution. For instance, a port draws its income from the necessity to transfer cargo from one mode to another. Simultaneously, a distribution center exists because supply cannot be perfectly coordinated with demand along supply chains, thus maintaining a buffer. A logistic zone offers an opportunity to mitigate these inefficiencies through various economies of agglomeration. They can act as functional intermediaries between terminals (or regional suppliers) from which parts and goods are received and customers (for manufacturing or final consumption). For exports, a freight distribution cluster is also an intermediary linking regional production with national and global markets. There are two major types of freight distribution functions performed at logistic zones.

  • The first involves performing an activity that improves the efficiency of freight distribution, particularly in terms of lower costs, better time performance, and more reliable deliveries. The added value thus results in benefits that are carried to the shippers or their customers. This leads to a wide array of specific functions to be carried, including processing, distribution, customs clearance, or being a container depot.
  • The second is extracting a form of rent from the existing flows, notably through wages, tolls, and taxes. Added value results in financial gains for the regional workforce and various government levels, which can be used to fund infrastructure projects and improve competitiveness. However, there is a risk of a rent-seeking behavior where freight activities are targeted strictly in terms of a source of revenue. The “added value” they generate for the rent-seekers thus comes at the expense of the productivity of the supply chain.

The logistic zone is a value proposition for freight distribution that goes well beyond the function of warehousing with distinct economic benefits, such as job creation and capital investment, but also costs such as environmental externalities. An array of services are required as they support the functions of a logistics zone and provide employment. The goal is often to create a service market within a logistics zone since it strengthens local expertise and improves the performance of freight distribution. This market is related to three main categories of services:

  • Freight services. Specialized services that are rarely found outside the freight distribution industry. They include freight transportation, warehousing, and light fabrication services. They also include an array of freight operations taking place in a distribution center that can be subcontracted. Since the majority of freight shipments are containerized, logistical activities servicing containerization are particularly significant.
  • Corporate services. General services that focus on the operation of enterprises. Several of these services can be specialized since logistics enterprises have specific needs. Much of these services are performed within the corporation, with a growing share is being subcontracted (lower costs and higher quality through specialization). A logistics zone thus offers the possibility to develop a specialized service market.
  • Personal services. An array of services for the concentration of workers in a logistics zone. While they are unrelated to freight distribution, they are complementary since they contribute qualitatively to the performance of a logistics zone.

Another important component of the value proposition of a logistic zone concern information technologies, where there is an opportunity to create a freight management system that encompasses several distributors as well as nearby intermodal terminals. Last, the sheer size and organizational complexity of logistic zones require a form of governance that either falls into private, public, or joint interests.


Related Topics

Bibliography

  • Boile, M., S. Theofanis and A. Strauss-Wieder (2009) “Feasibility of Freight Villages in the NYMTC Region: Task 3 – Description of How a Typical Freight Village Works”, New York Metropolitan Transportation Council.