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8
Logistics

ANURADHA NAGARAJAN

University of Michigan

CHELSEA C. WHITE III

Georgia Institute of Technology

INTRODUCTION

“Alexander’s army was able to achieve its brilliant successes because it managed its supply chain so well” says Michael Hugos (2006), drawing on published literature on the history of the successful campaigns of Alexander the Great. One of the critical differences between Alexander’s army and the ones he defeated was the fact that his army was the fastest, lightest, and most mobile army of its time. While other armies were constrained by carts and pack animals carrying the supplies, Alexander’s soldiers were trained to carry their own equipment and provisions and to live off the land as needed. Competitive advantage provided by logistics and the supply chain persists 2000 years later. In the battlefield of modern industry, globalization, demanding consumers, and efficient capital, markets have combined to create an environment that punishes mediocrity and incompetence. Firms are looking to the logistics industry to provide competitive advantage as goods and services move seamlessly worldwide. In a recent speech on global economic integration, Federal Reserve Chairman Ben Bernanke said, “Technological advances continue to play an important role in facilitating global integration. For example, dramatic improvements in supply-chain management, made possible by advances in communication and computer technologies, have significantly reduced the costs of coordinating production among globally distributed suppliers” (Bernanke, 2006). Economic integration brought about by vanishing global trade barriers has enabled firms to creatively manage their value chain, identifying sources of competitive advantage in the world stage to provide the best value for customers worldwide.

A consequence of the global dispersion of economic activity has been the



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8 Logistics ANURADHA NAGARAJAN University of Michigan CHELSEA C. WHITE III Georgia Institute of Technology INTRODUCTION “Alexander’s army was able to achieve its brilliant successes because it man- aged its supply chain so well” says Michael Hugos (2006), drawing on published literature on the history of the successful campaigns of Alexander the Great. One of the critical differences between Alexander’s army and the ones he defeated was the fact that his army was the fastest, lightest, and most mobile army of its time. While other armies were constrained by carts and pack animals carrying the supplies, Alexander’s soldiers were trained to carry their own equipment and provisions and to live off the land as needed. Competitive advantage provided by logistics and the supply chain persists 2000 years later. In the battlefield of modern industry, globalization, demanding consumers, and efficient capital, markets have combined to create an environment that punishes mediocrity and incompetence. Firms are looking to the logistics industry to provide competitive advantage as goods and services move seamlessly worldwide. In a recent speech on global economic integration, Federal Reserve Chairman Ben Bernanke said, “Technological advances continue to play an important role in facilitating global integration. For example, dramatic improvements in supply-chain management, made possible by advances in communication and computer technologies, have significantly reduced the costs of coordinating production among globally dis- tributed suppliers” (Bernanke, 2006). Economic integration brought about by vanishing global trade barriers has enabled firms to creatively manage their value chain, identifying sources of competitive advantage in the world stage to provide the best value for customers worldwide. A consequence of the global dispersion of economic activity has been the 2

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2 INNOVATION IN GLOBAL INDUSTRIES increased complexity of the supply chain. When national boundaries were imper- meable due to geographical, technological, logistical, and political constraints, firms could control the movement of goods through the value chain with more certainty. Consider the movement of goods in and out of the United States. In 2004, nearly $1.5 trillion worth of goods were imported to the United States, and $0.8 trillion of U.S. goods were exported to other countries. Nearly 16 million 20-foot equivalent units (equivalent to shipping containers that are 20 feet long, 8 feet wide, and 8 feet tall) arrive each year at U.S. ports. Roughly one-quarter of U.S. imports and one-sixth of its exports—or about $423 billion and $139 bil- lion worth of goods, respectively, in 2004—arrive or depart on container ships. Containerized imports include both finished goods and intermediate inputs, some of which are critical to maintaining U.S. manufacturers’ “just-in-time” supply chains. Supply-chain disruptions can leave manufacturers vulnerable if a neces- sary part does not reach an assembly plant in time. The lack of key parts could reduce output, employment, and income for individual companies and entire economic regions by amounts larger than the value of the delayed part—and in areas and businesses far removed from the port where a disruption occurred. Although concerns about disruptions in the flow of freight focus on terrorist at- tacks, similar economic losses could result from extreme weather, the high cost of fuel or fuel unavailability, or labor disputes that affect freight operations or from disruptions elsewhere in the supply chain.1 The increasing complexity of the global supply chain has compelled firms to look carefully at managing three primary challenges in logistics: (1) managing visibility of information and prod- uct movement as it relates to the ability to track orders, inventory, and shipments in real time; (2) managing costs; and (3) securing reliable service. Innovation in the logistics industry has played a major role in helping businesses manage these challenges. According to the U.S. State of Logistics report, although ab- solute logistics costs rose substantially in the United States in 2004, because of the growing economy, the costs of logistics remained at 8.6 percent of the gross domestic product (GDP). In fact, logistics costs have generally been declining annually since 1995. As shown in Figure 1, logistics costs were 10.4 percent of GDP in 1995 but they have declined year after year annually, except for a slight increase in 2000, reaching its lowest level of 8.6 percent in 2003 (Wilson, 2005). Innovation in lo- gistics has been critical to offering better products and services at lower costs. We begin this chapter with a brief definition of the logistics industry and its role in the economy. We classify the firms involved in the industry into four cat- egories and examine innovation practices in each of these categories in order to understand where innovation occurs and how the locus of innovation has changed over time among the various participants in the logistics network. We present the results of our semistructured interviews with 20 respondents consisting of execu- 1 See http://www.cbo.gov/ftpdocs/71xx/doc7106/03-29-container_shipments.pdf, p. 7.

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2 LOGISTICS 16.0 14.0 12.0 Percent of GDP 10.0 8.0 6.0 LOGISTICS % OF GDP 4.0 2.0 0.0 2000 2004 2002 1990 1984 1996 1986 1988 1998 1994 1992 YEAR FIGURE 1 Logistics as a percentage of GDP. SOURCE: Wilson (2005). logistics-1.eps tives from the logistics industry and industry experts. We then focus specifically on the locus of innovation, as indicated by the home country of the first inventor listed on logistics-related patents in the database of World Intellectual Property Organization (WIPO) patents we have collected, and we examine the changes in the location of innovation worldwide in the logistics industry. Our conclusions on the current state of innovation are derived from our observations from the two sources mentioned earlier: patent data and semistructured interviews with top industry executives and experts. We conclude with policy implications and our expectations for the future of innovation in the logistics industry. INDUSTRy DEFINITION AND DESCRIPTION Logistics management is that part of supply-chain management that plans, implements, and controls the efficient, effective, forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers’ requirements. Logistics management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order fulfill- ment, logistics network design, inventory management, supply/demand plan- ning, and management of third-party logistics services providers. To varying degrees, the logistics function also includes sourcing and procurement, produc- tion planning and scheduling, packaging and assembly, and customer service. It

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2 INNOVATION IN GLOBAL INDUSTRIES is involved in all levels of planning and execution—strategic, operational, and tactical. Logistics management is an integrating function that coordinates and optimizes all logistics activities, as well as integrating logistics activities with other functions, including marketing, sales manufacturing, finance, and infor- mation technology (Council of Supply Chain Management Professionals, n.d.). The logistics industry consists of firms offering a variety of services, including transportation and warehousing. As globalization has extended and expanded the supply chain, logistics firms have added order fulfillment, logistics network design, inventory management, and supply/demand planning to their portfolio of products. In terms of tons transported, domestic freight transportation in the United States grew by about 20 percent annually from 1993 to 2002. In the same period inventory carrying costs as a percentage of GDP have decreased from 8.3 percent in 1981 to 2.8 percent in 2002 as shown in Figure 2. “This reduction can be at- 9 Year 8 % of GDP 7 6 Percent of GDP 5 4 3 2 1 0 2001 1999 1983 1985 1989 1995 1993 1987 1997 1991 1981 Year FIGURE 2 Inventory carrying costs as a percent of GDP. SOURCE: FHWA Freight Management and Operations; see http://www.ops.fhwa.dot.gov/freight/freight_analysis/ econ_methods/lcdp_rep/index.htm. logistics-2.eps

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2 LOGISTICS tributed to timely, reliable delivery, efficiency, and visibility in the supply chain system. These reductions are especially evident in industries such as automotive and computer hardware manufacturers2.” Firms use logistics not only to man- age cost, as Dell did in their assembly and distribution of desktops, but also to be finely tuned to customer needs, as Zara has done in fashion retailing. Dell’s personal computer supply chain creates positive cash flow for the firm because it receives payment from its customers before it has to pay its suppliers by manag- ing its supply chain efficiently.3 Zara’s supply chain allows the firm to closely observe the market’s changing tastes and to respond quickly, keeping the firm in the forefront of fashion while minimizing inventory markdowns.4 In each case, these supply chains are well-coordinated, complex global networks, and in each case the firms have focused on innovation in their supply chain in order to achieve competitive advantage (Economist, 2006). Three trends have spurred innovation in logistics (Smith, 2006). The first trend is the increase in demand for high-tech goods.5 According to the Global Insight World Industry Service database, which provides production data for 70 countries that account for more than 97 percent of global economic activity, the global market for high-technology goods is growing at a faster rate than that for other manufactured goods, and high-technology industries are driving economic growth around the world. During the 22-year period examined (1980-2001), high-technology production grew at an inflation-adjusted average annual rate of nearly 6.5 percent compared with 2.4 percent for other manufactured goods. Between 1996 and 2001, high-technology industry output grew at 8.9 percent per year, more than double the rate of growth for all other manufacturing industries. Output by the five high-technology industries represented 7.7 percent of global production of all manufactured goods in 1980; by 2001, this output had doubled 2 Ginter, J. L. and La Londe, B. J. 2001. An Historical Analysis of Inventory levels: An Explor- atory Study. Ohio State Working Paper and Fein, A. J. 2004. The Myth of Decline: Assessing Time Trends in US Inventory to Sales Ratios. CES 04-18. See http://www.ces.census.gov/index. php/ces/1.00/cespapers?down_key=101710#search=%22Ginter%20and%20La%20Londe%22 3 Dell pioneered build-to-order supply-chain management in the 1990s to support its desktop busi- ness. Instead of building computers to forecasts and letting retailers sell them, Dell sells directly from its own website and call centers and then builds to order. Dell cuts retailers and distributors out of its supply chain but also gets paid up front, often before they have to pay for components. However, Dell has found it difficult to duplicate its supply-chain success in its laptop and consumer electronics businesses. 4 Zara, a part of Spain’s Inditex Group, is in the fashion apparel business. Fashion retailing is highly perishable, influenced quickly by changes in consumer and celebrity tastes. In contrast to a typical clothing company, where outsourcing manufacturing to Asia could take about 6 months to get a new design to shops, Zara completes the process in 5 weeks. Zara accomplishes this speed to market pri- marily by buying some garments and materials partly finished and by avoiding mass production. 5The five industries considered high technology by Organisation for Economic Co-operation and Deveopment (OECD) based on their R&D intensity are aerospace, pharmaceuticals, computers and office machinery, communication equipment, and scientific (medical, precision, and optical) instruments.

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2 INNOVATION IN GLOBAL INDUSTRIES to 15.8 percent.6 High-tech products typically have short product life cycles and complex value chains with design, manufacture, sales, and distribution located in different parts of the world. The role of innovation and execution of the supply chain has become paramount in this context. The second trend influencing the logistics industry is globalization—the integration of many microeconomies into one worldwide, interdependent econ- omy. Companies have the ability to source and sell globally and have begun to streamline their supply chains and open new markets. According to World Trade Organization statistics, world merchandise trade has grown by 70 percent since 2001.7 According to Global Insight, trade exports are going to increase signifi- cantly in all regions of the world, with the largest increases coming from exports from China to Europe and intra-Asia trade (Economist, 2006, p. 5). Table 1 shows the top 25 firms in the logistics industry as identified by the Hoovers Database.8 These companies, headquartered all over the world, are not only moving logistics services worldwide but are also creating innovation centers close to the new cen- ters of trade. For example, Saint Gobain, a glass manufacturer headquartered in France, has a “Technology Center” for conducting multidisciplinary research and development (R&D) in Blue Bell, Pennsylvania, to support its U.S. glass manu- facturing and logistics operations. It has also opened a new materials research and logistics support center in Shanghai, China, to cater to all its business divisions in Asia in 2006. In 2005, Hitachi invested in an information system company in China to help its third-party logistics (3PL) operations there.9 According to industry experts, including the council of supply-chain professionals, reliable, timely accurate data is the keystone of the new global supply chain (Bowman, n.d.; Wilson, 2004). Information is needed from each market and manufacturing outpost for planning, to enable flexibility, and to ensure security. Software and hardware innovations that enable greater visibility of product movement to ship- pers and carriers have become critical to success in the industry. Innovation in the industry has also been spurred by the growth of the Inter- net and e-commerce. Business-to-business commerce on the Internet has been increasing. According to Industry Week’s 2005 Value Chain survey, worldwide, in the 2 years between 2003 and 2005, business purchases made online increased 6 U.S. Technology Marketplace. See http://www.nsf.gov/statistics/seind04/c6/c6s1.htm#c6s1l1p2. Accessed October 23, 2006. 7 See http://stat.wto.org/Home/WSDBHome.aspx. Accessed August 15, 2006 8 Logistics services is described in Hoover’s as companies that engage in the process of planning, implementing, and controlling the movement and storage of raw materials, in-process inventory, finished goods, and related information from the point of origin to the point of consumption. We selected firms in the industry category that had logistics as one of their primary businesses. The firms are ranked by sales, not necessarily by logistics. 9 By definition, a 3PL becomes a third party to the traditional two-party (shipper/carrier) contract for transportation. A 3PL firm is, therefore, an outsourced provider that manages all or a significant part of an organization’s logistics requirements and performs transportation, locating, and sometimes product consolidation activities.

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TABLE 1 Top Logistics Companies Worldwide No. Company Name Location Year Started Sales ($ million) Employees Comments (source of information) 1 Hitachi, Ltd. Tokyo, 1920 2,524.80 323, 072 (Hitachi Company website, Annual Report 2005, One Japan Ltd.); 7505 Source Global Business Browser, Hoovers (Hitachi Transport Online System Ltd.) 2 Deutsche Post AG Bonn, 1949 MAIL: 16,486.42; MAIL: 125,282; One Source Global Business Browser, Germany EXPRESS: 23,393.09; EXPRESS: Hoovers Online, Annual Report 2005, Equinet LOGISTICS: 131,927; Analyst Report—February 2005 10,176.31 LOGISTIC: 148,095 3 United Parcel Atlanta, US 1907 42,581.00 (total); 407,000 One Source Global Business Browser, Annual Service, Inc. 5,994 (supply chain Report 2005, Factiva and freight operations) 4 Compaigne de Courbevoie, 1665 45,058 (total 199,630 One Source Global Business Browser, Annual Saint-Gobain France revenues); 19,808.18 Report 2005, Factiva (building distribution) 5 Deutsche Bahn Berlin, 1994 35,314 233,657 Hoovers Online, Company website Aktiengesellschaft Germany 6 DHL Worldwide Diegem, 1969 33,524.4 171,980 One Source Global Business Browser, Network Belgium Hoovers Online, Annual Report 2005 7 FedEx Memphis, 1971 32,294.0 184,953 One Source Global Business Browser, Corporation US Factiva, Hoovers Online 8 A.P. Moller– Copenhagen, 1904 34,809 76,000 One Source Global Business Browser, Maersk A/S Denmark Hoovers Online 2 continued

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TABLE 1 Continued 20 No. Company Name Location Year Started Sales ($ million) Employees Comments (source of information) 9 McLane Temple, US 1894 23,373.00 14,300 One Source Global Business Browser, Company, Inc. Hoovers Online, Factiva 10 Supervalu Inc. Eden Prairie, 1926 19,863.6 (total); 52,400 Company website, Factiva, One Source US 9,228.6 (food Global Business Browser distribution) 11 TNT N.V. Hoofddorp, 1946 (TNT 12,621.12 (total); 128,671 One Source Global Business Browser, Factiva, Holland originally founded) 991.30 (logistics) Hoovers Online, company website 12 Schenker AG Essen, 1872 10,912 39,000 Hoovers Online, One Source Global Business Germany Browser, Factiva, Company website 13 Mitsui O.S.K. Tokyo, 1964 10,920.2 (Total); 7,385 Annual Report 2006, One Source Global Lines, Ltd. Japan 553.4 (logistics) Business Browser, Hoovers Online, Company website 14 KBR, Inc. Houston, US The parent 10,138 62,500 Factiva, Hoovers Online company, Halliburton, was founded in 1919 15 YRC Worldwide Overland 1924 8,741.6 (total); 447.6 68,000 Factiva, Hoovers Online, Annual Report 2005, Inc. Park, US (Meridian IQ) Company website 16 CSX Corporation Jacksonville, 1980 8,618 35,000 Hoovers Online, One Source Global Business US Browser 17 Norfolk Southern Norfolk, US 1894 8,527 30,294 Annual Report 2005, Hoovers Online, One Corporation Source Global Business Browser, Company Web site 18 R.R. Donnelley & Chicago, US 1864 8,430.2 50,000 Company website, Factiva, One Source Sons Company Global Business Browser

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19 Kuehne + Nagel Schindellegi, 1890 11,276.6 (total); 23,000 Company website, Factiva, One Source Global International AG Switzerland 1,681.2 (railroad Business Browser, Annual Report 2005 logistics); 1,071.1 (contract logistics) 20 Bollore Puteaux, 1955 7,648.7 32,808 Company Website, Factiva, One Source Investissement France Global Business Browser 21 Hanjin Shipping Seoul, South 1988 5,921.1 1,641 Company website, Factiva, One Source Global Co., Ltd. Korea Business Browser, Supplychainbrain.com 22 Ryder System, Miami, US 1934 5,740.8 (total); 27,800 Company website, Factiva, One Source Global Inc. 1,637.8 (supply chain Business Browser, Annual Report 2005, The solutions) South Florida Business Journal—southflorida. bizjournals.com 23 C.H. Robinson Eden Prairie, 1905 5,688.9 5,776 World Trade Magazine (worldtrademag. Worldwide, Inc. US com), company website, One Source Global Business Browser, Hoovers Online 24 Canada Post Ottawa, 1867 5,520.3 72,874 Factiva, Company Website, One Source Corporation Canada Global Business Browser 25 Panalpina Basel, 1890 5,290.6 13,583 Company website, Factiva, One Source World Transport Switzerland Global Business Browser (Holding) Ltd. 2

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22 INNOVATION IN GLOBAL INDUSTRIES from 15 to 20 percent (Vinas, 2005). In addition, according to Forrester Research, of the 80 million U.S. online households, three-fourths have purchased products online (Mulpuru, 2006). Acquiring and retaining customers online necessitates providing complete satisfaction from the first click on the company’s website to delivery to the door. The product has to be delivered when, where, and how the customer wants it delivered (Bhise et al., 2000). In contrast to the bricks-and- mortar economy, delivery of the product on a timely basis has become a critical part of the overall customer’s purchasing experience. The Internet and computing technologies have increased the amount of information available to the buyer and manufacturer about the product and the fulfillment process. Consequently expectations relating to timely and accurate fulfillment are rising. Data from the American Customer Satisfaction Index Annual E-Commerce Report in 2005 showed a slump in scores after 2 years of progressive increases (Smith, 2005). Auction leader eBay had a 4.8 percent reduction, and Amazon.com dropped 4.5 percent in their customer satisfaction scores. Firms such as Amazon and eBay depend on the logistics function to improve and complete their customer’s pur- chasing experience. Innovation along the supply chain, especially warehouse management software and tracking products, support firms’ efforts to cope with the demands of the Internet environment. In summary, the modern logistics industry is a complex network of firms involved in the flow and transformation of goods from the raw materials stage to the end user. Innovation in the industry has been spurred by increases in the demand for high technology products, globalization in all aspects of the value chain, and the advent of ecommerce. PATTERNS OF INNOvATION IN THE LOGISTICS INDUSTRy One of the most challenging aspects of understanding innovation in logistics management lies in the accepted wisdom that every product has its own unique value chain. Thus, innovation is primarily a pull phenomenon10 for firms in the logistics industry, with new products and services being developed in response to specific customer needs. The competing pressures of managing global supply chains cost-effectively while increasing visibility, which allow a firm to monitor events and exceptions in real time, have created an environment ripe with oppor- tunity for innovation. We adopt a broad definition of innovation that is not limited 10 John Seely Brown and John Hagel III define pull and push systems in the context of innovation as follows: “Push systems contrast starkly with pull ones, particularly in their view of demand: the former treat it as foreseeable, the latter as highly uncertain. This difference in a basic premise leads to fundamentally different design principles. For instance, instead of dealing with uncertainty by tightening controls, as push systems would, pull models address immediate needs by expanding op- portunities for local participants—employees and customers alike—to use their creativity. To exploit the opportunities that uncertainty presents, pull models help people come together and innovate by drawing on a growing array of specialized and distributed resources” (Brown and Hagel, 2005).

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2 LOGISTICS to technological breakthroughs or new products. As Rogers notes, “Innovation is an idea, practice, or object that is perceived as new by an individual or other unit of adoption” (Rogers, 1995). Consequently logistics innovation could improve internal efficiency within a logistics firm or could help serve shippers better. For the purposes of this study, logistics innovations could be new to the world or new to the particular context of the firm and its stakeholders. To understand the locus of innovation in the logistics industry, we begin with a classification of firms in the industry. Our analysis of innovation patterns in the industry is presented in the context of this taxonomy. We present the results of our semistructured interviews with top management personnel and experts in the industry on innovation practices of prominent firms in the industry. These semistructured interviews, though few in number, allow us a fine-grained look at innovation practices in the industry. Then we present an analysis of patent data from the WIPO to provide further insight into the innovation practices in the logistics industry and how they have changed over time. Classification of Firms To identify meaningful patterns in innovation behavior, we needed to clas- sify firms according to the role they play in the industry before we discuss the interview data and patent data. Figure 3 depicts our classification of firms into Logistics service integrators Product Solutions Providers Inbound Outbound Suppliers logistics Manufacturers logistics Reverse logistics Warehousing and Outbound distribution Customers Retailers logistics Logistics Service Users (LSU) Logistics Service Providers (LSP) FIGURE 3 Classification of firms in the logistics industry. logistics-3.eps

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02 INNOVATION IN GLOBAL INDUSTRIES 450 400 United States of America 350 United Kingdom 300 Switzerland PATENTS 250 Netherlands 200 Japan 150 Germany 100 Australia 50 0 00 04 02 0 6 8 4 2 9 9 9 9 9 20 20 20 19 19 19 19 19 YEAR FIGURE 8 Patents by country of assignee between 1990 and 2004 for the top seven countries. logistics-8.eps percent of total patents in 2000, the PSP share of overall logistics patents declined to 41 percent in 2004. The patents assigned to LSPs doubled between 1999 and 2000 and doubled again in 2001. Additionally, and consistent with our earlier dis- cussion on the recent participation of LSIs in the logistics network, a few patents have been assigned to LSIs since 1997. Our discussions with LSIs and industry experts indicate that the role of the LSI in the industry is often focused more on process improvement and less on patentable innovation. A large number of pat- ents have also been assigned to LSUs, suggesting that user firms are investing in developing logistics capabilities as a critical business advantage. In 2004, more patents were assigned to LSUs than to PSPs, with the LSU share of total patents rising from 15.7 percent in 2000 to 44.1 percent in 2004. Figure 8 shows the distribution of patents by assignee home country or coun- try where the assignee is headquartered. It is worth noting from the figure that, although the firms headquartered in the United States have nearly seven times as many patents as the next country—Germany—the countries of Switzerland and the Netherlands have 129 and 53 patents assigned to them. Further analysis shows

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0 LOGISTICS 1600 PSP 1400 LSU LSP LSI 1200 Expert 1000 800 600 400 200 0 Africa Asia Australia Europe North South America America FIGURE 9 Patents by category of assignee by continent. logistics-9.eps that the individuals listed as first inventor for the patents assigned to Dutch and Swiss firms were mostly from Germany, the United States, or Belgium. In the geographic distribution of patents shown in Figure 9, firms assigned the most patents were from the two developed-economy regions represented broadly by North America and Europe followed by the emerging economies of the Asia-Pacific region. Three times as many patents were generally assigned to firms in North America as were assigned to firms in Europe, and the order of magnitude was even larger when compared to the Asia-Pacific region. A closer examination of the data reveals that PSPs in the United States were assigned the most patents between 1990 and 2004, with more patents than all the patents worldwide for experts, LSIs, and LSPs combined and almost as many patents as patents assigned to LSUs worldwide. In contrast to the prolific innovation of PSPs in the United States, LSUs were assigned the most patents in most of the European countries, with the exception of Germany and Sweden. Among the countries in Asia no particular pattern could be discerned. Experts were assigned the most patents in China, LSUs in Japan, and PSPs in India and Singapore.

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0 INNOVATION IN GLOBAL INDUSTRIES 35 30 PSP LSU LSP 25 Expert 20 15 10 5 0 1990 1996 1997 1998 1999 2000 2001 2002 2003 2004 FIGURE 10 Patents filed by category of assignee between 1990 and 2004 when inventors are from different countries. logistics-10.eps Figure 10 presents the number of patents with inventors from different countries for each assignee category over time. Although more than one-half of co-invented logistics patents were assigned to PSPs (80 out of 149), in fact the share of PSP-assigned patents that were co-invented (7.3 percent) is similar to the share of co-invented LSU patents (7.7 percent) or co-invented LSP patents (6.3 percent). After peaking in 2002 at 10.7 percent, collaborative PSP patents decreased to 9.3 percent in 2003 and 7.1 percent in 2004. One explanation for this trend may be that firms are creating local R&D centers to create innovative products and solutions for local consumption. Our study of patent data indicates that logistics innovation gained impor- tance in the mid- to late 1990s. In addition, we found that most of the innovation activity remains in the United States. However, logistics innovation has become increasingly dispersed. For each of the past 5 years, inventors from more than 20 countries had filed logistics-related patents with nearly 60 percent of the patents coming from inventors based in the United States. More patents have been as- signed to PSPs—firms who provide software and hardware to enhance communi- cations, tracking, and visibility along the supply chain—than to users of logistics services and providers of logistics services until 2004, when users were assigned

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0 LOGISTICS nearly 44.1 percent of all patents. Since 1996, the number of patents with inven- tors from different countries has increased but the trend has been flat since 2000. Inventors from Germany have the highest proportion of collaborative patents, av- eraging more than 13 percent since 2000, and 11 percent of the United Kingdom’s logistics patents during the same period reflect collaborative invention. Inventors in the United States have partnered with inventors in over 17 countries, primarily in Europe. However, when considering the share of patents created through col- laboration (with the first inventor located in the United States), only about 5 per- cent of the patents were co-invented between 2000 and 2004. There is evidence of recent partnerships with inventors in the Asia-Pacific region. DISCUSSION An analysis of innovation in the logistics industry is handicapped by the lack of readily available data. Most of the innovation activity is confidential information, and the level of investment in logistics innovation is hard to track specifically. Financial and operational data about this aspect of their business is not publicly disclosed. To the extent possible we have relied on public sources of data to augment our understanding of the phenomena learned through private conversations. Where public data are lacking, we have relied heavily on the in- formation obtained from our interviews, although our conclusions are not based on any single source of information. Our study examined multiple aspects of innovation in the logistics industry through interviews with industry insiders and experts and through a study of pat- ent data. While the logistics industry’s innovation may not be perfectly reflected in patent data, we believe that, with cautious interpretation, they provide valuable information about important trends in innovation in logistics. In addition we also examined the innovation activity of the top logistics firms, as listed in the Hoovers database, in order to understand innovation in logistics. For each of the top firms we looked at company websites, articles in industry periodicals, and databases such as Factiva and One Source Global Business. As noted earlier, we find that innovation is gaining importance in the lo- gistics industry. The advent of new technologies and globalization has inspired firms to look for new solutions for the challenge of business in today’s competi- tive landscape. Innovation is also becoming more global than it has been in the past, although the United States continues to lead the innovative effort in the industry. Inventors in the United States have been the most productive throughout the past 15 years and we do not observe any threat to this dominance. Inventors from Japan and Australia have become more productive in the past 5 years, and many European countries have become more active in logistics innovation as trade increases within the European Union. Since 2000, there has been increased collaboration in the industry. Inventors from different countries collaborated on

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0 INNOVATION IN GLOBAL INDUSTRIES about 6 percent of the patents filed, 88 percent of which were filed after 2000. Nearly half of the intercountry collaboration involved a U.S. first inventor but these patents were a very small proportion of the total U.S. patents. U.S inventors collaborated with inventors in 17 other countries when they were listed as the first inventor, and inventors from 9 countries when they were the second inven- tor. PSPs were the most frequent collaborators but more recently LSUs and LSPs have been more actively collaborating for innovation. Our data lead us to the conclusion that logistics innovation is most often a pull phenomenon. The users of logistics services identify a business challenge. As the supply-chain process has increased in complexity due to the increasing scope of business activity, solutions to these challenges require specialized and often distributed resources. The LSU “pulls” the innovation from the PSPs and LSPs with requisite specialized capabilities. More recently, LSI firms have entered the logistics value space. They are software and hardware platform- and product- neutral and focus on providing the best solution to the customer. We tracked few innovations from these firms. However, if their role increases in the logistics landscape, we may see an increase in innovative activity among the integrators. Product innovations, especially those related to new technologies, are en- abled through collaboration. For example, DHL Worldwide, an LSP, has recently unveiled its RFID pilot project, which it is developing in partnership with IBM, an LSI. Savi Technologies, a PSP and recently acquired by Lockheed Martin, leverages its leading position in RFID solutions through alliances with lead- ing firms in data collection, services, software, and solutions for the logistics industry.23 We see a growing trend of innovation in different parts of the world as the outcome of globalization. We have noted that a few LSUs and LSPs are beginning to locate logistics R&D centers in different parts of the world in order to be close to the customer in lead markets. We believe that these centers are used to cre- ate capabilities that allow greatest responsiveness to local customer needs while exploiting local expertise and relationships. Nearly two-thirds of the executives responding to a survey by The McKinsey Quarterly in September 2006 stated that they are concerned with increasing risks from disruptions to their supply chain. The environment is ripe for firms in the logistics industry to continue to innovate and address users’ concerns about their supply chain. POLICy IMPLICATIONS Archibugi and Iammarino (1999) offer a taxonomy of globalization of in- novation with a view to understanding the implications for national policy. Based on the locus of innovation and the nature of exploitation, the three categories they suggest are the international exploitation of nationally produced innovations, the 23 See http://www.savi.com/partners/program.shtml.

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0 LOGISTICS global generation of innovation, and global techno-scientific collaborations. Our study of the logistics industry indicates that innovation in the logistics industry has mostly belonged to the first category—international exploitation of nation- ally produced innovations. Logistics innovations have generally been developed for the home market, predominantly the United States, and then scaled for the international market. However, the U.S. logistics industry is slowly moving to- ward the second and third categories—global generation of innovation and global techno-scientific collaborations. Accordingly, one of the most relevant policy is- sues for the logistics industry is the role of governments in creating and enforcing patent law. Patent law enforcement is disparate and unequal in many parts of the world. Our study shows that U.S. logistics firms have been prolific in innovation compared to their peers in other parts of the world. With the globalization of logistics users and suppliers, innovations developed in the United States should be adopted in every country without concern for misappropriation of intellectual property (IP). Inadequate IP protection is a concern for many industries, and the logistics industry is no exception. As seen from the data, innovation in logistics is in the early stages of its life cycle. While there is no evidence that IP protection is hindering innovation now, the role of formal IP protection is likely to assume greater importance as innovation increases in the industry. Reducing trade barriers and standardizing import rules would also help inno- vation in the U.S. logistics industry. Market liberalization in many of the world’s fastest-growing economies would increase opportunities for U.S. logistics firms. Data indicate that the U.S. logistics industry is the most innovative and the most advanced in the world. Liberalization would provide the opportunity to extend the market reach of U.S. logistics firms and add to their capabilities by being ex- posed to different contexts and conditions. For example, Brunei, Singapore, and Thailand have recently signed the Multilateral Agreement on the Full Liberaliza- tion of All-Cargo Services. This agreement allows airlines to operate unlimited cargo on any route within the three countries (Bower, n.d.). This type of agree- ment enables logistics firms to create innovative solutions to better respond to customer needs since they have fewer constraints imposed on the flow of goods, information, and funds. A skilled workforce is an essential component for successful innovation in any context. However, as discussed earlier in this chapter, the logistics industry has become a high-tech complex network with information flow becoming the critical source of competitive advantage. Graduate enrollments in science and engineering fields in U.S. universities reached a record high of 566,800 in the fall of 2003, according to data collected by NSF through 2003.24 Encouraging higher education, especially in the fields of mathematics, computer science, and 24 S&E Indicators 2006 Available at http://www.nsf.gov/statistics/seind06/c2/c2h.htm. Accessed January 22, 2007.

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0 INNOVATION IN GLOBAL INDUSTRIES engineering, is essential so that the requisite skilled workforce is available for the United States to continue its dominance in logistics innovation. Since the events of September 11, 2001, supply-chain security has been receiving much publicity. According to a recent report by the Council of Supply Chain Management Professionals, none of the programs instituted by the U.S. government have been successful in eliminating or significantly reducing sup- ply-chain vulnerability (Wilson, 2005b). While most of the attention and funding has been directed toward enhancing airport and passenger security, little attention has been paid to the rest of the transportation system. The shipment of containers represents one of the greatest risks in the cargo supply chain. In 2004, over 10 million loaded cargo containers were imported into the United States, represent- ing about $1.43 billion of containerized goods moving through U.S. ports each day.25 Despite the security programs enacted by Congress, such as the Maritime Transportation Security Act and the Customs-Trade Partnership Against Ter- rorism, experts agree that security along the supply chain remains woefully inadequate (Wilson, 2005b). It is critical that the U.S. government devote greater resources to address this security risk by increasing funds and manpower for adequate implementation of security programs. There is no evidence to suggest that firms in the U.S. logistics industry have received federal funding for security- related innovation. The innovative power of the U.S. logistics industry could be harnessed for creating new products for increasing supply-chain security. The logistics industry has been up to the challenge when faced with many changes in the environment; with the right incentives from the government, the industry could become a partner in creating a safer, more secure, supply chain through innovation. CONCLUSION The Council of Supply Chain Management Professionals has been publish- ing an annual report on the state of the logistics industry for the past 17 years. According to the latest report, after declining for most of the last 7 years, logistics costs as a percentage of the nation’s GDP are pushing upward. After hovering around 10 percent of GDP during the 1990s, logistics costs as a percent of GDP decreased as interest rates declined and business cost pressures mounted. How- ever, the most recent estimate is for 2005, when logistics costs were about 9.5 percent of GDP, as shown in Figure 1. Estimated logistics costs in 2005 totaled $1.183 trillion—an increase of $156 billion over 2004 and the largest year-on- year change in the 17-year history of the report. Shippers are feeling pressure from two directions. One factor is the steady climb in interest rates, which has pushed up inventory-carrying costs. But the biggest cost driver has been rising 25 Liner Shipping Facts and Figures. World Shipping Council. Available at http://www.worldshipping. org/liner_shipping-facts&figures.pdf. Accessed December 26, 2007.

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0 LOGISTICS ($ billions) Carrying 393 Costs • Interest 58 • Taxes, Obsolescence, Depreciation, Insurance 245 • Warehousing 90 Transportation 744 Costs Motor 583 Carriers • Truck – Intercity 394 • Truck – Local 189 Other 153 Carriers • Railroads 49 • Water (International 29, Domestic 5) 34 • Oil Pipelines 9 • Air (International 15, Domestic 25) 40 • Forwarders 22 Shipper- 8 Related Costs Logistics 46 Administration Total 1,183 Logistics Costs FIGURE 11 Costs in the logistics logistics-11.eps market, 2005. SOURCE: http://www.logisticsmgmt. com/article/CA6352889.html. Accessed August 28, 2006. transportation expenses, which reached $744 billion in 2005, up from $636 bil- lion in 2004. Soaring fuel prices, a driver shortage in segments of the trucking industry, and diminished competition have all come together to raise rates across all modes, and for trucking in particular. Figure 11 shows the breakdown of the costs in 2005.26 Managing these increasing costs is going to become even more critical in the future. Domestic freight transport is expected to increase by another 65 to 70 percent by 2020. International shipments are expected to increase even more 26 See http://www.logisticsmgmt.com/article/CA6352889.html. Accessed August 28, 2006.

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0 INNOVATION IN GLOBAL INDUSTRIES over this period (by about 85 percent).27 As the need for logistics management grows, businesses will need to be adaptable and flexible to changing environmen- tal conditions. In a world of synchronized trade, collaboration among all parts of the logistics network becomes critical. Innovation in logistics is essential for the flow of goods, information, and funds to be seamlessly choreographed. Some factors such as interest rates and fuel prices are beyond the control of the firm, but investment in innovation, especially that directed at reducing variability in quality of service and uncertainty in the supply chain, shows the greatest promise for the future of the industry. ACkNOWLEDGMENT We are grateful to the Sloan Foundation for generous support of this research. REFERENCES Archibugi, D., and S. Iammarino. (1999). The policy implication of the globalization of innovation. Research Policy 28(2,3):317-336. Bartels, N. (2006). 21st century logistics. Manufacturing Business Technology. March. Bernanke, B. (2006). Global economic integration: What’s new and what’s not? Available at http:// www.federalreserve.gov/boarddocs/speeches/2006/20060825/default.htm. Accessed August 28, 2006. Bhise, H., D. Farrell, H. Miller, A. Vanier, and A. Zainulbhai. (2000). The duel for the doorstep. The McKinsey Quarterly 2:32-41. Bower, E. Z. (n.d.). Off shoring operations by United States firms in logistics and distribution services: Implication for ASEAN. Available at http://www.us-asean.org/ASEAN/Svcs_FDI_ Comp_Paper.doc. Accessed August 15, 2006. Bowman, R. J. (n.d.) Supply chain management: The perils of going global. Available at www. supplychainbrain.com, category SCM Technology. Accessed August 15, 2006. Brown, J. S., and J. Hagel III. (2005). From push to pull: The next frontier of innovation. McKinsey Quarterly 3. See www.Mckinseyquarterly.com Accessed July 26, 2006. Council of Supply Chain Management Professionals. (n.d.). Supply chain management/logistics man- agement definitions. Available at http://www.cscmp.org/Website/AboutCSCMP/Definitions/ Definitions.asp. Accessed July 26, 2006. Craig, T. (2003). 4PL versus 3PL—A business process outsourcing option for international sup- ply chain management. World Wide Shipping. December/January. See http://www.ltdmgmt. com/mag/4pl.htm. Economist. (2006). The physical Internet: A survey of logistics. June 17. Gerybadze, A., and G. Reger. 1999. Globalization of R&D: Recent changes in the management of innovation in transnational corporations. Research Policy 28(2,3): 251-275. Grosspietsch, J., and J. Kupper. (2004). Supply chain champs. The McKinsey Quarterly 1:2-4. Handfield, R., and E. Nichols. (2002). Supply Chain Redesign. Englewood Cliffs, NJ: Prentice Hall: p. 13. 27 Seehttp://www.ops.fhwa.dot.gov/freight/freight_analysis/nat_freight_stats/docs/05factsfigures/ table2_1.htm. Accessed August 27, 2006.

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