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increased complexity of the supply chain. When national boundaries were impermeable 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 billion 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 necessary 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 attacks, 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 product 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 absolute 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 logistics 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 categories 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-

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