By Derek Cutler and Chris Steele
From the July/August 2023 Issue
The economic landscape is ever-evolving—even and perhaps especially when we might like to think otherwise. The case of logistics and freight movement is particularly so. Even though companies change how they move goods and freight all the time, they do so over and through a series of infrastructure channels that are less immediately changeable. A port is a port, an airport is an airport, and a railroad goes where it goes. While each can make changes over time and through significant capital investment, sometimes the very physical and immovable nature of these key assets could make them as much risks as they are key assets.
So, just as any company that relies on its global supply network could be in the process of tracing back several steps in its value chain to understand key pieces of infrastructure, the communities that house these key ports, airports, and rail yards are beginning their own reverse-engineering process.
In other words, while companies reconfigure to specialize their production networks in ways that explicitly recognize logistics facilities as being specialized parts of their value chains rather than “end-all, be-all” linkages, communities and regions have the same opportunity and can re-imagine what they do and how they do it.
By asking questions about the value chains that move through their location, their infrastructure, and their facilities, economic development agencies can identify areas of risk and opportunity. This analysis is not only fascinating, but also can reveal ways in which companies and regions alike can take economic evolution by the horns and nudge it in ways that will produce even greater results.
Regions are already doing so— for example, by re-examining the logistics strengths of the region, Kosice, Slovakia was able to convince Volvo to locate their newest electric vehicle plant not in Asia, but instead in Slovakia. Representatives for both Volvo and the region specifically note that not only does this decision create a European triangle of manufacturing covering Volvo’s largest sales region, but that it will maximize Volvo’s access to suppliers and to logistics points that specialize in the electric vehicle supply chain.¹
Supply Chains And Reliance On Logistics Nodes
Local businesses have been quick to take advantage of more diverse sources of materials and products for decades. In doing so, they implicitly rely on technology that allows for quick and efficient distribution of goods through modern supply chains spanning multiple modes. While manufacturers, suppliers, and eventual customers may not pay attention to the specific ports, airports, and freight yards along the way, these logistics nodes are of critical importance.
Just as one example of how the importance of international logistics continues to grow, the below diagram shows the U.S. reliance on imported goods, using national level data and economic models from IMPLAN (a specialized economic impact analysis modeling platform).
The y-axis shows the percentage of inputs (by value) an industry uses to produce its good or service which comes from an international source. Indexed growth in usage of imported goods is shown on the x-axis and communicates a largely growing usage of imports (index > 1.0) from a pre-pandemic reference year of 2019 as part of their day-to-day operations.
There is a clear trend towards higher technology manufacturing being integrated into broader and more complex supply chains.
Framework For Industry
Economists have long described and celebrated the virtues of regional specialization. Technology has in many ways accelerated this specialization by reducing barriers and transactional costs, which have historically impeded direct connections and trade between more distant markets. This is as true for the specialization of logistics nodes as it is for the manufacturers and suppliers that reside in any given region.
There is a need for a conceptual, structural way to link industry and regional services together in a region. Classic economic models refer to the process of production of goods through interindustry trade and value-added activities, but freight (and the data communicating freight movement) show nothing more than the physical execution of the trade between those economies. Things begin to fall into place when one instead looks at the points of origin and destination as points of production and consumption.
Economic models excel at taking the production functions of industries and then breaking them down into how much of each good is produced and consumed. By aggregating models like these across industries, it is possible to derive effective measures of production and attractions for these same goods.
Maximize Freight Movement
Freight dependence models are two things:
- A framework that links freight data and economic models to give a construct that enables scenario testing, analyses, and
- Using this framework in planning for linkages between the two.
But freight dependence models also enable us to investigate the importance specific types of freight to a region, allowing a quantification of what proportion of economic activity and what types of economic activity are reliant on freight services.
The following examination of the state of Arkansas shows a map (below) of the state’s production and consumption of freight activity in thousands of tons (top left) and the intensity of its economic output (bottom left). However, there is more to identifying the desired types of industry for attraction beyond identifying who has the highest demand for freight volumes.
Instead, a more nuanced approach includes looking at the potential contribution of their activities to the economy (graph, top right). The economic activity aggregated to fourteen key sectors—where the blue represents the magnitude of economic activity (employment) relative to the total activity in that sector – shows that the economic value of freight is concentrated within a few obvious higher-level sectors.
In addition to demonstrating the magnitude of demand, freight dependence models can also integrate with local measures of freight movement to tell the story of the mix of logistics services by industry (graph, bottom right). Combining approaches like these serves to position a region to better identify local industry needs and make a value pitch that matches the resources available to the region. This exercise becomes a jumping off point for looking at the sufficiency of infrastructure within a region, helping demonstrate connections to vital markets for a prospective industry (in addition to highlighting slack capacity to support future growth).
Mapping The Linkages And Identifying Key Nodes
Freight dependence models also lend themselves to describing linkages between economies, the ways industries produce and consume goods, and the value produced along the way. Using the models in turn aids regions in their efforts toward industry attraction through better understanding industry needs for their most important source and destination markets.
The graphic below—derived from data for the state of Michigan—focuses on value-added chains related to the manufacture of forestry-related goods (see below diagram). The tactical mapping shown can be used by economic development professionals and other stakeholders to evaluate ecosystems within a region, as well as across regions.
The map above highlights specific portions of the value-added chain that focus on more advanced processing of wood into furniture and finished goods and shades local geographies based on their level of participation in the value chain. Specific rail and freight facilities serve as pipelines into and out of those counties. The weight and color of the transportation lines allow visualization of current patterns of usage by a specific value chain and highlight the relationship between market and mode. Such tools can be used to map physical infrastructure connecting broader multi-regional value chains or serve to identify critical corridors that will require additional investment to support new industrial development and resettlement.
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The Last Word: The Reshoring Movement Is In Full StrideUnderstanding where freight activity is most clustered, what it supports, and the key corridors or facilities on which it relies provides new perspective on how to use these hard-to-reproduce assets. The ability to look forward, to examine alternate scenarios about how a region’s economy grows/evolves (or how a company’s needs change) and to quantify what this means for a region’s freight activity can help demonstrate adaptability for a region.
In Summary
We live in a world that is incredibly connected, and one in which the parts in the device on which you are reading this likely came from dozens of locations, and made multiple stops during mining, processing, manufacturing, assembly, and distribution. Neither tech product development processes nor the logistics chains that produce these goods are static. While the key logistics points that facilitate these movements are of course at constant risk of obsolescence due to this change, they also represent logical points for examining how companies and regions alike can evolve to stay ahead of global competition.
References
Cutler is Chief Economist at EBP-US and a veteran of the firm with 12 years of experience. He specializes in the generation and application of custom economic models to address the impacts of infrastructure performance on economic growth and development. Previous work internationally includes work with both Asian and African Development banks, European industry organizations, and custom freight-economy models for a wide range of clients.
Steele is CEO and President of EBP-US and also heads the firm’s economic development practice, applying over 30 years of experience to helping communities better understand how to attract and sustain investment, job growth, and entrepreneurial activity. He has written on location strategy and real estate topics for multiple publications and served as an editor for Ernst & Young’s United States Investment Monitor. He also co-authored the chapter on US Incentives for Columbia University Press’ Rethinking Investment Incentives.
