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Suggested Citation:"8 Logistics." National Research Council. 2008. Innovation in Global Industries: U.S. Firms Competing in a New World (Collected Studies). Washington, DC: The National Academies Press. doi: 10.17226/12112.
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Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

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 273

274 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. 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-   See http://www.cbo.gov/ftpdocs/71xx/doc7106/03-29-container_shipments.pdf, p. 7.

LOGISTICS 275 16.0 14.0 12.0 Percent of GDP 10.0 8.0 6.0 4.0 LOGISTICS % OF GDP 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

276 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

LOGISTICS 277 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 manufacturers.” 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. 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. 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. 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   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   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.   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.   The 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.

278 INNOVATION IN GLOBAL INDUSTRIES to 15.8 percent. 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. 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. 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. 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   U.S. Technology Marketplace. See http://www.nsf.gov/statistics/seind04/c6/c6s1.htm#c6s1l1p2. Accessed October 23, 2006.   See http://stat.wto.org/Home/WSDBHome.aspx. Accessed August 15, 2006   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.   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.

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 279 continued

TABLE 1  Continued 280 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

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. 281

282 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).

LOGISTICS 283 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

284 INNOVATION IN GLOBAL INDUSTRIES four categories based on a simple logistics value chain.11 They are logistics ser- vices users, logistics service providers, logistics service integrators, and product solution providers. In this section, we focus on describing the classification since our subsequent sections discuss innovative activity along the categories detailed in the following paragraphs. Logistics service users (LSUs) are shippers, such as Dell and General Mo- tors (GM), who manufacture products and use logistic services. There are many variations among the firms in this category. Some LSU firms manage important parts of the logistics function while outsourcing parts of the supply chain such as transportation planning, execution, and warehousing to logistics service pro- viders and logistics integrators. In other firms, the purchasing and transportation departments have combined to form supply chain departments. Beginning in the mid- to late 1990s these departments were given the responsibility for logistics management as defined earlier. As LSU firms began to focus more on core op- erations in the late 1990s, they began outsourcing many aspects of the supply chain, giving rise to 3PL providers and fourth-party logistics (4PL) providers. 3PL and 4PL providers enable logistics outsourcing and provide logistics value- added services.12 A recent survey of 381 LSUs revealed that 69 percent of them outsourced their logistics operations to 3PLs (Stoffel, 2006). However, as innova- tion in the supply chain becomes critical for business success and the competitive advantage it confers becomes more evident, there has been a move to bring parts of the activity within the organization again. For example, Vector SCM was a joint venture created in December 2000 by Con-way and GM to manage GM’s global supply chain. However, in June 2006, GM declared its intent to enter into negotiations to purchase Vector from Con-way. GM noted that, by integrat- ing Vector into the firm, it had made a strategic decision to resume more direct control over its logistics functions.13 Most LSUs are not interested in acquiring the physical assets involved in the physical transportation of their goods. Rather, they look to increase their capability in supply-chain management to effectively partner with 3PLs and 4PLs to leverage their combined capabilities. According to Razat Gaurav, vice president of global transportation and distribution for i2, companies “want to let 3PLs execute against their plans and then rely on their specialized local knowledge. If you are highly reliant on international sources of supply, you also need some internal competence” (Bartels, 2006). Specialized industry and firm-specific supply-chain challenges are best un- derstood by LSUs. These firms use their specialized knowledge to innovate products and processes as solutions to solve their particular business challenges. A survey of LSUs by McKinsey and the Institute for Supply Chain Management 11  We thank Tushar Dave of Satyam for helping us develop these categories. 12  Please see section on Logistics Service Providers for 3PL and 4PL definitions; see also footnote 9. 13  http://www.menloworldwide.com/mww/en/newsroom/prarchives/29_Jun_2006.shtml. Accessed July 20, 2006.

LOGISTICS 285 at the University of Munster found that the best supply-chain performers cre- ate innovations to increase efficiency in logistics by borrowing from efficiency programs in other parts of their business process, such as lean manufacturing (Grosspietsch and Kupper, 2004). Consequently, LSUs generate efficiency-based supply-chain innovations that draw on business practices outside the supply-chain function. The United States, with more than one-fourth of the world’s GDP, de- pends heavily on logistics for movement of goods within the country and across its borders. It provides a fertile environment for innovation among LSU firms with U.S. operations regardless of where it is headquartered. Logistics service providers (LSPs) are firms, such as Fedex, UPS, Con-way, and Ryder, that offer partial or complete logistics solutions. These firms could be 3PL or 4PL providers. The difference between 3PL and 4PL, to be explained in more detail later, lies primarily in the value provided to customers and the basis of firms’ competence, although the boundary defining the scope of activity is hazy. 3PLs are firms that enable logistics outsourcing. Drawing on their core business, whether it be forwarding, trucking, or warehousing, they have moved into providing other services for customers. 3PLs, in general, are commodity transportation service providers who have moved into higher-margin, bundled services such as warehousing and inventory management. Exel Plc and Penske Logistics are among leading 3PL firms headquartered in the United States with expanding international operations. In the past decade, competitive pressures have created more complex supply chains as LSUs deal with multiple customers, suppliers, transportation providers, and government organizations worldwide. 4PLs, such as UPS Supply Chain Solu- tions, emerged in the late 1990s in order to manage the flow of information and to coordinate the movement of goods. The 4PL firm wants to position itself as an extension and part of its customer’s business environment. For example, UPS operates a computer repair service center in Louisville, Kentucky. The Digital Products Division of Toshiba America Information Systems, Irvine, California, has used the UPS repair service since 2004 for repair of it laptop computers. UPS has decreased the turnaround time by two and a half days since they took over re- pairs for Toshiba (Violini, 2006). A key differentiator between 3PLs and 4PLs is that while many 3PLs focus on providing value-added services to their customer with a view to maximizing the utilization of the assets of the parent LSP, 4PLs develop solutions tailored to meet the unique and special needs of each customer, without regard to a parent company’s service offerings and operations. The 4PL’s parent’s assets are given due consideration; however, the overarching goal of the 4PL is to serve the customer’s specific needs and provide visibility and efficiency to the logistics process (Craig, 2003). 3PLs and 4PLs are the backbone of the logistics system. In the past the primary task of an LSP was to transport goods from one location to another. To- day, as we have noted earlier, all the firms along the supply chain have to work

286 INNOVATION IN GLOBAL INDUSTRIES in concert in order to achieve cost-effective and flexible solutions. LSPs turn to innovation to improve supply-chain efficiency as demanded by LSUs, their cus- tomers. Innovation among the LSPs has focused on creating new supply-chain solutions such as “dock-to-stock” delivery systems,14 increased information vis- ibility through implementation of innovative information software and hardware systems, and better asset utilization through load-and-back haul management. LSPs, working closely with their customers, have expanded their operations as their customers have globalized. As the locus of operations expand, so too has the locus of innovation for these firms. Innovation among LSP firms draws on local environments, and solutions created depend on local challenges. Logistics service integrators (LSIs) such as Accenture, IBM, and Satyam are firms that are platform-neutral15 and non-asset-based in that they do not own means of cargo transportation such as trucks, ships, or planes. The key differ- ence, as per our definition, between 4PLs and LSIs is asset ownership. The value proposition that LSIs bring to their customers is knowledge of specific business processes going beyond a firm’s logistics needs. LSIs work with a variety of product solution providers, including vendors of products based on radiofre- quency identification technologies (RFIDs), enterprise resource planning (ERP) software vendors, software developers, and transportation providers to provide customized solutions for their customers, the LSUs. In the past decade, firms that have traditionally focused on strategy consulting have set up supply-chain divisions to exploit the need for unbiased and process-capable integrators. On the other end of the spectrum, firms specializing in the provision of informa- tion technology services have recognized the vital role that information plays in supply-chain management and have created divisions specializing in supply- chain services. LSIs recognize that innovation in the supply chain lies in the management of shipment visibility and requires analysis of critical supply-chain information (Pande et al., 2006). Innovation among LSI firms is often collaborative in nature. These firms work closely with LSUs and LSPs to enhance supply-chain operations. LSI in- novation often arises in the United States, where many management consulting firms have begun to offer supply-chain integration services. Their innovative efforts are likely to draw upon their knowledge of products, processes, and practices in contexts outside the supply chain. Supply-chain innovation among LSIs may be expected to increase their innovation efforts, especially in business processes and in information integration. Product solution providers (PSPs) such as SAP, Oracle, Manugistics, i2, 14  Robert Handfield and Ernest Nichols (2002) define “dock-to-stock” delivery as those supplier deliveries of component parts that are made directly to the plant floor and end up in finished goods by the end of the same day. 15  LSIs are platform-neutral in this context in the sense that they do not work necessarily with one brand of hardware or software. They examine the business process to determine the best solution.

LOGISTICS 287 and SAVI Technologies are firms that create products that are used in logistics management. They often work with firms in each of the other three categories to enable efficiency, visibility, and integration.16 Some examples of products developed by these firms include asset tracking technologies such as RFID hardware and software, ERP systems, and warehouse management software. Figure 4 shows how different asset tracking technologies are deployed from the truck level to the product level. Organizationally, these firms begin as vendors of a specific product that fulfills a specific niche in the supply chain. In time, they grow to offer deeper and broader product and service solutions but are generally not complete LSPs with transportation assets. PSPs are the most prolific innovators in the logistics industry, consistent with the “pull” characteristic of the logistics industry. They are specialists and create new products and solutions that address specific challenges in parts of the logistics network. For example, RFID manufacturers offer innovative passive RFID products that help LSUs track inventory at the product level. The same manufacturer may offer innovative active RFID products that assist 3PL firms with fleet monitoring. As the demands on the supply-chain network increase, PSPs can be expected to continue to offer innovations to enable LSUs and LSPs to manage the supply chain more effectively. Innovation among PSPs, unlike firms in the categories discussed earlier, draws upon basic and applied research and development. According to National Science Foundation (NSF) reports, the United States ranked sixth among coun- tries with reported R&D-to-GDP ratios with a ratio of 2.9 percent in 2003. The business sector performed nearly 70 percent of the U.S. R&D in 2004. Besides performing the majority of U.S. R&D, the business sector was also the largest source of R&D funding in the United States, providing 64 percent ($199 billion) of total R&D funding in 2004.17 U.S.-based PSP firms draw on this rich tradition of R&D to provide most of the innovation in the logistics industry. The preceding taxonomy has been developed so that data gathered through interviews and patent analysis may shed light on where, when, and why innova- tion is occurring in the logistics industry. Depending on their primary business, firms are classified as LSU, LSP, LSI, or PSP. In the sections that follow, we ex- 16  Efficiency in supply-chain management often relates to minimizing the time that elapses between procurement of raw material and the delivery of an order to a customer while minimizing the total cost of procurement, transportation, inventory management, and warehousing and reducing variability in execution. Visibility in the supply chain relates to the ability to track orders, inventory, and ship- ments in real time. Visibility allows a firm to monitor events and exceptions in real time so that it may proactively manage supply-chain activities. Supply-chain integration involves sharing and combining information flows relating to critical business processes including customer service management, procurement, product development and commercialization, manufacturing flow management and support, physical distribution, outsourcing and partnerships, and performance measurement. 17  US R&D continues to rebound in 2004; see http://www.nsf.gov/statistics/infbrief/nsf06306/. Accessed December 22, 2006.

288 INNOVATION IN GLOBAL INDUSTRIES Conveyance • Bar Code and 2D • Active or passive RF • Mobile communications and GPS Container • Bar code and 2D • Active or passive RF tags • Untethered mobile communications and GPS Pallet • Bar code and 2D • Optical cards, tags • Active or passive RF tags Multipac • Bar code and 2D • Optical cards, tags • Passive RF tags Part • Bar code and 2D • Inscribed part • Passive RF tags FIGURE 4  Asset tracking technologies. SOURCE: Available at http://www.ops.fhwa. dot.gov/freight/intermodal/freight_tech_story/freight_tech_story.htm#toc1. Accessed July 27, 2006. plore patterns of change in innovative activity by examining interview and patent data for the industry as a whole and for each category separately. We begin by presenting the results of our interviews with executives in the industry. Semistructured Interviews with Executives in the Industry and Industry Experts To delve into the innovation process of the logistics industry, we conducted semistructured interviews with top executives in the industry and with industry experts. A copy of the questionnaire used for discussions with industry executives is available from the authors on request. We interviewed a total of 16 firms and 4 industry experts who were faculty at leading universities and representatives of industry associations. The firms include 4 LSUs (2 non-U.S.), 2 LSIs (1 non- U.S.), 4 LSPs (2 non-U.S.), and 6 PSPs (all U.S.). Since the respondent pool is small, there was concern raised by many respondents about the nature of informa- tion revealed. In order to obtain the most comprehensive information, we agreed that all information would be kept anonymous and that the names of responding firms would not be revealed.

LOGISTICS 289 The four firms classified as logistics users are large multinational firms with global operations in different manufacturing industries. Two of them are headquartered in the United States, one is in Europe, and one is in Asia. The two LSIs are among the world’s largest consulting organizations. One of these firms is headquartered in the United States and one is in Asia; however, both have operations worldwide. One of the four LSPs is a 3PL organization located in Asia while three of them provide the complete range of logistics services as 4PLs. Two of the three 4PL firms are headquartered in the United States and one of them is headquartered in Europe. All three of the 4PL firms have worldwide operations and are among the largest providers of logistics services in the world. The six PSPs represent a range of products and provide hardware, software, or both for specific use in logistics. These firms are among the global leaders in their product categories, are headquartered in the United States, and have worldwide operations. Two of these PSPs have their primary supply-chain business functions in Europe, and we conducted our interview with their supply-chain personnel in Europe. Finally, we talked to two industry experts in the United States and two in Asia. During the course of our conversations with the two LSI firms, we realized that, although they fill an important role in the industry, these two firms did not actually create new products or services. Rather, they reduce the friction in the supply-chain system, using products and services developed by the other three categories. Since our interest is focused on the changing locus of innovation in the industry, we have classified the responses of the LSI firms along with the responses provided by the industry experts for this section since LSI firms are prominent players in the industry and have valuable insight into the innovation activity in the industry as a whole. The respondents were asked about the evolution of the supply-chain organi- zation within their own firm. The mid-1990s appear to have been watershed years for supply-chain services for logistics users and providers. The user organizations we talked to began their logistics and supply-chain division, usually combining their purchasing and transportation departments of the past, around 1995. In sub- sequent periods, our LSU respondents noted that there has been partial outsourc- ing of parts of the logistics process such as transportation of raw materials and finished goods, inventory management, and warehousing. Some of them reversed their decision to outsource some logistics services but LSU firms differed in terms of logistics activities conducted within the firm and activities outsourced. Around the same time, the 3PL and 4PL firms we interviewed began offering more value-added services by adding warehousing and inventory management to providing transportation. Separate divisions offering supply-chain services such as transportation, warehousing, cross-docking, inventory management, packag- ing, and freight forwarding began in the 3PL and 4PL companies between 1995 and 1997. These divisions worked closely with customers to provide complete transportation solutions and used the parent company’s fleet only if it was the

290 INNOVATION IN GLOBAL INDUSTRIES best solution for the customer. The supply-chain services organizations among the users and the transportation providers of our respondents are usually headed up by a vice president who reports directly to the CEO or COO. This organiza- tional arrangement shows the importance placed on the supply-chain activity by the LSU and LSP firms. The PSP companies in our sample were usually started when the innovator applied technology solutions to the logistics domain. All the PSP firms we talked to were created during or after 1990. Once again, most of their activity picked up around 1997. It is clear that the Internet, computing, and communications technologies created the right environment for firms to develop new products and services for the logistics industry just as the LSUs and LSPs were recognizing the need to effectively manage supply chains as the cornerstone to success in a global context of competition. All respondents to the survey identified globalization—defined in the survey instrument as the increased mobility of goods, services, labor, technology, and capital throughout the world—as the primary driver of innovation in the industry. They noted the consequences of globalization for their business. First, globaliza- tion has increased competition in the LSU home countries. Consequently, firms can no longer trade cost for quality of product or service. Rather, they need to offer cost-competitive products of high quality to increasingly demanding con- sumers. LSUs are responding by looking to supply-chain solutions within their own firms and to partnering with LSPs and LSIs to create maximum visibility of information relating to the flow of product and money through the value chain. According to our respondents, globalization has also led LSUs to locate various value chain activities, such as product development and manufacturing, in differ- ent parts of the world. LSUs look for logistics partners who can provide global logistics solutions as they expand their supplier base and their markets. As LSUs and LSPs extend their product development, manufacturing, marketing, sales, and service activities around the world, they are confronted with unique country- specific challenges. For example, while labor costs in the emerging economies are attractive, the infrastructure for transportation and the regulations of local, regional, and national authorities create barriers to effective transportation solu- tions. LSUs and LSPs, sometimes with the help of local LSIs, have developed unique solutions in response to these challenges using their local subsidiaries and partners. All the respondents concurred that most often users drove innovation in the logistics industry. An innovation typically began by identification of a business problem by the LSU. Sometimes, LSUs with their own supply-chain organiza- tions developed unique solutions based on their particular needs. The LSUs we interviewed estimated that about one-fourth of the innovations they implemented in the past decade came from within their firms. Firms in the industry also worked collaboratively with subsidiaries and suppliers to innovate. For example, a global glass manufacturer we interviewed developed and deployed a simple supply- chain solution from within its own local operations in India, created a solution in

LOGISTICS 291 partnership with another division within the same company in South Korea, and worked with an LSP to deploy a supply-chain innovation. The glass manufacturer looked first to internal R&D capabilities before seeking help from outside the firm. In general, industry-specific solutions were more likely to be created with internal R&D resources. In other situations, the LSUs communicate the supply- chain challenge to LSPs, and these firms then create innovative solutions, often working closely with LSUs. According to our respondents, innovation at a PSP begins by working with a customer on a solution to a specific business problem. A leading RFID innovator and manufacturer mentioned that the firm also looks for feedback on its products from industry analysts, academia, and other external stakeholders. Internally, the customer service division, along with the sales, research and development, and professional services divisions, looks for new ways to enhance the customer experience. Our PSP respondents noted that they share the cost of development with the LSU when the solution is customized and later scale the product for wider market adoption. One of the PSPs we interviewed, a leading software firm, acquires smaller firms with the requisite innovation. Sometimes it just acquires the rights to the technology, leaving the smaller firm alone to continue its in- novative trajectory. At other times, the entire firm is acquired. After acquisition, the firm may be completely integrated into the larger PSP business or may be left alone for product-development purposes while the customer interface func- tions—marketing, sales, and service—are handled by the larger firm. The same software firm noted that incremental innovations arise by continuously tracking customer complaints and wish lists. The next new release of the product addresses the issues most often raised by customers. PSPs and LSPs that have operations in many countries release products on a global basis but permit the local entities to have great freedom to adapt the product to local conditions. According to our U.S.-based respondents, products are released first in the United States and are subsequently scaled for global release. We asked our respondents about their R&D process. The LSU and LSP respondents commented that, over the past decade, innovation has become more dispersed, both organizationally and geographically, and solutions involve mul- tiple firms in locations all over the world. In the past, many supply-chain solutions were developed in-house. Today’s best in class order management, warehouse/in- ventory management, and transportation management systems from PSPs provide the majority of functionality necessary to support new product development. Economies of specialization encourage PSPs to innovate, as can be expected from the “pull” system of innovation prevalent in the logistics industry where firms address immediate needs by expanding opportunities for local participants to use their creativity and innovate by drawing on a growing array of specialized and distributed resources. According to our LSU and LSP respondents, the ac- tive participation of PSPs in supply-chain innovation began about a decade ago as globalization combined with advances in communication and information

292 INNOVATION IN GLOBAL INDUSTRIES technologies. The PSP respondents supported this view, stating that they focused on specialized niches and worked with LSPs and LSUs to customize products if necessary. The respondents felt that the consequence of the modular R&D process increased innovative output and allowed for greater specialization in all parts of the logistics network. Interestingly, LSIs have arisen as a response to the challenge of integrating modular inputs from the PSPs. LSUs in particular noted that LSI firms fill an important role in encouraging innovation among PSPs, since they facilitate the widespread adoption of innovative products with their integra- tion expertise. We then asked the respondents about the organizational structure of the supply-chain-related R&D activity. Among the LSUs and LSPs, there are signifi- cant structural differences in the way innovation is managed within the organiza- tion, with the trend shifting from large unwieldy product development groups to more focused, small development teams. For example, one firm we interviewed uses a dedicated core team, leveraging Six Sigma methodology18 to drive product development; another firm, using techniques based on the systems development life cycle (SDLC) process,19 uses a champion along with three leads (business, IT, and customer organization) to design, develop, and deploy the new products. The PSPs have a more traditional approach to R&D and have separate R&D depart- ments to focus on both basic and applied research. For example, one of the PSPs we interviewed had a separate division focusing on RFID and related technolo- gies. They worked closely with universities to improve electronic circuitry in tags or communication between tags and readers. A separate division worked with the customer service department to monitor and understand customer requests and complaints and then worked on creating customer- or industry-specific solutions. In general, PSP respondents noted that they detected the need in recent years to work more closely with their customers while developing new products. 18 Six Sigma (6σ) is a business-driven, multifaceted approach to process improvement, reduced costs, and increased profits. With a fundamental principle to improve customer satisfaction by re- ducing defects, its ultimate performance target is virtually defect-free processes and products (3.4 or fewer defective parts per million [ppm]). The Six Sigma methodology, consisting of the steps “Define, Measure, Analyze, Improve, Control,” is the roadmap to achieving this goal. Within this improvement framework, it is the responsibility of the improvement team to identify the process, the definition of the defect, and the corresponding measurements. The primary goal of Six Sigma is to improve customer satisfaction, and thereby profitability, by reducing and eliminating defects. Defects may be related to any aspect of customer satisfaction including high product quality, schedule adher- ence, and cost minimization. 19 SDLC is a systematic approach to problem solving and is composed of several phases, each comprised of multiple steps including the software concept stage, which identifies and defines a need for the new system; the requirements analysis phase defining the information needs of the end users; the architectural design step, which creates a blueprint for the design with the necessary specifications for the hardware, software, people, and data resources; the coding and debugging phase to create and to program the final system; and finally the system testing phase, which evaluates the system’s actual functionality in relation to expected or intended functionality.

LOGISTICS 293 Another interesting phenomenon we observed from our respondents is a shift in the geographic locus of innovation. Our respondents felt, based on the number of new products and services introduced, that the United States has historically been the hub of innovation for logistics for LSPs, PSPs, and LSUs headquartered there. According to our respondents, most of the innovation activity for these firms—idea generation, product development, and deployment—was conducted in the United States between 1995 and 2005. More than half of our U.S. respon- dents noted that the United States continues to be the primary source of innova- tion; however, about one-third of our respondents noted that innovation activities have shifted either to multiple locations around the world or to specific research centers in Europe and or Asia. These companies cited the need to increase op- erational efficiency, and for better information and shipment visibility in import and regulatory operations as reasons for geographic dispersion of innovation. However, one of our LSPs noted that it is in the process of creating regional centers of innovation to identify and develop products and services relevant to its geographic areas. The regions assigned to the centers were broadly continental in scope, defined as Asia-Pacific (including Australia and New Zealand), Europe, the Middle East, Africa, and the Americas. Larger firms are able to leverage global re- sources to develop efficient solutions on a cost-effective and industry-wide basis. However, local conditions may not permit these solutions due to regulations and lack of appropriate infrastructure. Understanding and adapting to local conditions is critical to successful innovation for firms in the industry. According to one of our respondents, the creation of regional innovation centers is expected to confer a competitive advantage. The firm believed that innovative output for the firm as a whole would be enhanced by the decentralization of innovation resources. In dollar terms, the shift is still quite insignificant; less than 10 percent of total logistics-related development dollars are spent outside the United States, according to our U.S. respondents. For firms headquartered in Europe and Asia, a similar pattern has been observed by our respondents: more firms are going beyond country borders to develop innovations in response to customer needs. According to one of our respondents, “the move is not for cost reasons but for logistics reasons,” meaning that increases in trade among the nations of the Asia- Pacific region and Europe and the Americas increase the need to be sensitive to local conditions and to develop country-specific solutions where necessary. These strategies are consistent with two of the five motives put forth by Gerybadze and Reger (1999) through their survey of 21 firms on the R&D internationalization process. In the logistics industry, based on the information provided by our re- spondents as to their reasons for creating R&D facilities in markets outside their home country, we find that firms tend to locate R&D centers in markets close to their lead customers. In addition, they exploit unique logistics-related capabilities available in developed and emerging economies to which their lead customers have expanded. Zander (1999) offers a taxonomy of international innovation networks based

294 INNOVATION IN GLOBAL INDUSTRIES on the extent of international duplication of technological capabilities and in- ternational diversification of technological capabilities. Early evidence on the capabilities of the innovation networks being developed in the logistics industry indicates that these networks belong to the dispersed category, in that capabilities at each of the centers combines core logistics R&D capabilities and diversified capabilities developed with local know-how and expertise in response to local lead customers.20 R&D centers located outside the home country have been cre- ated by the LSUs and LSPs with a mandate to use and develop local expertise to create new products in developed and emerging-economy markets. Respondents noted that increased collaboration among LSUs and LSPs is a significant shift in innovative patterns, especially in the past 5 years. LSU respon- dents indicated that they work closely with LSPs to develop custom solutions for their business needs. According to one LSU respondent, collaboration is necessi- tated, especially in a global context; this respondent provided an illustration based on the firm’s experience in China. He noted that unique solutions are required in each market due to differences in infrastructure and resource availability. Varia- tions in the physical network in each market can be expected because physical infrastructure in many emerging economies is inadequate and communication infrastructure is insufficient. However, the LSU respondent could ill afford to decrease information visibility for any reason and expected continuous monitor- ing and timely shipment delivery. The firm worked closely with a U.S.-based LSP’s division in Hong Kong to ensure that the communications infrastructure was sufficiently robust and seamlessly integrated with the LSP’s fleet and package tracking system, with the LSU’s ERP systems in the United States, and with the supplier’s ERP system in China. Similar incidents were shared with us by other respondents. The respondents acknowledged that close collaboration among the firms in the logistics network is necessary in order to create innovation that is effective system-wide. Comparing responses between firms headquartered inside and those head- quartered outside the United States, we found that U.S. firms had a global view of innovation. Innovative activity for these firms was more decentralized, both organizationally and geographically. In contrast, innovation occurred primarily in the home country for respondents from Europe and Asia. Although all the re- spondents stressed the importance of collaborative innovation, LSUs and LSPs in the United States have been more active in collaborative innovation. The global market was the focus of innovation of U.S.-based respondents, whereas respon- dents in Asia were focused on innovations for the local markets. 20  Zander (1999) differentiates between international duplication and international diversification of technological capabilities. According to Zander, firms belonging to the internationally duplicated category include those where foreign units are typically involved in the same kind of technologies that are represented at home. Firms in the dispersed category have significant duplication or overlap of technologies across locations but also harness a number of technologies for which units in foreign locations have developed world product mandates.

LOGISTICS 295 Looking to the future, respondents believed that there would be greater emphasis on the intercontinental supply chain due to increased product flows between Asian countries and the United States and Europe. In addition there was expectation among the LSP respondents that there would be more mergers and acquisitions by LSPs leading to consolidation in that category. This activ- ity will be driven by increased competition for larger shippers and the need for an increased global footprint. These trends will spur greater development of logistics R&D centers in the lead markets, especially in Asia. The PSPs in our survey primarily had marketing outposts in markets outside the United States. We expect that they will join the LSUs and LSPs to extend their R&D presence in their international markets. In summary, our interviews with executives in the logistics industry revealed interesting insights into the innovation process. The dynamic management of the supply-chain process—going beyond transportation—as a distinct value-enhanc- ing activity began in most organizations in the mid-1990s. Innovation is driven primarily by user needs and firms collaborate closely to develop solutions. Logis- tics innovation follows the global dispersion of markets and production capacity in most industries, although the extent of offshore migration of innovation-related activities in logistics remains modest. Our respondents noted that they are just beginning to create R&D centers in countries other than their home country, often to remain close to lead markets and to respond quickly to changing user needs. Increasing global trade has accentuated the need for LSUs and LSPs to create local solutions that take into account differences in physical infrastructure, avail- ability of reliable transportation providers, and government and export rules and regulations. However, the PSPs’ innovation-related activities appear to remain more “homebound” in the United States. Innovation has necessitated increased and closer ties among the LSUs, LSPs, and sometimes PSPs in the last 5 years in order to create products and services that are creative, efficient, and cost-effective throughout the supply chain. Analysis of Patent Data There are many organizations that collect and organize patent data, includ- ing country patent offices and proprietary databases such as those created by Thomson’s Delpion. Each database has valuable information. We used the patent database created by the WIPO, a specialized agency of the United Nations. The WIPO website (http://www.wipo.int) has a patent search option for all patents filed worldwide. This option was used to do a search on patent filing data. The patent search uses a Boolean search option and hence enabled us to restrict pat- ents to only those related to innovation in the logistics industry. The search was restricted to following four phrases in the description of the patent: supply chain, logistics, inventory, and freight. For the period between January 1990 and Decem- ber 2004, we identified 2,268 unique successful patents filed worldwide that were

296 INNOVATION IN GLOBAL INDUSTRIES relevant to the logistics industry after checking for incomplete data and multiple patents issued for the same innovation in different jurisdictions. We acknowledge that the cutoff year of 2004 may create some data truncation problems and so we interpret the data for the year with caution. Additionally, patenting may not be the best measure of innovation in an industry that is primarily focused on service to its customers. The logistics industry is quite unlike industries such as pharma- ceuticals and biotechnology, where patenting is ubiquitous. However, the data on patenting reveal important patterns and trends that allow us to cautiously interpret the changing locus of innovation in the industry. A database was developed with the following fields from the WIPO database augmented by firm-level informa- tion from company websites: the patent name; date of filing; date of publication; international classification; application number; country and continent in which the patent was first filed; the inventor’s name, home country, and home continent; and the name, home country, and home continent of the assignee. Each assignee was further designated as an LSU, LSP, LSI, or PSP using the description of the company’s business from the company website and other published sources. Figure 5 shows patent filing by continent of the first inventor between 1990 and 2004. The figure indicates that worldwide patent filing for supply-chain products climbed very slowly between 1990 and 1996, increasing from 17 in 1990 to 27 in 1996. The number of patents filed almost doubled in 1997 and then climbed dramatically until 2001. The economic downturn caused by the crash of Internet stocks and the 9/11 terrorist attacks may be reason for the slight decrease in patents filed between 2001 and 2004. While the patent filing levels have not yet reached the peak of 480 patents filed worldwide in 2001, the trend appears to be increasing. The number of patents filed in North America are nearly double the number filed in any other continent in any year and contributed about 60 percent of the patents filed each year between 1990 and 2004. The number of patents filed in Asia and Europe is steadily increasing: Europe’s share of total patents hovered between 20 and 30 percent of total patents filed between 2000 and 2004 and Asia contributed around 7 percent in the same time frame. Patents filed in Aus- tralia21 have shown an impressive increase, moving from 1 patent filed in 1996 to between 14 and 17 each year between 2001 and 2004. Logistics innovation is beginning to occur in Africa, where 11 patents were filed between 2001 and 2004. There were only 3 patents filed from inventors in South America during the entire period from 1990 to 2004. Australia, Africa, and South America together have contributed less than 1 percent of the total patents filed in any year. Figure 6 shows the patents filed between 1990 and 2004 as indicated by the country of the first inventor for the top five countries with patents. Consistent with the perspective of the survey respondents discussed earlier, most of the innova- tion has taken place in the United States in this period. U.S.-based first inventors filed 1,340 patents. The number of patents filed by the U.S.-based inventors 21  We included New Zealand in the numbers for the continent of Australia.

LOGISTICS 297 600 South America 500 North America Europe Australia 400 Asia Africa 300 200 100 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 FIGURE 5  Patents filed by continent of first inventor between 1990 and 2004. logistics-5.eps almost doubled from 49 patents in 1998 to 81 in 1999, doubled to 167 in 2000, and almost doubled again in 2001 to 308. The number declined to 214 in 2002 and even further to 169 in 2003 but shows signs of increasing again in 2004. In a distant second place is Germany, with 250 patents filed between 1990 and 2004. The number of patents filed by Germany-based inventors increased dramatically from 3 in 1997 to 19 in 1998 and then nearly tripled to 55 in 1999 and remained between 25 and 37 between 2000 and 2004. Following Germany, in third place, is the United Kingdom with 150 patents filed between 1990 and 2004. Japan and Australia filed 63 and 62 patents, respectively, in the same period, round- ing out the top five countries when considering patents filed by country of first innovator. Considering the locus of innovation over time, inventors from nearly 40 countries have been involved in innovation in the logistics industry since 1990, although Figure 6 shows only the top five countries. The increase in the number of inventor countries from 6 in 1990 to 26, 26, 25, and 27 in 2001, 2002, 2003, and 2004, respectively, is an indication of the increasing dispersion of innovative activity. Another indication of dispersion of innovative activity is the fact that five countries that filed in 2002 did not have an inventor file a patent in 2003 and four countries that filed in 2003 did not have a patent originate in their country in 2002. Eleven countries filed over 20 patents between 1990 and 2004 including

298 INNOVATION IN GLOBAL INDUSTRIES 350 300 United States of America Germany 250 United Kingdom 200 Japan Patents Australia 150 100 50 0 00 04 02 0 6 4 8 2 9 9 9 9 9 20 20 20 19 19 19 19 19 Year FIGURE 6  Patents by country of first inventor between 1990 and 2004 for the top five countries. logistics-6.eps Australia, Canada, Denmark, Finland, France, Japan, the Netherlands, Singapore, and Sweden since 2000. It appears that China, India, Israel, and Korea are just beginning to become involved in logistics innovation. A total of 149 patents had at least one inventor from a country different from the first inventor.22 We examine those patents to understand patterns of cross- country collaboration. There is one instance of inventors from multiple countries in 1990 and then one in 1996 with no patent activity between 1991 and 1995 with inventors from multiple countries. After climbing to 29 instances of collabora- 22  There were four patents that had inventors from three countries. They were not separated since they all involve the United States as the first inventor and a clear second inventor. Therefore, we counted each patent only once whether they had inventors from two countries or three focusing on the second inventor. We do provide details about the instances where inventors from the United States collaborated with inventors from two other countries in the discussion below and in Figure 8.

LOGISTICS 299 tion among inventors from different countries in 2001 and 2002, there is a sharp drop in collaborative activity to 20 instances in 2003, which may be an artifact of the beginning of the war in Iraq. These data indicate that cooperation in innova- tion in the logistics industry began only in the late 1990s and confirms the data provided by our survey respondents. Although U.S. inventors have more patents that involve inventors from other countries, the share of U.S. patents with a U.S. inventor as the first inventor and one or more foreign inventors (60 out of 1340, or 4.5 percent) is in fact somewhat smaller than the share of patents with German first inventors and foreign co-inventors (23 out of 250, or 9.2 percent), or logistics patents with British first inventors (16 out of 250, or 10.7 percent). In 1999, inventors from the United States collaborated with inventors from China and Great Britain. In 2000, inventors from the United States collaborated with inventors from the Netherlands and Italy in one of the two instances of col- laboration with the Netherlands. In 2001, inventors from the United States col- laborated with inventors from Canada and the United Kingdom in one of three instances of collaboration with Canada and inventors from the United States partnered with inventors from the United Kingdom and Germany in one of four instances of collaboration with United Kingdom. AU, Australia; BE, Belgium; BM, Bermuda; BR, Brazil; CA, Canada; CN, China; DE, Germany; FR, France; GB, United Kingdom; IE, Ireland; IL, Israel; IN, India; JP, Japan; MX, Mexico; NL, Netherlands; SG, Singapore; TW, Taiwan. Table 2 shows the countries with whom first inventors from the United States have partnered over time. Inventors from the United States have partnered with inventors in over 17 countries between 1990 and 2004 for a total of 60 patents. TABLE 2  Patents with Inventors from Multiple Countries with United States as First Inventor US Grand AU BE BM BR CA CN DE FR GB IE IL IN JP MX NL SG TW Total 1997 1 1 2 1998 1 1 1999 1 1* 2 4 2000 1 1 1 2* 5 2001 2 3* 1 1 4* 1 12 2002 1 1 2 3 6 1 1 15 2003 1 2 1 1 1 1 7 2004 2 1 4 1 1 1 1 2 1 14 Grand 3 4 1 1 7 2 12 3 13 1 2 2 1 1 4 2 1 60 Total NOTES: There are four instances when there were inventors from three countries and these are noted with an asterisk. We have counted these instances against the second inventor country.

300 INNOVATION IN GLOBAL INDUSTRIES While inventors in the United States partnered with inventors from only three countries in 1999, they partnered with inventors from nine countries in 2004, indicating an increasing scope of cooperation. U.S. inventors partnered with inventors from the United Kingdom and Germany most often during this period. However, 2004 data indicate that inventors from the United States have one patent with an inventor in India, one with an inventor in Taiwan, and two with inventors in Singapore, showing an increasing trend of cooperation of U.S. firms with the Asia-Pacific region. The share of all U.S. logistics patents accounted for by patents with inventors from multiple countries for which U.S. inventors appear as first inventors varies from a low of 2 percent in 1998 to a high of 7 percent in 2002. After a drop to 4.1 percent in 2003, in 2004 the number of U.S. co-invented patents rose to 6.2 percent of total U.S. logistics patents. Table 3 provides the details about the 37 patents between 1990 and 2004 by first inventor’s country, where the second inventor is from the United States. Once again, the collaboration shows a sharp increase in 2000 and is flat after that point. In 2003 and 2004 the inventors from the United States supported inventors in five other countries—the most in the 15 years studied. Most of the collabora- tion, where the second inventor is from the United States, was with Germany and the United Kingdom, which is similar to the pattern when the inventor from the United States is the first inventor. These data must be interpreted with caution, however, since instances of collaboration account for a small share of overall logistics patents. For instance, the share of all German logistics patents with U.S. inventors in second position fell from 6 percent in 2003 to 3 percent in 2004; the share of all British logistics patents similarly classified was 8 percent in 2004 and 5 percent in 2005. Data in Tables 2 and 3 combine to show that U.S. inventors in the logistics industry are increasingly collaborating with inventors worldwide. However, given the growth in patents over the period studied, the proportion TABLE 3  Patents with First Inventors from Different Countries and with Second Inventor from the United States Grand 1990 1997 1999 2000 2001 2002 2003 2004 Total Belgium 1 1 Canada 5 4 1 10 Germany 2 4 2 1 9 Denmark 1 1 Spain 1 1 France 1 1 2 United 1 1 1 1 2 2 1 9 Kingdom Israel 1 1 Japan 1 1 1 3 Grand Total 1 1 1 7 8 7 7 5 37

LOGISTICS 301 of co-inventions in logistics with U.S. inventors listed as the first inventors or second or lower appears to be limited. Figures 7 through 10 examine patterns in assignee patent data. While as- signee data are not meaningful when considering geographic location of innova- tive activity, they do indicate the kinds of firms that own the patents. Figure 7 compares patents filed by category of assignee over time. Only those countries that had more than 50 patents between 1990 and 2004 are shown in Figure 10. A brief discussion on assignee data provides some insight into patterns relating to resource allocation. Examination of patents filed in the past 15 years indicates that PSPs have been the dominant assignee worldwide with 1,095 patents, followed by 678 for the LSUs. Of the 302 patents that have been assigned to individuals designated as experts in our study, 13 patents were assigned to universities and 36 patents were assigned to individuals associated with universities. The number of patents filed by PSPs worldwide shows a steady increase from 1997 through 2001 in absolute terms. The share of logistics patents assigned to PSP almost doubled from 30.8 percent in 1997 to 60.4 percent in 1998. After climbing to nearly 68 600 PSP 500 LSU LSP 400 LSI Expert 300 200 100 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 FIGURE 7  Comparison of patents filed by category of assignee between 1990 and 2004. logistics-7.eps

302 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

LOGISTICS 303 1600 1400 PSP 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.

304 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

LOGISTICS 305 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

306 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.

LOGISTICS 307 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.

308 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.

LOGISTICS 309 ($ 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.

310 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  See http://www.ops.fhwa.dot.gov/freight/freight_analysis/nat_freight_stats/docs/05factsfigures/ table2_1.htm. Accessed August 27, 2006.

LOGISTICS 311 Hugos, M. (2006). Essentials of Supply Chain Management. Hoboken, NJ: Wiley and Sons. 2nd edition, pages 7-9. McKinsey Quarterly. (2006). Understanding supply chain risk: A McKinsey Global Survey. September. Mulpuru, S. (2006). US eCommerce: Five year forecast and data overview. October 12. Available at www.Forrester.com. Accessed November 8, 2006. Pande, A., R. Raman, and V. Srivatsan. (2006). Recapturing supply chain data. McKinsey on IT. Spring 2006, pages 16-21. Rogers, E. M. (1995). Diffusion of Innovations. 4th Ed. New York: Free Press, p. 11. Singh, M. (2004). A review of leading opinions on the future of supply chains. Supply Chain 2020. Working paper. Available at http://ctl.mit.edu/public/opinions_future_supply_chains.pdf. Ac- cessed July 26, 2006. Smith, B. (2005). Customer satisfaction is the wrong measure. Gallup Management Journal. April 14. Available at http://gmj.gallup.com/content/15850/Customer-Satisfaction-Is-the-Wrong- Measure.aspx. Accessed December 22, 2006. Smith, F. (2006). Going with the Flow: How to Succeed in a Macro-trend Environment. Speech given at George Washington University, February 8, 2006. See http://www.fedex.com/us/about/news/ speeches/gwu.html?link=4. Accessed July 26, 2006. Stoffel, B. (2006, July). Navigating the world of outsourcing. LQ Magazine 12(3). Vinas, T. (2005). IW value-chain survey: A map of the world. Industry Week. September 1. Avail- able at http://www.industryweek.com/ReadArticle.aspx?ArticleID=10629. Accessed August 9, 2006. Violini, B. (2006). What can logistics do for you. Global Services. June. Available at www.globalser- vicesmedia.com. Accessed July 15, 2006. Wilson, R. (2004). 15th Annual State of Logistics Report. Presented at the National Press Club, Washington, D.C., June 7. Wilson, R. (2005a). U.S. state of logistics. Available at http://www.logistics.or.jp/member/pdf(maza zineinformation)/20050809.pdf. Accessed August 26, 2006. Wilson, R. (2005b). 16th Annual State of Logistics Report. Presented at the Ronald Reagan Building and International Trade Center, Washington, D.C., June 27. Zander, I. (1999). How do you mean “global”? An empirical investigation of innovation networks in the multinational corporation. Research Policy 28(2,3):195-213.

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The debate over offshoring of production, transfer of technological capabilities, and potential loss of U.S. competitiveness is a long-running one. Prevailing thinking is that "the world is flat"—that is, innovative capacity is spreading uniformly; as new centers of manufacturing emerge, research and development and new product development follow.

Innovation in Global Industries challenges this thinking. The book, a collection of individually authored studies, examines in detail structural changes in the innovation process in 10 service as well as manufacturing industries: personal computers; semiconductors; flat-panel displays; software; lighting; biotechnology; pharmaceuticals; financial services; logistics; and venture capital. There is no doubt that overall there has been an acceleration in global sourcing of innovation and an emergence of new locations of research capacity and advanced technical skills, but the patterns are highly variable. Many industries and some firms in nearly all industries retain leading-edge capacity in the United States. However, the book concludes that is no reason for complacency about the future outlook. Innovation deserves more emphasis in firm performance measures and more sustained support in public policy.

Innovation in Global Industries will be of special interest to business people and government policy makers as well as professors, students, and other researchers of economics, management, international affairs, and political science.

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