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Logistics, Logistics, Logistics

By Greg Paeth

DHL Express’ global hub at the Cincinnati/Northern Kentucky International Airport is the company’s largest facility in North America.

When a state government agency such as the Cabinet for Economic Development declares “We’re a logistical dream” in its locate-in-Kentucky sales pitch, some people might be skeptical.

In the past 15 years, however, huge companies whose sharp-eyed accountants weigh out hard dollars to separate logistical realities from dreams have invested well over $2.4 billion in Kentucky because of its central U.S. location: A huge swath of the country’s commercial and consuming population can be reached by truck or air within a matter of hours.

Live in Denver and need a pair of Sergio Rossi’s – maybe a size 6½ Alton, the platform slingback with a peep toe – from Zappos? UPS may be rapping on your door with a shoebox almost before you punch in the three-digit security code on the back of your Visa card.

These multibillion-dollar (and rapidly growing) investments in moving, distributing and delivering products throughout the country and around the world have created 23,500 full-time Kentucky jobs since 2001 and established the state as a go-to location for far more than bourbon, basketball and Thoroughbreds, according to data compiled by the cabinet.

In mid-November, the state said 55,248 people have jobs in the logistics and distribution sector, which employs about 3 percent of the people working today in Kentucky, according to the Cabinet for Economic Development.

The U.S. Commerce Department also makes clear logistics and transportation are a huge element of the U.S. economy, accounting for revenues of $1.3 trillion or 8.5 percent of GDP in 2012, the most recent year for which data is available.

Erik Dunnigan, acting director, Kentucky Cabinet For Economic Development

“Obviously, there’s the old adage: location, location, location,” said Erik Dunnigan, acting director of the state cabinet. “Kentucky is blessed with a fantastic geographic location. … The reality is you can get packages to two-thirds of the U.S. population with a day’s drive.”

“Kentucky – Louisville in particular – has an undeniable geographical advantage,” said Kevin Gue, a professor at the University of Louisville and the director of the school’s Logistics and Distribution Institute inside the J.B. Speed School of Engineering.

“It’s (logistics and distribution) been on fire lately because we’re so well positioned in the country,” said Dan Tobergte, president and CEO of the Tri-County Economic Development Corp. (Tri-ED) in Northern Kentucky, about 80 miles east of Louisville on I-71.

For example, Wayfair, a huge Boston-based online retailer of home furnishings and décor, announced plans in late August to build a 900,000-s.f. fulfillment center on 52 acres owned by the Cincinnati/Northern Kentucky International Airport. But unusually, began work immediately.

Wayfair, whose brands include Joss & Main and DwellStudio, didn’t wait for local or state agencies to approve financial incentives the company or the developers might have been eligible to receive, Tobergte notes.

“That’s another indication that the market is pretty hot. They just wanted to go ahead with the project,” he said. “The proof is in the pudding in the lack of bulk warehouse space (in Northern Kentucky). The vacancy rate is around 3 to 4 percent.”

U.S. logistics index based at UofL

The intersection of Interstates 64, 65 and 71 in Louisville, where morning and evening rush-hour traffic slows to a crawl, have been described as one of the most significant highway transport bottlenecks in the nation. A reworked and streamlined Spaghetti Junction will be completed in 2016.
The intersection of Interstates 64, 65 and 71 in Louisville, where morning and evening rush-hour traffic slows to a crawl, have been described as one of the most significant highway transport bottlenecks in the nation. A reworked and streamlined Spaghetti Junction will be completed in 2016.

Logistics and distribution firms are located throughout the state. They are concentrated, however, in and around Louisville where I-71, I-65 and I-64 converge, and in the Cincinnati/Northern Kentucky metro area where I-74, I-75 and I-71 are tied together.

A two-year-old study commissioned by Greater Louisville Inc. said the logistics sector employs 40,000 people and has grown 20 percent since 2003. During that period, the national growth rate for the industry was 8 percent, according to the “Advantage Louisville” study.

Over the next 10 years, “Advantage Louisville” projects, employment is predicted to increase another 25.2 percent, which is double the national growth rate.

The 55,000-plus logistics jobs in the state rank the industry second behind the automotive category (89,443 jobs) among industries the state is “targeting for recruitment and future growth,” according to Jack Mazurak, communications director for the cabinet. Number three on the growth target list is food and beverage (44,933) while number four is described as “telecom intensive” (37,654).

The Louisville region boom in logistics and academic research at the UofL’s Logistics and Distribution Institute (LoDI) prompted Erin Gerber to develop the LoDI Index when she was working on her doctorate a couple of years ago. The 1-100 index forecasts industry activity at both the Louisville and national levels with numbers above 50 indicating expansion.

“It’s a predictive indicator of the growth or the health of the logistics and distribution industry,” said Gerber, who now is a PhD and an assistant professor in the Speed School’s Department of Industrial Engineering. “Companies can use this to plan ahead.

“If the index is showing a lot of growth, it’s a good time to invest. If not, it’s probably best to hold off on an investment,” said Gerber, whose index is cited and used frequently by Bloomberg, the respected business news service, and the Federal Reserve Bank of St. Louis.

Easy access to truck, air, rail and barge transportation, she said, is a factor that distinguishes the Louisville region, which includes Southern Indiana, from other metro areas where logistics also plays a major economic role. Rail and barge facilities, she said, mean commodities like coal often are among regular transshipments.

Deana Epperly Karem,  Vice President for Economic Development, Greater Louisville Inc.
Deana Epperly Karem,
Vice President for Economic Development, Greater Louisville Inc.

Deana Epperly Karem, vice president for economic development of GLI, emphasizes the importance of barge and rail transport on the menu of options available to shippers.

GLI recently launched a branding initiative that links 10 Kentucky and five Southern Indiana counties as a single region with a receptive business climate, Karem said. The Ohio River, while a state boundary, does not pose an impediment to business development in the two states, she said.

“Companies don’t care about those boundaries,” Karem said. “When one county does well, it affects the others that are nearby.”

Louisville bridge openings near

Karem also stressed the importance of the $2.3 billion Ohio River Bridges Project, whose two new bridges are about to dramatically improve access between the states with more and better traffic capacity.

The stunning new Downtown Crossing this month opens its six northbound I-65 lanes alongside the 52-year-old Kennedy Memorial Bridge, whose four north- and three southbound lanes are being rehabbed to become six southbound interstate lanes.  Pedestrians had a chance to walk the Downtown Crossing Dec. 5.

And about eight miles east, construction work is underway on the East End Crossing, which is expected to fuel development on both sides of the river. By the end of 2016, it will connect rings of I-265 that bypass downtown traffic: Gene Snyder Freeway in Kentucky and Lee Hamilton Highway in Indiana.

Already, the 6,000-acre River Ridge Commerce Center on Lee Hamilton Highway, almost within sight of Kentucky, is booming with active commercial and industrial operations of hundreds of thousands of square feet each plus a 1 million-s.f. Amazon.com fulfillment center. Site development officials are in negotiation with a party that is proposing a 1.5 million-s.f. building.

Kevin Gue, Director, Logistics and Distribution Institute, University of Louisville
Kevin Gue, Director, Logistics and Distribution Institute, University of Louisville

While Karem, Dunnigan and Tobergte all emphasize the advantages of the state or their regions for logistics and distribution, there’s also a mathematical model that bolsters their arguments, according to UofL’s Gue.

For the last 20 years or so, the best locations to build warehouses for products that ship throughout the country have been located within about 100 miles of Louisville, according to Terry Harris, a managing partner and one of the founders of Chicago Consulting, a firm that designs and engineers supply chains to facilitate movement of raw materials to a plant and finished product shipment to customers.

According to Chicago Consulting’s model, the best location for a company with a single warehouse to serve the entire country is Vincennes, Ind., which is 115 miles west of Louisville and 60 miles north of Henderson. From Vincennes, the average distance to U.S. customers is 806 miles and average transit time is 2.28 days, Harris said.

Those numbers may seem unimpressive, but under the one-warehouse model, customer distance and shipping time increase in any other U.S. location.

Under the Chicago Consulting model, Harris said, distance and transit time numbers for Louisville are a tiny fraction higher than Vincennes. That Indiana city is 100 miles – in a straight line – from Louisville and 141 miles in driving distance.

Chicago Consulting’s model shows how the use of multiple, strategically located warehouses reduces shipping mileage and “time to market.” In 2015, the optimal sites for a U.S. company using two warehouse to serve the entire country were Ashland, Ky., and Porterville, Calif.

Vincennes is at a rail service intersection, but unlike Louisville it is not on the interstate highway system and does not have a major airport or a river port.

Creating a ‘Mecca of distribution’

Since January 2001, Kentucky has logged 400-plus announcements about companies either locating logistics or distribution facilities in the state or expanding existing operations, according to the New and Expanding Industries Report from the Cabinet for Economic Development. The companies created 23,500 jobs and saved about 550 in jeopardy of elimination, the report said.

Dunnigan is a rapid-fire advocate for the state and its arms-wide-open business climate, of course. But UofL’s Gue, an academic whose livelihood isn’t contingent on how many companies set up – or expand – shop in the Bluegrass, echoes very closely what the acting cabinet director says.

UPS has 23,000 employees in Louisville where operates its Worldport global air freight hub at Louisville International Airport. Worldport shipping services has attracted 170 companies with 13,000 employees to the region.
UPS has 23,000 employees in Louisville where operates its Worldport global air freight hub at Louisville International Airport. Worldport shipping services has attracted 170 companies with 13,000 employees to the region.

“We have a tremendous geographical advantage that makes Louisville almost the distribution center of the United States, and this is perhaps the main reason why UPS located the Worldport here,” said Gue, referring to the United Parcel Service Worldport hub at the Louisville International Airport.

UPS describes the facility, which has the square footage of about 90 football fields, as the largest fully automated package-handling facility in the world. It handles packages from 130 aircraft per day, averaging about 1.6 million parcels every 24 hours. When things are really humming, UPS says Worldport can process 416,000 packages per hour.

The company said Worldport roots go back to 1982, when UPS decided Louisville was the best location for its new “Next Day Air” package-handling hub. With two major expansions since that represent a $1 billion investment and a 5.2 million-s.f. facility, UPS has established itself as a driving force in and around Louisville and the state.

Gue said UPS experts analyzed a long list of factors before selecting Louisville as its package handling hub.

“They chose a location that would minimize the cost of getting things in and out every night for their next day air service in particular,” he said.

That decision, Dunnigan and Gue said, has had a profound impact on the state, putting Kentucky on the national and international map as a major player in logistics and distribution.

“There is absolutely no doubt about its importance,” Dunnigan said. “They bring credibility to the game for us. The impact they’ve had on that industry for us is significant, and well over 250 companies have located here because of UPS,” he said, describing Bullitt County just south of Louisville as a “Mecca of distribution operations.”

UPS, DHL hubs big attractions

“They’ve put us on the global stage as it relates to being a logistics hub and really given us the credibility that we needed to be successful in the industry. It’s not unlike what Toyota did for us (with its Georgetown assembly plant) in the ’80s with the Japanese business community,” Dunnigan said. “We had three Japanese companies here when Toyota made the decision to locate here back in ’85-’86. Now we’ve got over 175 Japanese companies located in Kentucky. UPS has had that same impact.”

It’s logical, Gue said, for companies that want to ship with UPS to locate near its Worldport.

“Around the Worldport some 150 to 200 distribution centers have sprung up … and when you become known for something, you tend to be a point of attraction for that thing,” Gue said.

“Once you develop a base of knowledge and experience among the workforce in a region, it just makes it easier for companies to move in who are new to the space in an industry that knows them already. They’re probably more inclined to find workers who can get busy from day one and not have to learn new skills.”

UPS reports about 170 companies that employ 13,000 workers moved to the Louisville area to be near the Worldport, according to Mazurak.

UPS is the largest private employer in the state with 25,000 employees, including 23,000 in Louisville, GLI’s Karem said.

Although considerably smaller than Worldport, the DHL Express global hub at the Cincinnati/Northern Kentucky Airport is the largest facility in North America for a German air cargo firm that specializes in international shipping.

Since 2009, DHL has invested $281 million at the airport, including a $108 million expansion scheduled for completion next year. DHL has 2,400 employees in Northern Kentucky and is the region’s largest logistics employer.

Like Toyota in Georgetown did with Japanese companies, DHL works with state economic development officials to attract German businesses to Kentucky, where 64 German-owned facilities now employ nearly 10,000 people, according to the cabinet.

Memphis-based shipper FedEx Corp. is expected to open a 300,000-s.f. distribution center in Louisville in May 2016 and in September received approval for state tax incentives for a possible $199 million expansion of its Northern Kentucky hub, which opened in 2005 after a $50 million investment.

The Louisville distribution center on 46 acres at Interstates 64 and 265 reportedly will create 650 to 700 jobs. The Northern Kentucky expansion remains under consideration, but the company’s successful application for economic development incentives stated its existing FedEx Ground Package System hub is nearing capacity with volume expected to keep growing.

Third-party logistics a growing trend

The ongoing surge in e-commerce is one trend expanding the logistics industry, but another is the growth of third-party logistics (3PL) through which manufacturers hire specialty companies to handle their product packing and shipping.

“Most manufacturing companies today are focusing on their own capabilities and outsourcing those tasks that don’t fit their scope/core competency,” said Abe Eshkanazi, CEO of Chicago-based APICS, a professional society for people who handle supply chain management responsibilities. “In the United States, logistics is 8.2 percent of GDP, and we see continued outsourcing of non-key competency tasks from manufacturers and shippers to 3PL’s.”

Central location, a “robust workforce,” attractive tax rates and business incentives, highway infrastructure, access to air freight and the availability of large tracts of land are factors Eshkanazi cites when he lists the advantages of locating in Kentucky.

Paul Verst, president and CEO of Verst Group Logistics, based in Walton, heads a 3PL company that has grown steadily in recent years.

The company handles packaging, warehousing and transportation for a long list of customers that include Procter & Gamble, Kraft Foods and Kroger. The company has six locations in Northern Kentucky, six in Cincinnati, two in Louisville, one in Lexington and is opening another in Frankfort.

“The big change that you’ve seen is that in the past logistics was never a board room topic,” Verst said. “But it is now because they are beginning to see how much money is being invested in it.”

Verst also talked about how e-commerce is “exploding” and creating plenty of opportunities for companies that handle logistics and distribution.

He also offered an observation about the success of retailing behemoth Wal-Mart, which “understood logistics costs better than anyone else.”

“Being cheaper and faster – that’s the name of the game,” Verst said.