1. George Mason University The School of Public Policy Policy Analysis Center An Overview of Manufacturing and Logistics in the U.S. “Legacy Mega-Hubs” Lecture 2

2. George Mason University The School of Public Policy Policy Analysis Center Outline Three stages of Manufacturing and Transport –In-Sourcing and “Mega-Hub Transport” (Traditional Rail and Water) –Intermediate Logistics and the Development of Regional Distribution Centers –Outsourced Global “Value Chains”

3. George Mason University The School of Public Policy Policy Analysis Center In-Sourced Production and “Mega Hubs” (Rail and Water) Late 18 th century to 1950’s

4. George Mason University The School of Public Policy Policy Analysis Center Drivers for In-Sourcing and “Mega-Hub Transport” Vertical Integration: … defines a business model that controls every aspect of production; from raw material supply, through refinement, production, and resale of finished goods… Mature rail and water infrastructure

5. George Mason University The School of Public Policy Policy Analysis Center Vertical Integration Early pioneers included Andrew Carnegie who owned iron ore and coal mines to support the production of steel Cornelius Vanderbilt who owned coal mines to support his steamship and railroad interests BUT, no one perfected the concept more diligently than Henry Ford

6. George Mason University The School of Public Policy Policy Analysis Center Vertical Integration Vertical Integration helped Henry Ford develop the most efficient industrial machine of its time The Ford “Rouge River” plant was THE modern industrial wonder in it’s day It produced steel, glass, textiles, rubber, and countless other products essential for automobile production It was the total “in-sourced” model

7. George Mason University The School of Public Policy Policy Analysis Center To this day, Rouge River represents the pinnacle of early 20 th century manufacturing

8. George Mason University The School of Public Policy Policy Analysis Center Vertical Integration Plants such as Rouge River and similarly vertically designed facilities were the manufacturing engines that helped the US defeat Nazi and Japanese aggression during WWII They continued to dominate well into the late 1950’s

9. George Mason University The School of Public Policy Policy Analysis Center Impact on Logistics There was no large interconnected highway system in the US until the late 1950’s Railroads and water transport dominated the transportation of goods and raw materials for most of the 20 th century The rail and water transport system was extensive and reached many rural areas that were considered strategic (oil, gas, coal, grain, iron ore, steel, and finished goods, etc..)

10. George Mason University The School of Public Policy Policy Analysis Center Mega-Hubs Railroads provided mega staging and warehousing services for their customers at strategic locations across the US Chicago, Kansas City, Richmond, Denver, Pittsburgh, Boston, -- etc These areas served as fixed rail-access warehouses and staging areas for railroads Manufacturers and producers also maintained large warehousing operations at railroad and water terminals

11. George Mason University The School of Public Policy Policy Analysis Center Mega-Hubs There were 13 such yards at one time in Chicago

12. George Mason University The School of Public Policy Policy Analysis Center Major Innovations in this Era To manage this infrastructure railroads built the most elaborate private telephone, telegraph communication system at the time Communication was integrated with large industries because railroads owned “Right of Way” along their tracks. Railroad freely shared this infrastructure with Industry, who took advantage of these communication assets to manage their local logistics across the entire US

13. George Mason University The School of Public Policy Policy Analysis Center Major Innovations in this Era Containerization – First large scale effort to standardize containers and increase efficiency for WWII (i.e., piggy-backing) Interconnected railroad telephone logistics and communication systems Mega-Hub logistics infrastructure that was linked into the railroad telecom networks

14. George Mason University The School of Public Policy Policy Analysis Center Mega-Hubs Decline in Post WWII In the 1950’s and 60’s, railroads could not justify the cost of their wide rail nets (which expanded in WWII), and thus they were forced to downsize This cut long traditional logistics services to many city, rural and newly developed sub- urban areas The rail downsizing provided a niche for the growth of Intermediate Highway based logistics models

15. George Mason University The School of Public Policy Policy Analysis Center Intermediate Logistics and the development of Regional Distribution Centers Late 1950’s to early mid-1970’s

16. George Mason University The School of Public Policy Policy Analysis Center Drivers for “Intermediate Logistics ” Post WWII saw great changes in consumption patterns and regional demographics (urban vs. sub-urban) Industrial production moved away from vertical “in-sourcing” toward an “out- sourced” model Inventory management became a significant competitive advantage

17. George Mason University The School of Public Policy Policy Analysis Center Change in American Demographics The sub-urban migration was characterized by local strip malls, outlying shopping centers, and specially developed shopping venues Telephone technology and direct marketing (TV, Radio, Print) increased the availability of goods and services to the rural and suburban consumer

18. George Mason University The School of Public Policy Policy Analysis Center Change in American Demographics Demand for goods grew due to increased consumer activity with local suburban retailers and the invention of “telephone ordering” systems Large retailers (Sears, Montgomery Ward, Spiegel, etc) used newly invented electronic ordering systems and telephone PBX technology to spread their business model to an ever increasing rural and sub-urban audience

19. George Mason University The School of Public Policy Policy Analysis Center Change in American Business Vertical “in-sourcing” was getting too costly in terms of labor, transport and industrial complexity Limited componentization was starting to become a common American manufacturing practice Component manufacture (sub-assembly) was outsourced to cheaper and more specialized US sub-contractors

20. George Mason University The School of Public Policy Policy Analysis Center Change in American Business Component and subassembly outsourcing necessitated an increased flow of goods in manufacturing operations; which required a drastic expansion of the industrial logistics infrastructure Better inventory management techniques were required for producing cost efficient products under this model

21. George Mason University The School of Public Policy Policy Analysis Center Highways and Intermediate Logistics The “older” railroad-based mega-hub model could not keep up with new Business and Consumer demand Planning for the national Interstate Highway system was started in the mid-1950’s. This system marked the beginning of large scale “Truck” based logistics networks Trucks initially filled the gap between declining railroad infrastructure limitations and rural/suburban deliveries

22. George Mason University The School of Public Policy Policy Analysis Center Highways and Intermediate Logistics The effect on Local Area Logistics: –For small goods orders United Parcel Service (UPS) and the Postal Service (USPS) saw a huge increase in parcel service demand –Growth for these distribution companies was very high and they developed intermediate distribution centers that consolidated rail and truck shipments into local distribution networks –Local distribution was handled by smaller sized truck deliveries from in-house operations and local sub-contractors.

23. George Mason University The School of Public Policy Policy Analysis Center Highways and Intermediate Logistics The effect on Regional Logistics –Highway transport started to compete with rail because it was more flexible in servicing suburban and rural areas –However, large consumer and industrial goods, component based products, and perishables, required a separate logistics model –Interstate Trucking firms and Railroads became partners in developing Regional Distribution centers

24. George Mason University The School of Public Policy Policy Analysis Center Regional Distribution Industry viewed outsourcing as a necessity because cheap and plentiful consumer goods needed to flow into new and growing suburban areas and traditionally underserved rural regions Hence, a consolidated Regional Distribution model was needed

25. George Mason University The School of Public Policy Policy Analysis Center Regional Distribution Trucking companies and railroads started private partnerships to build Regional Distribution Centers Where applicable, Railroads would service the National routes to and between Distribution Centers, while Trucking Firms would complete the Regional deliveries This model still dominates today

26. George Mason University The School of Public Policy Policy Analysis Center Major Innovations in this Era Computer-based Logistics Management systems supported Regional Distribution Center partners (Railroad and Trucking Firms) Automated railroad container and freight car tracking Two-way radio communication between a centralized dispatch system and truck deliveries

27. George Mason University The School of Public Policy Policy Analysis Center Major Innovations in this Era Inventory management system innovations: –Inventory planning and replenishment –Distribution center and warehousing operations –Inventory accuracy and audits –Inventory measurement and reporting –Inventory forecasting and demand management