Clusters

Introduction

Companies today enjoy a global marketplace with ease of access through the World Wide Web. Components can be developed and purchased globally with labor intensive products sourced to areas of cheaper labor. Supply chains crisscross the globe creating extra effort in management due to the distances and lag times associated with time zones. Add to this the increasing costs of material movement, and you have a recipe for chasing competition that you will never catch if your competition happens to be those using and developing clusters.

What Is a Cluster?

Porter (1998) defines a cluster as:

… geographic concentrations of interconnected companies and institutions in a particular field. Clusters encompass an array of linked industries and other entities important to competition. (p. 78)

The key word is geographic. Porter suggests that when firms operate in one location, the repeated interactions among them boost competition, improve productivity, innovation and coordination, and build trust (DeWitt et al., 2006). In our Amish case study, we see this close coordination and sharing of resources in the localized area of one county in Ohio for furniture building. Building various furniture pieces is the particular field requirement of the cluster that starts with specialization of timber processing through the various stages of linked industries to produce the final product for sale. The close proximity of the industry players leads to innovation, efficiency, relationships, knowledge sharing, and motivation for all to have success. This linked industry provides an ample supply of knowledgeable personnel reducing the added costs of recruitment. It is just much easier conducting business when all the players are in the same general location.

California Wine Cluster

Porter cites several examples of Clusters in his article published in Harvard Business Review, (Porter, 1998), such as Hollywood’s entertainment industry, finance on Wall Street, or consumer electronics in Japan, but the example of the California wine cluster was the best example for me in understanding clusters. The cluster includes 680 commercial wineries as well as several thousand independent wine grape growers (Porter, 1998). When you think of all the local supporting companies to this industry such as grape stock, irrigation, barrels for the wine, harvesting equipment, advertising, etc., you can visualize how interconnected they must be to compete with other world markets such as French, German, and Italian made wines. This plays into Porter’s definition of clusters as being a specific field of interconnected companies supporting each other in one geographic location.

China’s Clusters

China is emerging as the most competitive manufacturing platform in the world, ambitiously aiming to saturate the global market with low-priced products (Wu et al., 2006). China enjoys a dominant low-cost competitive advantage, abundant labor resources, and ability to quickly expand production capacity (Wu et al., 2006). China is able to achieve this competitive advantage through cluster design.

Foreign visitors to China are often surprised to find hundreds of factories producing the same type of merchandise in a single township along the east coast (Wu et al., 2006). This cluster concept is at the heart of China’s competitive ability to offer a cheaper product more so than the cheaper abundant labor. In looking at China’s usage of clusters related to supply chain management, we can further understand the benefits associated with clusters.

Facilities

Facilities are the places where the products are produced. With so many manufacturing facilities producing similar products in a concentrated area, flexibility and capacity pooling can be more easily implemented in responding to erratic or uncertain demand. Component resources can be procured in bulk among the cluster members, based on trusting relationships, and shared when shortages occur. In China’s case the shortage may be obtained in many cases within the township or literally right across the street. Locating facilities close to one another is also beneficial when it comes to sharing the local resources and infrastructure.

Transportation

Inbound and outbound logistics can be maximized more efficiently in clusters. Concentrated areas of manufactures producing like products are usually procuring similar components if not the same components from the same supplier. Trucks servicing the area can be maximized with full loads, thus reducing the transportation costs shared among the cluster members. Outbound shipments can similarly be maximized through consolidation. The close proximity relates to short travel distance allowing for increased responsiveness and efficiencies compared to longer, more traditional supply chains, where compromises have to be made between delivery speed and costs (Wu et al., 2006). Maximizing transportation is another cost advantage that can further be shared downstream to the customers in the form of less expensive products.

Inventory

Geographic closeness of a cluster facilitates better inventory management and just-in-time delivery. Inventory is less tied up in in-transit transportation which in effect ties up working capital. Frequent small shipments can occur in daily and hourly time frames creating better efficiency for lean concepts related to inventory movement. The need for large warehousing is diminished as each step of product development between facilities is moved in a localized fashion.

Information

Information transmission and sharing is recognized as one of the major advantages of industrial clusters (Wu et al., 2006). Information technology infrastructure is usually somewhat lacking in small or medium sized firms in a cluster. Frequent