Economic Development: The Care and Feeding of U.S. Enterprise

Logistics site selection is all about due diligence. Whether it’s siting an e-commerce fulfillment center, import deconsolidation facility, general merchandise warehouse, or hybrid retail/fulfillment space, companies whittling down their shortlists run through a litany of considerations: labor cost and availability, proximity to market, transportation accessibility, utility rates, and business tax incentives. Different industries prioritize one criterion over another. Utility rates trump labor for more data-intensive purposes; heavy commodity sourcing may favor rail access over road.

Whatever the magic formula is, companies have primary criteria that help define their unique requirements; secondary and tertiary considerations further narrow the options. It’s why economic development agencies at all levels—from municipal to regional to state—spend a lot of time and effort pulling and parsing countless data points, filtering to fancy, in attempts to capture the attention of site selection teams.

But value can’t always be neatly categorized or quantified. Sometimes it’s intangible—like entrepreneurial spirit.

There’s something to be said for areas that inspire and nurture enterprise. U.S. entrepreneurship is in a downward spiral, according to a recent Brookings Report. For the first time in 30 years, the number of business failures exceeds the number of startups in the United States.

As talk of an American manufacturing renaissance continues to surface, companies are starting to take notice of regions such as Northwest Arkansas, Cleveland, and Bentonville, Ark., that encourage and celebrate business development, expansion, and innovation.

Northwest Arkansas: Innovative By Nature

Northwest Arkansas is off the beaten track. The 500,000-people-strong metro area, which comprises four cities—Fayetteville, Springdale, Rogers, and Bentonville—is a cultural crossroads between the South and the Midwest. The deep-wooded Ozark Mountains, well known for their crystalline rivers and geological wonders, still exude a frontier sensibility.

As a site selection factor, entrepreneurism can’t be easily overlooked—especially as the United States looks to stimulate the economy by supporting small-business growth.

But there’s another wonder. Northwest Arkansas is home to three billion-dollar juggernauts: the world’s largest retailer; the world’s second-largest beef, poultry, and pork processor; and one of the largest transportation companies in the United States. With a population roughly the size of Fresno, Calif., the region hosts as many Fortune 500 companies as Kansas City, Indianapolis, and Memphis; and more than Austin, Des Moines, Jacksonville, and Orlando.

Brand names the likes of Walmart, Tyson Foods, and J.B. Hunt turn heads. Maybe it’s something in the water—freshwater springs fed and filtered through eons of limestone formations. More likely it’s the legacy of entrepreneurship and the expectations forged by Walmart, the world’s foremost supply chain.

“The big brand companies in Northwest Arkansas embrace an entrepreneurial spirit,” explains Greg Primm, vice president of operations, Acumen Brands.

Acumen Brands is among the many heirs to the entrepreneurial legacy. An e-commerce brainstorm by a doctor and lawyer who both tired of their professions, and decided to sell medical scrubs exclusively online, the company has quickly grown into a lifestyle apparel-branded mini Amazon.

The company is eclectic—from the wide-open dot.com feel of its corporate offices to the Kiva robots roaming its fulfillment center across the street to its marketing partnership with country musician Ronnie Dunn. This is the reality of Northwest Arkansas.

You find a similar verve at CrossFleet, a Fayetteville IT startup envisioned by Clint Elcan and Jeremy Williams, both of whom cut their teeth at J.B. Hunt. They identified a problem in the trucking industry—a technology gap among smaller owner-operators and independent contractors—and devised a mobility app that uses driver cellphone GPS data to help shippers and carriers track assets.

Then there’s EcoVet, a Rogers-based manufacturing company founded by Drake Vanhooser and his father. They wanted to provide jobs and training to military veterans transitioning to civilian life, while allowing them flexibility to return to school. With the support of Walmart and others, they put in motion a business plan to recycle and make furniture from out-of-use trailers.

Not to be outdone, Northwest Arkansas’ very own railroad is the epitome of bootstrapping ambition. The Arkansas & Missouri (A&M) runs 150 miles from Monett, Mo., in the north to Fort Smith, Ark., in the south. Uniquely, it interchanges with three other Class 1 railroads: BNSF, Union Pacific, and Kansas City Southern.

The advantage? A&M and its customers have options, explains Jim Seratt, general manager, marketing and transload services. The shortline isn’t captive to any one railroad, which affords it greater flexibility to develop innovation solutions for rail shippers.

For example, A&M helped Pittsburg, Calif.-based steel manufacturer USS-POSCO Industries rethink the way it delivered product to Texas. The company used to ship product across the country via truck. By transitioning to intermodal, it was able to reroute shipments via BNSF Railway to Missouri, interchange with A&M through Arkansas, then use the shortline’s drayage operation to handle the last mile to destination.

USS-POSCO saved $60 per ton by shifting to rail/intermodal. Considering the thousands of tons of steel coil it moves, that’s a hefty savings.

Cleveland Expresses Itself

The pathfinder spirit of the Ozarks inspired Sam Walton, John W. Tyson, and Johnnie Bryan Hunt to become pioneers in their respective industries. That lineage lingers to this day. But sometimes necessity forces invention.

Consider what’s happening at the Port of Cleveland, Ohio. Port officials recently debuted an express cargo service between Cleveland and Antwerp, Belgium, via the St. Lawrence Seaway. The monthly round-trip run, which made its first port call in April 2014, ferries non-containerized and containerized freight between the ports. It is the only regularly scheduled international service linking the Great Lakes region to Europe.

The Port of Cleveland introduced the service to diversify its freight portfolio. Currently, about 95 percent of the port’s general cargo business is imported, non-containerized steel in various forms—coils, rods, bars, and beams. International shipping lines that serve Cleveland share a similar operating model: they bring in steel, unload all or part of that load, then make runs to other Great Lakes ports. Once vessels are empty, they sail to Duluth or Thunder Bay, are loaded with grain, and travel back to Europe.

“The shipping lines are using non-containerized steel as backhaul to position vessels into the Great Lakes to handle grain exports,” explains David S. Gutheil, vice president for maritime and logistics, Port of Cleveland. “As a result, the port misses out on a lot of heavy machinery, capital equipment, and containerized cargo that we can’t handle because of insufficient vessel capacity.”

For the steamship lines, that’s a moneymaking venture. Consequently, when the port came calling about its idea to run a Cleveland-to-Antwerp service, there were no takers. The Port of Cleveland was forced to circumvent convention and charter a blue-water strategy of its own.

“We developed the service alone out of necessity,” Gutheil says. “No vessel company was going to step up and be willing to start a business with no guarantee of cargo, and without bringing anything else to the table.

“It became evident the only way this new service would happen is if the port started the business itself, and served as the business owner,” he adds.

So the Port of Cleveland did just that, partnering with Dutch vessel operator Spliethoff. The arrangement is without precedent. The port leases a vessel on a monthly basis and pays for fuel. It alone has control over the business, marketing the new value proposition to prospective customers.

Big Risks, Huge Rewards

The risk is big. But so are the rewards. After costs are accounted for, whatever money is left over is pure profit. And because the port has a vested interest in the service, its incentive is huge.

“Running the service allows us to be more entrepreneurial,” says Gutheil. “We’re involved in quoting rates to customers because we are the business owner. We also can offer localized, personal-touch advantages that larger ports might not have.”

“If a shipper has cargo or a container delivered to the port, and has a question or wants specific information, we can be on the dock in two minutes,” he adds. “You won’t see that level of service at big ports.”

If the service proves popular, the port has flexibility to add another vessel and scale capacity to demand. Some shippers have already said they’d be interested if the service ran more frequently.

“This is an example of a private/public entity being entrepreneurial,” says Mark Chesnes, founder and president of InterChez Logistics Systems, an Akron, Ohio-based 3PL. “You don’t see that anywhere else. The port is taking some calculated risk, but it’s also improving the process. By shipping or receiving containers directly through Cleveland, shippers avoid at least two touches.”

Cleveland wants to be a two-way valve that allows importers and exporters to bypass more congested coastal ports, and tap directly into the U.S. hinterland. For Midwest shippers, the service greatly reduces drayage time and costs. It’s also a greener transportation solution. Because Spliethoff has further connections to Russia, Finland, the United Kingdom, Spain, and the Baltic region, among other places, it opens up European markets to U.S. importers and exporters.

“This service can save at least four to five days on door-to-door transit time—for both breakbulk and container,” Gutheil notes. “Transit time for containers moving from Cleveland to Antwerp—all water, port to port—is 12 to 13 days. From New York to Antwerp, transit time is about nine days. But, because of congestion issues on the East Coast, it can take five to 15 days before cargo moves on or off those facilities.”

The new service features a mix of containerized cargo, capital equipment, and breakbulk moving in both directions. Cleveland will be competitive on containerized pricing rates, Gutheil says. For non-containerized freight, cost depends on where product originates, its size, and whether ancillary escorting fees apply. But inland transport costs represent huge opportunities for savings.

Bentonville: A Company Town

The Cleveland-Europe service is likely to become a game changer for the port. More significantly, some envision a broader economic development impact throughout the upper Midwest as regional shippers converge on Cleveland looking for an escape from costly inland drays and coastal congestion. That’s how innovation crosses over and becomes revolutionary.

In Northwest Arkansas, that phenomenon has had more than 50 years to take hold. Tyson Foods was the progenitor in 1931; J.B. Hunt started as a trucking company in 1961, largely hauling poultry and seed; one year later, Sam Walton parlayed the five-and-dime retail concept into a big-box bonanza. An enduring synergy and collective legacy exists among these three companies. Walmart‘s global clout and perennial presence atop the Fortune 500 list make it the obvious focal point for the region. And for good reason.

Bentonville is a company town. It just so happens that company is the largest retailer in the world, with 11,000 stores, 2.2 million employees, and $466 billion in sales in 2013. But you wouldn’t know it seeing the “everyday low price” home office up close and personal. The big-box retailer practices what it preaches.

Things are different in Bentonville. Walmart suppliers are everywhere you go. On a flight into and out of Northwest Arkansas Regional Airport, you’ll likely run into a representative from Smitty Bee Honey, Hallmark, or any of the 1,400 vendors that maintain staff in the city. It’s a brain trust of brands.

Given the U.S. Southeast’s population growth, some vendors are even thinking about locating regional headquarters in Bentonville because they already have boots on the ground.

When you consider the facility this affords Walmart—being able to counsel business partners on new initiatives at a moment’s notice, or, better still, share R&D inputs and innovate—it’s a remarkable advantage.

In some ways, Bentonville is a laboratory of sorts. The big-box retailer recently opened its beta Walmart To Go express store. The gas station-convenience store format is tethered to a Walmart Supercenter across the road—in effect, inventory is replenished through the brick-and-mortar channel. It’s the latest innovation in omni-channel management.

Some suppliers are naturally worried about the new SKU requirements for smaller formats such as Walmart To Go, explains Terry Esper, associate professor at the University of Arkansas. What better way to ease those concerns than to offer a real-world working model to prod and poke?

If that doesn’t suffice, the university has its own retail lab, set up in a warehouse on the outskirts of the city. It’s where theater meets retail in a mock setup of what different store formats look like, replete with stocked shelves and a working backroom. Students can study consumer behavior, as well as new replenishment strategies and technologies.

Site Selection Tipping Point

By many measures, economic development can be a staid enterprise, fixated on location and costs. Being a center for innovation is a soft sell—merchandising for the real buy. For larger markets with dense populations and transportation infrastructure, value is often entrenched. Critical mass, whether people or freight, is the ultimate magnet.

Still, intangibles such as entrepreneurism can’t be so easily overlooked—especially as the United States looks to stimulate economic recovery by supporting small and medium-sized business growth.

The Port of Cleveland envisions a sea-change shift as Midwestern importers and exporters recognize the value of using the Great Lakes and St. Lawrence Seaway to shorten inland drays and reduce costs.

That is the future state for Cleveland—betting on the possibility that moving freight all water between the U.S. hinterland and Europe has an upside. If a U.S. manufacturing renaissance is in the offing, labor unrest at U.S. ports continues, and energy prices drop, that’s a risk contingency-minded East and West Coast shippers might strongly consider. Never mind the cost and carbon emissions advantages.

Northwest Arkansas is banking on a different value proposition. The legacies of Walmart, Tyson Foods, and J.B. Hunt—and more recent successes of entrepreneurial-minded startups such as Acumen Brands, CrossFleet, and EcoVet—demonstrate how economic development transcends generations. There is an expectation of success.

The region is also an incubator for supply chain talent. Collaboration between the University of Arkansas and Northwest Arkansas’ business community has created a talent pool that is attractive to corporate recruiters.

Cleveland and Northwest Arkansas—second-tier metro areas by most standards—are all about invention and re-invention. How do you take the assets you have—titans of industry and a Great Lake—and spin new wheels of industry? Sometimes it just requires a little creative vision.