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Hours of service--problem or opportunity? New regulations may force companies to rethink how they manage their supply chain operations.

On Jan. 4, 2004, a new set of hours-of-service (HOS) regulations took effect. While many carriers have taken note of this legislation, shipper reaction has been somewhat muted. For example, last November, one state motor carrier organization attempted to assemble a panel of two carriers and two shippers to discuss the transportation and customer-service implications of the new rules. They had no difficulty finding the two carrier members for the panel. But they could not find two shippers who were willing or able to discuss the new legislation. As a result, the session was cancelled.

It's hard to believe that a regulatory change that the government estimates will cost trucking companies $1.3 billion--and that could result in significant increases in motor carrier rates--could slip under the radar of most shippers. The few that have analyzed the regulations' impact are expecting productivity losses in the range of 4 to 14 percent. Wal-Mart, for example, estimates that 275 drivers and 300 new trucks will have to be added to its fleet operation to deliver and handle the same amount of cargo. The price tags for the new trucks alone are put at $24 million.

Overall, the biggest impact on shippers will be the increase in freight rates. Depending on the characteristics of the shipper's freight ("high touch" freight, for instance, will cost more), rates are expected to increase from 6 to 9 percent to cover the higher operating costs. Averages, percentages, and estimates make the picture a little fuzzy. Yet one thing is certain: The hours-of-service implementation will have the most significant impact on the flow of goods since deregulation of the motor carrier industry in 1980.

For this reason, shippers and supply chain professionals everywhere need to take a close look at the revised HOS regulations, which can be found on the Federal Motor Carrier Safety Administration Web site, www.fmcsa.dot.gov. The law's intent is to reduce driver fatigue and motor carrier accidents. However, a major consequence is that over-the road drivers likely will be driving fewer miles and making fewer stops. That's because the rules limit drivers to a 14-hour on-duty period, with no more than 11 of those 14 hours behind the wheel. The clock starts ticking when the driver reports for preshipment activity and includes all interim wait time, unload time, break time, and so forth. When the clock strikes 14 hours, the driver must stop and rest for 10 hours--regardless of how many hours he's actually driven.

The hours-of-service ruling is a complex piece of legislation that significantly affects multiple constituencies. Motor carriers as well as operators of private fleets will likely face additional capacity demands and be forced to acquire new drivers and equipment. Both of these constituencies will be challenged to manage drivers more aggressively and develop new strategies for improving driver productivity. Third-party logistics providers (3PLs) will have to adjust to changing service areas in the face of heightened service demands from customers. In fact, because the new rules will likely reduce the service areas that can be covered within a given period of time, all of the parties to the supply chain will have to evaluate their network design to maintain or improve the balance between cost and customer service.

How Will You React?

Partners in any given supply chain can react to the new hours-of-service rules in at least two significantly different ways. On the one hand, they could react independently and seek to optimize their individual systems. The problem with this course of action, however, is that it could result in higher costs and/or lower customer service levels across the supply chain.

A better approach is to respond aggressively to the regulations by leveraging the supply chain for competing advantage. For most companies, transportation costs are approximately 40 percent of their total logistics costs. The opportunity to avoid all or part of a 6- to 9-percent increase in transportation costs could convert to a 1- to 2-percent increase in gross profit margins. So the stakes are high and a made-to-order opportunity for an integrated supply chain.

How can the partners in the supply chain achieve this kind of competitive edge? A big part of the answer lies in maximizing the allowable drive time in the 14-hour on-duty period. This means eliminating as much delay throughout the supply chain as possible and converting delay time to driving time. Accomplishing this will most certainly entail a rethinking of transportation strategy and a reconfiguring of the distribution network.

Shippers will need to more closely integrate their inbound and outbound transportation activities with their motor carrier partners. Friction at the dock will have to he reduced or eliminated. Waiting time, loading time, and paperwork delays must be drastically cut. Those two-plus hours that the driver spends waiting at your clock will now be counted as part of the driver's 14-hour on-duty period. Cutting dock time in half by streamlining loading operations, paperwork requirements, and the appointment process could result in an extra delivery for the over-the-road driver or extend the driver's daily service range by another 60 miles. For many firms this will mean redesigning the loading/unloading process and working more closely with a limited number of core carriers. It could also mean redesigning material-handling and material-flow processes to enhance dock flow.

The same strategy works throughout the supply chain. Downtimes at 3PL providers or customer dock doors are all counted as part of the 14 hours. The shipper must work with customers and suppliers to make certain that they understand the importance of reducing friction at these critical junctures. Industries that traditionally have had long lines of trucks at their docks will have to rethink their loading/unloading process or face sharply higher transportation costs.

I realize that the challenges and opportunities are not as simple as suggested in this brief column. The U.S. transportation system is a complex mix of art and science, and, to a large degree, it is still a "work in progress." Many questions still need to be addressed as we sort out the impact of the new HOS regulations over the next few years.

Yet whatever the broader outcome, the new hours-of-service rules offer an opportunity for truly integrated supply chains to test their network and collaborate capabilities. Let's see who rises to the challenge.

Bernard J. "Bud" La Londe is professor emeritus of logistics at The Ohio State University.
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Title Annotation:Insights
Author:La Londe, Bud
Publication:Supply Chain Management Review
Geographic Code:1USA
Date:Jan 1, 2004
Words:1067
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