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SCDigest Expert Insight: Supply Chain by Design

About the Author

Dr. Michael Watson, one of the industry’s foremost experts on supply chain network design and advanced analytics, is a columnist and subject matter expert (SME) for Supply Chain Digest.

Dr. Watson, of Northwestern University, was the lead author of the just released book Supply Chain Network Design, co-authored with Sara Lewis, Peter Cacioppi, and Jay Jayaraman, all of IBM. (See Supply Chain Network Design – the Book.)

Prior to his current role at Northwestern, Watson was a key manager in IBM's network optimization group. In addition to his roles at IBM and now at Northwestern, Watson is director of The Optimization and Analytics Group.

By Dr. Michael Watson

July 9, 2013

Three More Reasons the Impact of the New Hours of Service Rules May Not Be So Drastic

The New Hours of Service Rules will Certainly Increase the Cost of Transportation, but Shippers will Respond in Ways to Reduce the Impact

Dr. Watson Says:

...even as transportation rates are likely to rise, there are other reasons we shouldn’t expect transportation costs to rise as much as the rates.
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A SCDigest Staff Editorial on the new Hours of Service rules quotes Thom Williams saying that the impact will not be as bad as forecast.  He cites the fact that some truckers using paper-based systems will simply ignore the rules, two-thirds of all runs are less than 550 miles, and most fleet managers don’t currently run their fleet at maximum utilization anyway. 

All these are valid (although the ethics of the first one are questionable) reasons why the impact won’t be as drastic as predicted. 

But, even as transportation rates are likely to rise, there are other reasons we shouldn’t expect transportation costs to rise as much as the rates. 

First, as transportation rates rise, inventory becomes relatively less expensive.  With less expensive inventory, firms will create larger buffers of inventory.  A larger buffer of inventory means fuller initial shipments (as you build the buffers) and fuller on-going shipments (since your buffer is larger, you can afford to wait another few days to fill up the truck when you do replenish).  So, the net effect is that total transportation costs can decrease with an increase in the amount of inventory held.

Second, as transportation rates rise, shippers re-evaluate the modes they are using.  As rates increase, more shippers find opportunities to shift LTL to multi-stop, multi-stop to full truckloads, and full truckloads to rail.  Higher rates make it more valuable to evaluate the modes you are using.  Again, this can decrease transportation costs per ton shipped.

Columns by Dr. Watson

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Learn Python, PuLP, Jupyter Notebooks, and Network Design

EOQ Model and the Hidden Costs of Fixed Costs

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Supply Chain by Design: Why Business Leaders should think of AI as an Umbrella Term

Third, optimization technology will help mitigate the impact of increased rates.  Williams suggested this in his third point.  With tighter hours of service rules, you need to more carefully manage your fleet, drivers, and loads.  As transportation rates increase, it becomes cost-effective to invest in optimization capability to help better match your fleet and driver capacity with demand while following all the rules.  We’ve seen cases where optimization technologies allowed companies to actually reduce their transportation spend while better meeting their requirements (like hitting delivery windows and following hours of service requirements). 

Final Thoughts

The points I make here and that are made by Thom Williams are at the macro level.  To make sure these new rules have the minimum impact on your business, you’ll need to figure out how you’ll mitigate them.  This article has outlined a few good places to start looking.  As Dan Gilmore mentions many times, the ability to answer questions like this is another good reason to have some internal modeling capability in-house.

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