As originally published in Journal of Commerce.
By Theodore Prince, Executive Vice President/Chief Operating Officer, Tiger Cool Express
Twenty years ago, in his book, “Only the Paranoid Survive," Andrew S. Grove, as president and chief executive officer of Intel Corporation, described Intel’s survival through the existential threats created by the drastic changes in its primary market. Grove framed the concept of strategic inflection points as “an event that changes the way we think and act.”
Grove observed that “not only didn’t we realize that the rules had changed — what was worse, we didn’t know what rules we now had to abide by.” While strategic inflection points offer an opportunity to elevate performance to new heights, they can also signal imminent demise. The need to make dramatic changes is frequently anathema to providers and purchasers. It also flies in the face of the traditional transportation credo “It’s not the way we’ve always done it.”
In the past 40 years, our industry has experienced several inflection points.
- Motor carrier deregulation transformed domestic supply chains by replacing motor freight carriers (and their unionized workforce) with advanced truckload carriers (deploying owner operators).
- Globalization and the development of double-stack transportation restructured the intermodal industry.
- Y2K accelerated the development of enterprise planning and the deployment of transportation management systems.
Since 1980, the US economy has become based on just-in-time trucking with an underlying reliable supply of trucking capacity and generally “reasonable” rates, both of which were expected to last forever.
Hours of Service
Hours of service (HOS) for trucking date back to 1938, when the former Interstate Commerce Commission first limited work hours. Over the decades, permitted time periods (and allowable work durations) have varied. In 2003, after extensive fatigue research, the Federal Motor Carrier Safety Administration (FMCSA) imposed a 34-hour restart.
Modifications followed, and a final rule was published December 27, 2011; it went into effect 18 months later, on July 1, 2013. FMCSA published the electronic logging device(ELD) Final Rule on December 16, 2015 with compliance due by December 18, 2017. Strict enforcement was deferred until April 1, 2018. The interim period has been noteworthy for temporary exemptions and a phased-in enforcement.
Grove observed that the need for transformation could arise with the introduction of a different regulatory environment. Change is unavoidable, but strategic points of inflection are not always obvious in real-time. In the future, it’s likely that April 1, 2018 — the date ELD enforcement “went live” — will be enshrined as a red-letter day for our industry.
Many trucking companies have been ELD-compliant for years, but there has been on-going, online chatter from the late-adopters. While truckers complain about ELDs, they are most distressed that HOS rules will now be strictly enforced. Routine enforcement will directly impact drivers who had previously been exceeding legal driving times with multiple log books.
Figure #1 illustrates the “Driver Pay Algebra” that is at the heart of this industry about-face.
- Previous: Prior to ELD enforcement, a driver could accrue 750 miles daily by running an additional four hours every day.
- Legal: With new ELD enforcement, the number of miles driven — and resulting compensation— will both be reduced by 27 percent (300 to 220 and $300 to $220, respectively).
- Necessary: To make the driver economically indifferent, (by retaining daily compensation at $300), the rate-per-mile must increase by 36 percent ($0.40 to $0.55). This algebra applies independently of the other issues adversely impacting driver availability: demographics, full employment, and minimum wage laws.
- Notional: Theoretically, the driver could remain economically indifferent (by retaining daily compensation at $300) by increasing driving speed by 36 percent, so that daily mileage remained at 750. This ignores the additional fuel cost and risk of accidents, speeding tickets — and the resulting increase in insurance premiums. (Recent, anecdotal information indicates that there has been an increase in speeding citations since mandatory ELD enforcement went into effect.)
Since December, the truckload market has reflected this algebra. Rates have increased for two reasons.
- Rates must increase to make the driver whole for shorter (but legal) work days; and,
- Since the reduction in available miles driven reduces available capacity, the laws of supply and demand will also apply upward rate pressure. (In other words, fewer trucks available for the same volume will increase the price paid for every order.)
Microeconomics would define this as “Cost-Push Inflation.” This arises when there is a decrease in the aggregate supply of goods or services. Microeconomics also maintains that one substitute good (or service) can replace another. The price of these services increases (or decreases) along with the price of the other.
This impact is displayed in Figure #2. When the price of truck increases from P1 to P2, then the demanded quantity decreases from Q1 to Q2 It will also result in intermodal’s demand curve shifting to the right – denoting a higher price. As ELD enforcement reduces the supply of truckload capacity, the price of both truckload and intermodal increases.
Figure #3 outlines the changes: not only do drivers’ driving time and mileage lessen, but mandatory breaks and reset periods also increase. Because of the length of haul, a 34-hour reset will be required after each transcontinental run. If the currently suspended requirement that the reset include two periods from 1:00 a.m. to 5:00 a.m., the [minimum] 34-hour reset could significantly increase.
Figure #4 tracks the cumulative time and distance of intermodal and truckload shipments between Bakersfield, California for the 3,002-mile transit to Boston, Massachusetts. Intermodal transit was — and remains — 113 hours. Prior to ELD enforcement, single truckers were providing a faster — albeit illegal — transit time of 101 hours. In today’s world, that transit time has significantly increased to a range of 145 to 151 hours. Whereas the truck alternatives have rest periods of no activity, the intermodal product is almost continuously moving.
Figure #5 illustrates this change on four long-haul markets. These corridors are significant lanes in the transportation of fresh produce.
The pre-ELD transit times were widely understood to be the single-truck standard which intermodal needed to match — or against which intermodal had to discount. This “don’t ask, don’t tell” service standard survived for years because the truckload segment was predominantly (if not exclusively) served by owner-operators that lacked ELDs and ignored HOS compliance.
The long-haul produce lanes are not one-offs. The 870-mile length of haul between New York and Chicago was frequently viewed as a one-day, “overnight” truck lane. Without actual teams performing this service, team-like service provided by single drivers will also disappear. Evidence suggests that the one thing more difficult to recruit — and retain — than a driver is two (team) drivers who will stay together.
When capacity requirements are examined beyond individual one-way moves, the capacity crunch is shown to be even more severe. Figure #6 defines the round-trip impact of ELDs. The long-haul transit is significantly slower in both directions. Furthermore, the mandatory breaks and reset periods increase the overall roundtrip.
Figure #7 summarizes the roundtrip capacity reduction. Prior to ELD enforcement, a single driver might achieve 35 annual transcontinental roundtrips; however, post-ELD implementation, the same driver is legally constrained to 21. This represents a 40 percent capacity reduction. This draconian shrink is not yet obvious. Rather, it is a “rolling” impact which will become evident over the next several months, and will either hasten the exit of truck drivers from the market, or accelerate rate increases already extant in the market – or both.
It’s up to the shippers now
Grove believed that major transformation requires fear, which can overcome complacency bred by years of success. His book’s title mandated paranoia — a suspicion that things are changing against you — as the spark to light the fire of change.
The strategic inflection point is for truckload shippers. Grove realized that Intel had to abandon its core business, and redirect resources into microprocessors. Shippers will need to take a similar leap of faith by abandoning their reliance on truck and growing their intermodal capabilities.
Opportunity for intermodal right now is both significant and obvious. Intermodal, no longer a “truck plus-one wannabe” is faster and more capable of offering reliable capacity. The advantage is clear on trans-continental lanes, but it exists in shorter corridors as well.
Some 35 to 40 years ago, shippers and manufacturers remade their industries under transportation deregulation. Some were first-movers. Others were late adopters. The residual refused to change — and went out of business. Today’s challenges are our opportunities. They are equally enticing, and their solutions could prove to be similarly ground-breaking.