February 23, 2004

Shipper Responses to HOS Changes
By David Klugman

Growing up we all learned to expect consequences from our actions. The same lesson applies as we examine the new hours-of-service changes and the response of shippers to stop-off price increases by carriers.

The much anticipated rate increases have begun. How these increases affect you, the shipper, depends on what you ship and how you use your transportation options. The first increases appear to be targeting stop-off charges in multistop truckload movements. Why? Because the HOS change that includes waiting time as driving time has its biggest most visible and immediate impact on these types of moves.

Running out of driving time that now includes waiting time before you run out of stop-off deliveries is a very real concern for carriers and is compounded for those with complex networks. Clearly it is important for the consignee to turn the truck quickly for the "greater good" of the movement and these turns should be done quickly.

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Unfortunately, the consignees are shielded from the economic pain of excessive delays. To buffer the end of run uncertainty, carriers have begun presenting shippers with escalating stop-off schedules that in most cases are more than $300 for the third stop and beyond. This compares with historical stop-off charges of $50 to $85, depending upon the carrier.

These increased charges effectively eliminate the economic advantage of making many multistop truckload moves. What from a carrier perspective is primarily a driver compensation issue becomes a significant comparative cost change and challenge for many shippers. What is changing is the "advantage" of using the multistop truckload method for LTL or partial truckload movements that many shippers have enjoyed is being eliminated or limited to larger stops.

Measuring the economic advantage of multistop truckloads is typically based upon separate LTL/truckload costs. Depicted above (chart) is an actual multistop movement made by a shipper in December, the cost then, the cost under the new stop-off charges and the cost of shipping direct LTL (which has not changed).

A senior national LTL executive commented: "We have already started to see some of the larger LTL shipments which most recently have gone the way of multistop TL's come back to LTL."

Building multistop truckloads now requires a high level of diligence as the rules have changed. In this example the new stop-off charges make LTL the least expensive way to move this freight.

Multistop truckload and pool distribution always have been "tweeners." These unique methods of distribution fall between LTL and truckload. High density to a market in the case of pool distribution and the relationship between stop-off charges and LTL rates for multistop TL enabled a cost effective method shift. In the case of multistop truckload, the rules have changed for many shippers in favor of LTL.

One transportation manager spent years building such "tweeners" using a multistop truckload process to increase service and decrease cost. Her comment on today's HOS changes: "Over the past weeks I have had to instruct our shipping facilities to discontinue using carrier after carrier based upon new stop-off charges ranging up to $650. This is an evolving quagmire which may result in a dramatic increase in LTL for us."

Larger shippers should re-examine the opportunity for pool distribution in areas where shipment density permits. Both multistop truckload and pool distribution require looking at the mix of a series of shipments and creating something that is nontransactional. This requires more skill, time and/or technology than just determining parcel vs. LTL vs. truckload.

Other shippers have addressed this challenge from an additional dimension: carrier mix.

Moving freight away from larger carriers towards smaller firms and brokers with nonexistent or less complex networks is a reality for many shippers today. Large truckload carriers operate incredibly complex networks with in-transit variability created by a large number of stop-offs that cause planning and cost problems. Their current stop-off pricing seems to bear out a concern that this may not be business they want.

Another logistics director tells us that some carriers and brokers are not requesting radical stop-off increases. This shipper tells us, when you do the math, the new answer is LTL if price and service requirements are met, broker-truckload and smaller truckload where there are cost advantages, and judicious use of national truckload carriers with a limited number of stop-offs.

Many shippers are angry about the lack of "facts" being presented to justify these large increases in stop-off changes. Unfortunately, this would require opening a "Pandora's Box" of trouble - publishing drivers' logs, that is - which is in the best interest of no one.

Few will argue that there is less "practical work time," defined as driving miles on the road, for truckload and multistop truckload carriers under the new rules. Drivers and carriers need to be compensated for this. The unanswered question is in what areas and to what extent is right and fair?

Beyond mode and mix shifting, what can a multistop truckload shipper do to mitigate these dramatic increases in overall expense?

The problem exists at the delivery/shippers' customer level. Many carriers are going to highlight any delivery that takes more than an expected time frame - an hour, for example - as a problem. The large increases to stop-off charges could be interpreted as a form of universal detention applied to all but addressing the acts of only some.

Carriers always should have been charging for this wait time but typically built in one to two free hours per stop as it "fit" under the old hours of service rules.

One shipper calls this a role reversal, forcing her to work with customers to meet carrier expectations rather than with carriers to meet customer delivery expectations.

Unfortunately, delays no longer "fit" and there is no way to charge the party creating the delay (consignees) directly in a multistop movement, as these are prepaid moves. The changes sought in stop-off charges are the direct result of the HOS changes and are compounded by the need to fix an existing problem (wait times) that is greater in these moves than in any other.

So what's the answer? If multistop truckload is a significant part of your business, your costs are going to go up more than most other shippers based upon the HOS changes.

There are things you can do to mitigate the impact on your business, but there still will be an impact. Of course, you were the primary beneficiary of the savings that multistop movements created in the past. If you can work with your customers on wait times, you can present "negotiation points" to rationalize these increased expenses. If life were fair, carriers would charge "stop-off detention" vs. escalating stop-off charges to make the culprits visible and the course of action clear.

Hey, they could do that now, couldn't they?

— David Klugman is the President and CEO of Simplified Logistics, a consulting firm specializing in representing shippers in transportation buying, contract automation and change measurement. He can be reached at dlk@SimplifiedLogistics.com, or via telephone at 440.250.8912