Supply Chain & Logistics: Hours of Service Changes Add to Summer of Logistics Discontent

Now is the summer of our discontent, at least when it comes to transportation management. While the amount of freight hauled in June 2013 was virtually the same as that in May (only a barely visible uptick in June of 0.09%), freight expenditures were up 3.4%, based on analysis conducted by Cass Information Systems Inc.

"The upward drift in expenditures has more to do with heavier loadings and the commodity mix than an upward trend in rates," explains transportation analyst Rosalyn Wilson of Delcan Corp. "Most carriers in all sectors have reported strong downward pressure on rates, and competition in the intermodal arena remains strong."

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That's where any semblance of good news ends, though, as Wilson notes that the Transportation Department's new Hours of Service rules, which took effect on July 1, will have the immediate effect of reducing the productivity of existing capacity by an average of 5%. These rules effectively shorten the amount of time a truck driver can drive by 12 hours per week. "If trucking capacity gets scarce, and it will, then the initial beneficiary will be intermodal loadings. As trucking rates rise, rates for other competitive modes -- especially intermodal -- will also increase."

"As long as freight levels continue to inch upward, truck rates are likely to begin a more significant pattern of increases," adds Jonathan Starks, director of transportation analysis for FTR Associates. "If nothing else, fleets will be looking to cover their increased operating costs for drivers, in addition to taking advantage of the reduction in spare capacity that generally drives upward movement in truck rates."

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New research from financial services firm Morgan Stanley and IndustryWeek's sister publication Material Handling & Logistics bears out the capacity shift and rate hike trends. Capacity in every major transportation mode is expected to get tighter over the next six months, based on the latest Freight Pulse Shipper Survey. On a scale from 1 to 10, with 10 representing a situation where available transportation is extremely difficult if not impossible to find, every transportation mode is projected to be at least moderately tight (5.0 or above), with the exception of air freight, the most expensive mode. Finding a truckload carrier, the mode most heavily impacted by the new Hours of Service rules, will become even more difficult as capacity is expected to jump from 6.0 to 6.6.

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Meanwhile, rates are expected to be on the rise as well. According to the Freight Pulse study, shippers (i.e., companies with freight that needs to be moved) expect rail rates to increase by 2.4% over the next six months, as the railroads (the least expensive mode) are projected to see an uptick in volumes by 3.4%, mostly at the expense of truckload carriers. Truckload, meanwhile, will see rates increasing by 1.7%, national less-than-truckload (LTL) by 1.8%, regional LTL by 1.6% and intermodal by 1.5% .