February 26, 2015 Leave a comment
Regulatory change is a two-way street for companies: it can be disruptive while forcing a review of accepted practices that sheds new light on operational efficiency. This is what happened to PepsiCo Brazil when the Brazilian government introduced new rules that limit truck driver working hours. A study triggered by the change indicated how the company can adapt to the new rules, and provided fresh insights into the pros and cons of using private fleet versus common carrier transportation options.
The study was carried out by Renato Starling, Transportation Productivity Manager at PepsiCo, for his 2015 capstone project while studying for a Graduate Certificate in Logistics & Supply Chain Management (GCLOG)*. The GCLOG project is titled Choice Between Private Fleet and Common Carrier and the adviser is Edelcio Koitiro Nisiyama.
Legislation that took effect in September 2013 imposes a number of restrictions on the working hours of truck drivers in Brazil. For example, they are not allowed to drive for more than 10 hours daily (eight regular hours plus two hours of overtime), must have a break of at least 30 minutes every four hours, and take a weekly rest of 36 hours.
The changes have had a dramatic impact on productivity and costs. At PepsiCo, the number of miles driven has fallen by 7% compared to the previous work regime, and costs have risen 20% due to higher wage payments (not allowing for inflation in 2014). PepsiCo’s labor costs now account for about 37% of total transportation costs compared to 32% before the legislation was implemented.
The company uses a private fleet of trucks in combination with third-party carriers to deliver its products in Brazil. As the new regulations came into force, the challenge was to determine how to comply with the rules while maintaining both the efficiency of the company’s freight network and the quality of its customer service.
“When I joined the company in May 2013 we had created a new discipline that focuses on the productivity and cost management of transportation,” says Starling.
The company initiated a major study of its freight network as part of this new approach to transportation management. A key objective was to develop a methodology for evaluating the cost of private fleet movements in each lane. By comparing these costs to those associated with common carriers, PepsiCo could identify the optimal mix of carriers in each lane.
In addition to analyzing the logistics of PepsiCo’s freight network, the study took a number of industry factors into account. For example, the common carrier sector in Brazil is dominated by self-employed drivers who do not have to follow the new rules. Also, some larger operators initially opted to flout the regulations.
The study found that driver costs at PepsiCo have risen some 40% since the rules were implemented. However, the company’s private fleet is still competitive for shorter hauls, largely because there are fewer opportunities to carry freight on the backhaul. The breakeven for length of haul is about 200 Km.
In light of findings like these, the company introduced some important changes. “We decided to sell seventeen of our older, less efficient trucks, and to do another, more detailed study, that will probably result in us selling more vehicles,” said Starling.
With the benefit of the data from the study, transportation managers are making more informed decisions about carrier usage in each lane. For instance, in an effort to minimize the number of empty miles and fully utilize its private fleet, the company is actively looking for opportunities to capture backhaul cargo. PepsiCo has three main businesses in the country, snack foods, dairy products, and coconut water, and has managed to increase the number of backhaul loads by about 30% by pooling truck space for these businesses.
Undoubtedly there will be further changes as more data becomes available and the regulations are adopted more widely. Some structural changes are already taking place in the trucking industry. “Big carriers are trying to establish partnerships with self-employed drivers, and some carriers are pushing drivers to buy their own trucks,” said Starling.
It will take some time before the new rules are fully integrated into freight networks in Brazil. Meanwhile, “no one knows what the full effects will be,” said Starling.
*The GCLOG program is offered by the Center for Latin-American Logistics Innovation.
For more information on GCLOG contact the program director Dr. Roberto Perez-Franco. Renato Starling can be contacted at firstname.lastname@example.org.
This article was originally published in the winter 2015 issue of the SCALE newsletter Frontiers. Subscribe to Frontiers for free here.