Regulatory Impacts on Supply Chains
5 October 2020
Discussion paper on regulatory impacts on supply chains
The Chartered Institute of Logistics and Transport in North America (“CILTNA”) is pleased to offer a number of thoughts to supplement the direct responses made by its members to the survey prepared by Transport Canada and circulated to everyone on CILTNA’s mailing list.
We start from the premise that, in addition to the impact of regulatory regimes on the operations of transportation service-providers (which we generally refer to as “carriers”), there are important issues arising from the interaction and interdependences of sectors, disciplines, and components within supply chains:
- New delivery models are taking hold. Many of them encompass innovative new technologies. These models affect the architecture of supply chains and bring into play some important policy and regulatory questions.
- Major advances in data technology provide scope for enhanced movement, operational fluidity, and throughput capacity, but the fundamental shifts bring new regulatory challenges.
- New operating technologies (e.g. drones and autonomous operating systems) are fast moving and, from a policy and regulatory perspective, disruptive. Coherent policies and regulations across disciplines and departments, as well as across jurisdictions, will be needed to deal with them successfully.
Ultimately, the survey recognizes the impact of the pandemic as an extraordinary and severely-disruptive new factor in the performance and value to Canadians of supply chains. The post-pandemic recovery process may yet need an unconventional and unprecedented approach to determining priorities and policy solutions. We are of the view that the disruption represents as much an opportunity as a problem.
In many or most of the nine items described in this paper, the main policy question probably boils down to the tempo of adopting technology in Canadian logistics, transportation, and supply chains—is it fast enough to deal with fast-changing circumstances? We think that whatever tempo was needed in the past, is unlikely to be sufficient in the present and the future.
The items described here do not purport to be a comprehensive list of important contemporary issues. All kinds of others are at play, and we commend Transport Canada for considering them. We would like to stress that the items described in this paper are not arranged in any particular order of importance.
Finally, we would like to offer any further assistance Transport Canada may need in its deliberations, and we would be glad to discuss the content of this paper and what it contains, or any other issues the Department finds relevant and on which it would welcome thoughtful, impartial commentary.
. This discussion paper was prepared by the board of directors of CILTNA as an unsolicited contribution to a broad-based survey of Canadian industry by Transport Canada in early Fall 2020 regarding regulatory impacts on supply chains and their ability to serve national needs. The views expressed here are CILTNA’s and do not necessarily reflect those of Transport Canada.
Existing regulations that limit supply chain performance
1. Harmonized trucking regulations
Canadian provinces are responsible for regulating heavy vehicle weights and dimensions, so this item is only indirectly related to TC’s remit for maximizing the performance of the national transportation system.
In the mid 1980s, a program called the Heavy Vehicle Weights and Dimensions Study was launched, with participation and sponsorship by all ten provinces and Transport Canada to determine the highest-capacity truck configurations consistent with safety that could be adopted as a pan-Canada standard. The goal was to eliminate the patchwork of regulations that were forcing individual truckers to stop at many provincial borders and rearrange their loads and shift the position of their axles, and that often forced trucking companies to buy tractors and trailers designed for service in a single province with no flexibility for using them elsewhere in Canada. In other words, the lowest common denominator prevailed, not the highest. That reduced supply-chain throughput, slowed interprovincial commerce, and increased transportation costs for everyone.
The study resulted in almost exactly what was intended. A harmonized set of standards was adopted by all provinces in about 1989, and Canada arguably led the world in multi-jurisdictional trucking regulations. But that was 30 years ago, and since then all kinds of technologies have been made available, for example ABS brakes and direction-controlling-stability brakes, and new configurations continue to emerge as well. None of these was taken into account in the Weights and Dimensions Study of the 1980s.
The Government’s Fall Economic Statement 2018 announced a federal intention to work with provinces and territories to accelerate action to remove regulatory and other barriers in, inter alia, the trucking industry. Under the Regulatory Reconciliation and Cooperation Table, work is underway on several fronts. We understand that work on harmonizing truck vehicle weights and dimensions is not as far along as supply chain players would like it to be. In our view, the work is worth accelerating for the same reasons that applied in the 1980s.
Other forms of interprovincial trucking harmonization appear to be farther along. Electronic logging devices are in the process of being standardized across the country, as are measures to promote standardized truck driver certification, including mandatory entry-level training for commercial drivers. Both measures will improve supply chain performance in several ways—by reducing driver shortages, increasing labour mobility, enhancing employment opportunities for new entrants to trucking, adding labour surge-capacity, and helping trucking firms meet safety requirements without slowing the movement of freight.
2. Technology-based improvements
Every safety and security regulation is a proxy for some higher goal, usually the prevention of injuries, fatalities, and property damage. Regulations always reflect the state of technology at the time they are written. But technology does not stand still, and new capabilities emerge constantly. When they do, the premise on which prevailing regulations are based no longer fully applies. For example, inspection procedures stipulated two decades ago for detecting hazardous materials like explosives in goods crossing the border or carried onto aircraft, or for measuring the physical integrity of railcars and track, did not recognize the increased sensitivity of measuring instruments available now.
The performance of safety inspections often slows a carrier’s operations and reduces its throughput capacity and on-time performance for supply chains. There have been many examples of Canadian railways finding new technologies that speed up the inspection process and reduce costs, so there is a double benefit available for the taking. But unless the TC regulations are updated to allow railways to discontinue the old regulated practice when they introduce a new one, the economics of adopting the new technology do not work and railways are financially impeded from making progress that would benefit themselves and supply chains as well. In other words, regulatory stasis is a non-trivial impediment to transportation improvements.
One of many recent cases was the adoption of technology-enabled brake inspections on trains. It took about two decades for the technology to be accepted in railway safety regulations, during which time the benefits were left on the table. It took a large pilot project championed by the ADM of Safety and Security to bring about the regulatory progression. Another case is in the works: automated inspection of railcars travelling at speed on tracks using vision systems and interpretive software. This would replace visual inspections traditionally done by crews when trains are standing still in yards, a practice that takes considerable time during which the train cannot move. The change would increase mean train speed and add throughput capacity and timeliness that benefits the supply chains served by railways. A project is just getting started with a view to updating the regulations.
There are other technologies waiting in the wings, for example non-stop ultrasonic inspection of rail integrity. The evidence suggests this would improve safety and increase railway performance for supply chains at the same time. But the expected improvements are prevented by track safety regulations. Owing to resource constraints at TC, this case is not progressing at the moment. There are many others in the same situation.
The solution appears to lie in establishing “equivalent levels of safety” of a new technology being offered to replace an existing one and be recognized in the regulations. That is not always easy. The way forward is often to conduct large-scale physical experiments on the carrier’s system and compare the safety performance of the old approach vs. the new technology-enabled one. Carriers will contribute their share of the cost, but usually that depends on TC committing to change the regulation if the experiment is a success. That has not been TC’s disposition until recently. We think it should be made a standard departmental approach.
The primary policy question for TC probably revolves around whether innovations like these are receiving regulatory assessment and approval quickly enough to generate sufficient gains in supply chain performance and resilience for Canadian producers and manufacturers to remain globally competitive.
New regulations that could improve supply chain performance
3. Overcoming technology stasis
The creation of federal regulations can sometimes break longstanding barriers to the adoption of technologies which, if used, would improve the performance of supply chains.
A recent example is locomotive video and voice recording (“LVVR”) systems. These are devices that record activity and conversations in the cab of locomotives, similar to cockpit voice and flight data recorders in aircraft. By increasing safety, they raise supply chain resilience by helping to avoid the cascading delays and congestion resulting from accidents and incidents.
LVVRs on North American railways have a long history of advocacy but unfortunately not of implementation. The Transportation Safety Board first recommended their implementation on Canadian railways in 2002, and placed them on its official Watchlist in 2012. The U.S. National Transportation Safety Board first recommended their use on American railroads in 2010, and placed them on its Most Wanted List in 2017. But their implementation in Canada was stalled largely by resistance argued mainly on the basis of crew members’ privacy rights, a position that railways alone could not overcome.
The technology was studied in detail for about eight years. TC introduced regulations that took effect on 2 October 2020 mandating their use. This cut the Gordian Knot. But not completely. Information gathered from LVVRs is allowed by the new regulations to be used for accident investigation, but not for full incorporation by railways into their safety management systems (“SMSs”)—despite these systems being a regulatory requirement. That means the feedback cycle for operating improvements occurs irregularly and infrequently, or, in other words, only if there is an accident or incident. If LVVR information were fully incorporated into railway SMSs, it would help prevent accidents, not just investigate them after they occurred. But that is not part of the regulations ostensibly because TC is treading carefully about employee privacy at the expense of heightened safety and supply chain performance.
It seems likely there are other slowed or stalled innovations that TC could accelerate by shortening its decision-making cycle. One possible candidate is an outgrowth of in-cab video systems: optical detectors with software that analyzes the pattern of eye movement of crew members, which is known to be a good indicator of drowsiness. If done correctly, the technology is a better proxy for crew alertness than hours-of-rest requirements currently in use. But if railways push forward with it, the privacy issue is almost certain to be a cause célèbre once again. Then TC’s disposition is likely to govern the rate of implementation, hence the rate of increasing safety and supply chain resilience.
We include these examples under a different heading than those mentioned above in item 2, because in those cases the issue was the presence of a regulation that hindered progress which would help supply chains, but in this case it is the absence of a regulation that helps prolong the embedded stasis.
As mentioned above, the primary policy question for TC probably revolves around whether innovations like these are receiving regulatory assessment and approval quickly enough to generate sufficient gains in supply chain performance and resilience.
Other measures that could improve supply chain performance
4. Building a culture of trust within supply chains.
This deals with a phenomenon that’s common to many supply chains where, owing to lack of trust, ostensible partners act as competitors and seek maximum benefits for themselves individually. When they do, it reduces the performance and profitability of the supply chain as a whole: That is because the end result of many local optima is never the optimum for the total system.
Here we concentrate on steady-state performance of supply chains, as distinct from their ability to respond to disruptions, where conditions are changing quickly. (That aspect is covered in item 7 below.)
As part of the Asia-Pacific Gateways and Corridors Initiative, the Pacific Gateway Performance Table stood up an Intermodal Committee whose biggest task was to create an environment of trust among the many players, all of whom had their own KPIs they were reluctant to share, owing to insufficient trust in their counterparts not to make inappropriate competitive use of the indices and the data. After many trust-building meetings, agreement was reached on a set of KPIs the intermodal-container players could share. The results were rolled out to other ports in Canada. The net effect has been to coalesce multi-party behaviour that maximizes throughput by minimizing blockages and constraints in cargo movement.
The same has not occurred to the same extent with some other supply chains, most notably bulk commodities, especially grain and forest products. We think this represents an important opportunity for Transport Canada as a convenor of disparate parties and a source of moral suasion. It is unlikely anyone else can.
One valuable side-effect is that the determination of KPIs which actually matter to supply-chain players gets done by people with detailed knowledge of the behaviour of the logistics systems they are managing. Then government, with its limited direct knowledge, does not have to infer what those KPIs and data requirements might be. See also item 8 below on Data.
5. Visibility of containers and their contents
This issue is in three parts. All three deal with supply-chain performance under transient conditions, in other words when shocks or disruptions arrive suddenly. That affects their resilience.
The first is about institutional arrangements to expedite priority shipments in case of an emergency. The Covid-19 pandemic offers valuable lessons. Transport Canada must be the articulator of any kind of prioritization of goods-movement. Whatever the top priority cargo should be at any given time, for example, PPE and respirators in February and March 2020, only TC can convey national goals with appropriate gravitas to the transport sector. Yet when the pandemic hit, we understand there was no formal plan in place to obtain information on the whereabouts of those precious cargoes. We suggest there should be.
The second element is about the physical tracking of contents of intermodal containers in real time with high specificity. When the Covid-19 pandemic arrived in early 2020, for example, public health care agencies needed to know exactly which containers inbound from Asia contained PPE and respirators so they could be accessed immediately. It is not entirely clear to us how those determinations were made, but from what we know about current levels of precision of systems for container tracking in general use in Canada, it is highly likely that more effort and time were needed than this particular supply chain could afford in an emergency situation. Put another way, the potential for blockchain and other tracking systems to add value to freight shipments is not limited to improved security, and speed and accuracy of inter-company billing. It provides an important method of increasing the performance of critical supply chains when time is of the essence. These systems will arrive eventually, of course, but the main policy question for Transport Canada is probably whether that will be soon enough for national priories.
The third part of this recommendation is about visibility on empty containers in Canada, in other words when their contents are zero. That affects supply chain resilience in perhaps-unexpected ways. When the Covid-19 pandemic arrived, intermodal container movements slowed significantly and priority was given to essential commodities. That left non-essential commodities sitting on docks and in intermodal yards for extended periods of time. A shortage of empty containers arose. Many Canadian exports stalled. The problem was exacerbated by a lack of visibility on the precise location of empty containers in Canada. Part of the Pacific port optimization visibility initiative includes the development of an Empty Container Information System (“ECIS”). Its purpose is to make details about containers visible to appropriate parties as soon as they (the containers) become empty. If widely used it would improve supply chain performance, especially under transient conditions. We understand that Canada does not have an active plan for deploying a system like this on a broad national basis. It probably should. As mentioned above, one or more systems like this will arrive eventually, but, as above, the main policy question for Transport Canada is probably whether that will be soon enough.
A more bite-sized opportunity along the same lines would be to implement a digitized empty container information system. We understand one has been proposed for Vancouver. The benefit of something like that would include eliminating or reducing the number of empty kilometres within the port’s catchment area, as well as more certainty of container availability for exports. Both would improve supply chain performance and resilience.
In any event, we think there are important opportunities for Transport Canada to improve supply chain performance by taking initiative in all three of these areas.
6. Priority of goods-movement in a crisis
As mentioned above in section 5 on “Visibility of containers and their contents,” we believe Transport Canada must be the articulator of any kind of national prioritization of goods-movement. Without prioritization, visibility won’t get us very far. In a crisis situation—in other words, when changes to supply chains are occurring rapidly—there is a need for broad-based understanding of the dynamics of the supply chains, the interdependence of freight movements, and the complexity of keeping critical parts of the freight transportation system moving vital cargo to destination and then getting back quickly for re-loading.
Things are seldom what they seem in the absence of a deep understanding of how a complex transportation system works. For example, it would be tempting to concentrate on moving goods to destination without considering the empty back-hauls needed to keep goods flowing over a sustained period of time. Knowledge along those lines is resident in senior industry leaders but is probably in somewhat short supply among most other people.
We suggest TC establish a protocol of standing up a task force of industry leaders on an emergency basis when necessary, and adjuring them to share vital information about cargoes that the federal government considers essential, and what movements, including empties, are needed to sustain an accelerated cycle. It may not be practical to identify individual people, but a framework should be in place to bring the right leaders together, if necessary in a virtual environment. An initiative along these lines would take advantage of the federal government’s power to convene.
7. Digital data exchange
This is a generic term for “blockchain”. The original concept had a lot to do with creating a fundamental shift in speed, accuracy, and accountability of transmission, approval, and recording of information about cargo for the benefit of supply chains during steady-state conditions. It has major benefits for lead-time, throughput capacity, and security in the movement of physical cargo. It also improves security (but it creates new vulnerabilities to data security breaches by hacking.)
The point we would like to raise here is that the cargo traceability enabled by this revolution in information about shipments is vital in a crisis situation, when changes to supply chains are occurring rapidly as mentioned in item 5 above and visibility is essential as in item 4. That adds a temporal dimension to the value of digital data exchange and contributes to supply chain resilience as well as everyday performance. It is not entirely clear to us whether Transport Canada is a major participant in setting the national framework in terms of the speed and architecture by which it is introduced in Canadian supply chains. In case it is not, we suggest it be considered a worthwhile area for TC’s substantial involvement.
Despite its insufferably tedious nature, data has acquired a certain cachet in recent years. Most of the new value-added developments for improving supply chain performance come from being able to know the location, content, and temporal status of shipments. In short, we are now in a data-driven, IT-enabled world.
But data without theory is useless, and it is not clear to us that enough depth of knowledge is being applied at the national level to infer the key performance indicators (“KPIs”) that truly reveal the state of supply chains, especially during a crisis, and to reveal whether changes that are occuring in near-real-time are trending in a positive or negative direction. It is astonishingly easy to develop KPIs and even more astonishingly difficult to create the smallest set that drives good decision-making.
We are aware that data requirements are being articulated by at least one or two supply chain tables and committees, especially involving movements through Vancouver, and also of centres of excellence in data and statistics with which Transport Canada is involved or at least familiar. But we are not aware of their progress in reaching important milestones, or of the level of uptake and confirmation by those who might benefit from using the raw data that what is being collected is serving the purposes those users would have for it. Our main point here is that an update, circulated broadly, probably would be a good idea; and, if not already done, a deep review by TC of the degree to which the data being gathered will feed KPIs that matter most to supply chain participants.
In our various projects and interactions with supply chain players Canada-wide, a common thread has stood out: very few have an understanding of how their own operating decisions affect the throughput capacity and resilience of the supply chains of which they are a part. Yet those decisions in aggregate are probably the strongest determinants of supply chain performance. The situation is comparable to what we would have during the Covid-19 pandemic if there were no public health experts explaining how the virus spreads and what each person needs to do by way of social distancing, wearing a mask, washing hands frequently, getting tested, and participating in contact tracing. Without it, people would be ignorant of ways to minimize the rate of transmission of the virus and curtail its exponential growth within the population.
The most relevant type of knowledge to guide supply chain behaviour is known as “systems dynamics”. When understood, individual players will grasp the chain’s susceptibility to variations and disruptions, as well as to the transmission of faulty or incomplete information among players upstream and downstream. Without it, they are prone to behave independently and then supply chain throughput capacity and on-time delivery always declines. Even government regulators like the Canadian Transportation Agency are short of knowledge in the subject.
Many or most supply chain programs at Canadian universities, usually housed in business faculties, teach the basics. But our observation is that the principles are covered less broadly and deeply than in engineering / science faculties where the discipline of systems dynamics originated. Even applications of throughput theory, which is highly applicable to supply chain performance and resilience, are given relatively light treatment. That is unfortunate.
We consider this shortfall an important impediment to supply chain performance in Canada. Transport Canada could take certain initiatives to reverse it, for example by supporting, encouraging, promoting, enabling, and possibly helping fund developmental programs, and by organizing events, like workshops, to introduce the subject to supply chain groups and government departments and agencies, and by building expectations and presentations on the subject into meetings of supply chain tables.