Rail Cost Control Cost Optimizer

Optimizing to Reduce Shippers Rail Expenses

The most productive rail negotiations are win/win negotiations where a shipper gets lower rates and the railroad makes greater profit. These type of win/win negotiations are easier to develop than many shippers realize. The best way to create this type of win/win outcome is by a shipper optimizing railroads rates when performing the bid evaluation.

Optimize Your Rail Spend

Millions of dollars in value are created for shippers and railroads through the optimizing process: 

        • The benefit to shippers is cost reductions of 5% to 15%; while, 
        • Railroads benefit from a substantial increase in revenue and profits.

This optimizing process starts by a shipper calculating the railroad’s long term Variable Cost (Cost). This Cost is calculated for ALL rates in a railroad’s bid. Shippers frequently calculate the railroad’s cost for a movement to show that a railroad is making too much profit from the movement. Unfortunately, this is frequently not very effective.

A more productive use of railroad costs is to better understand how a shipper can increase or decrease railroad’s profits with volumes it can add or takeaway in negotiations.

Calculating railroads cost for all of a shipper’s moves, opens opportunities to create greater value for both shippers and railroads. It is best for a shipper to use a macro processing program like the Rail Cost Control Program  (RCC) to calculate the cost of all rail moves at one time. Calculations are effortless, as rail costs are automatically calculated and maintained for use in RCC’s bid evaluation optimizing program 

Once a shipper knows the railroads costs for moves, it has a much better understanding of the economic impact of adding, or taking away, moves from railroads in the bid evaluationWhen a railroads rates are reduced it becomes the low bidder on more competitive traffic in the bid evaluation. As a railroad wins more competitive traffic, its carloads increase as well as the profit it makes from the shipper’s business.  

It is important to find win/win opportunities with your railroads. These opportunities come from understanding the relationship between reductions in spend a shipper receives from reduced rates versus the increase in profit the railroad receives from obtaining additional volumes

As an example, if competitive rates are reduced by 11% on a railroad resulting in $6 million in savings this looks like a great deal for the shipper. But is this a good deal for the railroad? The shipper needs to know the economic impact on the railroad. If the railroad is awarded an additional 3,100 carloads, because it is now the low bidder on more competitive carloads, the shipper needs to know how this impacts railroad profit. Table 1 provides a summary of the results for the 11% rate decrease.  

Table 1 

 Example of Summary Results for a 11% Rate Reduction on a Railroads Competitive Moves   

Shipper Savings
$6.0 million
Increase in Railroad Profit
$7.3 million
Increase in Railroad Revenue
$13.4 million
Increase in Railroad Carloads
3,100

Railroad Profit vs Shippers Rates

Table 1 shows that the 3,100 additional carloads represent a $7.3 million increase in the railroad’s profit. This is $7.3 million in profit and $13.4 million in revenue the railroad would not get with the rates in its original bid. Table 1 shows that the railroad makes out better than the shipper from the 11% rate decrease. The value to the railroad is $1.3 million greater ($7.3 million versus $6.0 million) than the value to the shipper. By optimizing, you then equalize the benefits from strategic decisions on rates and volumes.

Optimizing created $6 to $7 million in value for both the shipper and the railroad. 

Though the value created by the 11% rate decrease is significant, it may not be the best rate decrease for either the shipper or the railroad. The question that needs to be answered, is how do you know the rate decrease that creates the most value for the shipper and railroad? Would a larger 15% rate decrease generate greater value or would a lower 7% rate decrease work best. Answering this question, you’ll need to know the optimizing Pivot Point for rates in each railroad’s bids for competitive traffic.

Understanding each railroads Pivot Point is important as it: 

  1. Generates greater value from the optimizing process; and, 
  2. Brings captive rail movements rates into the optimizing process. 

Understanding the Pivot Point increases the value created from optimizing. As an examplethe Pivot Point for the rail traffic used in this article increases the value created by optimizing by an additional 71% (more than a $5 million increase) . This is not an unusual Pivot Point optimizing result for mid to large rail shippers. Optimizing the rates in railroads bids creates a significant increase in value for the shipper and the railroad. 

It should be noted that though the calculations for optimizing are complex the process has become very easy to perform. For example, the Pivot Point is automatically calculated for the rates in each railroad’s bids in RCC’s: Cost Optimizer 

Our next blog will address determining the Pivot Point for each railroad and bringing captive rates into the optimizing process. 

 

 Escalation Consultants, Inc. developed Rail Cost Control (“RCC”)  to help shippers reduce rail expenses by managing costs and empowering negotiations. Furthermore, for more information about RCC and other related articles, visit the RCC Blog.

 

Rail Cost Optimizer

Rail Cost Control - Educate Railroads

Reduce Captive Rates by Educating Railroads

The March 17th blog titled “6 Ways to Make Railroads Compete for Your Captive Movements” stated that it is important to educate railroads. This is an important way to demonstrate why high captive rates are bad for both you and your railroads. Through this process, you educate railroads on the overall impact of high rates on your business. In addition, this process also shows how you can help improve the railroads business model for your commodities.  

The following are five examples of how educating railroads helps reduce rail expenses on captive movements.  

1. Capital Investment Plans to Increase or Maintain Production

Your railroad needs to be shown that investment will not be made at locations where you have high costs. The impact of how high captive rail rates impact your capital investment and production volumes is important for railroads to understand. Railroads have lost substantial business in the past by not listening to their customers. Educating railroads on the downside of high captive rates is a beneficial exercise for both you and your railroads.  

2. Your Competitors Can Be Big Source of Leverage in Reducing Captive Rates 

There are several reasons for this. One important reason is the location of competitors to your existing and potential customers. When a competitor is close to a customer, this provides a reason for a railroad to provide you with lower rates for movements to that customer. Your competitor will have lower logistics cost, either from a short distance rail move, or by serving the customer by truck.  Either way, if you lose this customer, the railroad also loses all or a major part of the revenue it would get from you. It makes economic sense for both the shipper and the railroad to work together to maintain this business. 

3. Are You Competing Against Imports? 

If the answer is yes, then you and the railroad have the same objective – STOP THE BLEEDING. You both lose out when competing against imports and you will accomplish more by working together than against each other. High captive rates make little economic sense when the objective is to compete more effectively against imports. Reference Blog article Creating Effective Alliances with Railroads.

4. Are You Short Distance from Port Where Your Product can be Exported? 

If yes, then you have additional negotiation leverage. High captive rates can make it more economical to export than ship domestically. When a shipper makes the switch from primarily serving the domestic market to primarily serving the export market, this can have a large impact on a railroad’s revenue and volumes. This can provide effective leverage in captive rate negotiations.  

5. Understand Problems with Your Railroad’s Business Model for Your Commodities

Many shippers do not take advantage of information that railroads must provide to the STB. This information is provided due to the monopoly power railroad’s hold over a large amount of their traffic. This information can be valuable to shipper’s rail negotiations. One example is the railroads Quarterly Fright Commodity Statistics Reports (QCS). Railroads QCS reports show what is good and bad about a railroads business model for your commodities. This data provides direction for how you can help improve weaknesses in the railroadresults for your commodities.  

The illustration below provides an example using results for Commodity Code 29114-Petroleum Lubricants on CSXT.

Rail Cost Control - Educate Railroads - Reduce Captive Rates

This illustration shows that CSXT receives more cars from connecting carriers than it originates on its lines. This means that there is not enough production capacity on the CSXT system to satisfy the demand for this commodity from customers on the CSXT system. As a result, few cars are delivered by CSXT to connecting carriers.  

To grow revenue CSXT needs to provide rates that encourage you to increase production. To incentivize this investmentCSXT needs to, at a minimum, provide lower rates to gateways with other railroads. This would be good for both CSXT and the shipper. CSXT growth is limited without further investment from shippers on its system. High captive rates that stifle growth appear to limit CSXT and its customers revenue for this commodity. This is fertile ground for negotiations focused on reasonable rates for captive movements. 

Railroads current and historical QCS results are included in the Rail Rate Checker section of the Rail Cost Control Program. In addition to carloads, the QCS data in Rail Rate Checker includes the following information for each Class 1 Railroad: 

          • Average rate for moving the commodity 

          • Historical change in average rates  

          • Total revenue from movements of the commodity 

          • How railroads total commodity revenue has changed over time 

This data is available down to the five-digit commodity code level in the Commodities by Railroad section of Rail Rate Checker 

 

Rail Cost Control (“RCC”) is a program developed by Escalation Consultants, Inc. to help shippers reduce rail expenses by managing costs and empowering negotiations. Furthermore, for more information about RCC and other related articles, visit the RCC Blog.

Database Management System

Rail Cost Control- Competitive Traffic

6 Ways to Make Railroads Compete for Your Captive Movements 

Last week, Escalation Consultants’ blog, “The Cost of Being Captive to a Railroad showed that traffic railroads view as captive has rates 107% higher than traffic railroads view as competitive. A shipper looking to substantially reduce rates must, therefore, make a railroad compete for more of its traffic. There are a number of ways to do this. The following are six examples to make railroads compete for your captive movements:  

1) Alternate Logistic Options:

The cost of trucking and transloading need to be understood. The higher the rail rate for a move the more viable other logistics options become. It is always good to know the ceiling price for rail movements. The cost of alternate logistics determines this price because once rail costs are higher than other logistic options, a railroad can lose the business. 

2) Create Geographic Competition:

If you produce a product at more than one plant, you can have railroads provide bid rates from each viable plant to customer destinations. This type of geographic competition can make a railroad compete for movements even though a shipper’s plant only has access to one railroad. Geographic competition can significantly reduce the rates for movements as it makes railroads provide competitive rates at captive locations. 

3) Commodity Swap Agreements:

Commodity swaps with competitors are used to reduce logistic cost for both you and your competitors. The framework for a commodity swap: 

      • You have customers closer to your competitors’ plant than your plant,
      • Your competitor has customers closer to your plant than his plant; and, 
      • The competitor serves your customer and you serve your competitors’ customer. 

Companies do not like competitors to serve their customers. However, when cost savings are very large a swap agreement is too good to pass up. The higher a railroad’s cost for a movement, the larger the savings from a commodity swap agreement. This type of agreement does not normally last for multiple years. The railroad gets the message loud and clear. 

4) Perform an Analysis of the Cost of Building a Rail Spur to Another Railroad:

Many rail spur analyses are performed, but few of these build-outs materialize. The reason, if a rail spur is viable, a railroad is under greater pressure to reduce rates. The railroad will need to lower rates to a level that does not provide the economic incentive for you to build the rail spur. Performing an analysis of the viability of building a rail spur to another railroad can be very valuable in captive rate negotiations.

5) Build a Rail Spur to Another Railroad:

If you build a line to another railroad, then you have two railroads competing for your business. This changes your moves from captive to competitive in the railroads’ pricing model. As demonstrated in the blog, “The Cost of Being Captive to a Railroad, rates for captive moves are on average 107% higher than rates for competitive moves. Building a rail spur represents significant savings as it generates downward pressure on your rates.  

6) Educate Railroads:

A shipper needs to educate railroads on why high rates are bad for both you and your railroads. This means you need to show the overall impact of high rates on your businessThe best way to do this is to provide railroad management with information on strategic plans for your companyThe information needs to show how railroads can benefit the most and the least from your business, going forwardRailroads have smart people in management. They need to be educated on the benefits of a more competitive rate structure on their business. 

The issues presented to railroads will be different for every company. Developing these issues is an important part of preparation for rail negotiations. Examples will be included in the next blog. 

These types of issues need to be considered in strategic planning designed to drive down rail expenses for captive movements. Every companies’ situation is different, but things that work best to reduce rail expenses do not change.  

To get a better rate structure for your moves, you must make railroads look at your traffic differently! 

This is what strategic planning for rail negotiations needs to accomplish. Escalation Consultants works with companies to reduce rates by accomplishing this objective. The Rail Cost Control (RCC) program facilitates this process. 

 

Rail Cost Control (“RCC”) is a program developed by Escalation Consultants, Inc. to help shippers reduce rail expenses by managing costs and empowering negotiations. Furthermore, for more information about RCC and other related articles, visit the RCC Blog.

Rail Cost Optimizer

Rail Cost Control Blog Article 11

The Cost of Being Captive to a Railroad

Traffic that’s captive to one major railroad is priced significantly higher than traffic where railroads must compete for movements. The difference between Captive Traffic and Competitive Traffic rail rates is very large.

Captive Traffic rates are, on average, 107% greater than Competitive Traffic rates 

Table demonstrates this rate difference. It illustrates profitability for both captive and competitive movements on the six largest Class I railroads. The table contains the average Revenue to Variable Cost Ratios (RVC) for captive and competitive traffic on each railroad. RVC’s in the table are calculated from the cost and revenue data provided by the Surface Transportation Board (STB) for captive and competitive moves on each railroad. 

Rail Rates for Captive vs Competitive Rail Movements

An RVC measures railroad profitability for movements. It is calculated by dividing the rate for a move by the railroads long term Variable Cost (Cost) for the move. Table 1 shows that the 185.9% RVC for Union Pacific (UP) is the highest average RVC. An RVC of 185.9% means that rates are on average 85.9% greater than UP’s Cost for moving its traffic.  

The breakdown of UP RVC’s is 248.9% for Captive Traffic and 135.4% for Competitive Traffic. This makes captive rates for UP 83.8% greater than competitive rates ((2.489 – 1.354) ÷ 1.354). The average increase in captive rates on all six railroads is 107.2%.  

The largest increases in captive rates over competitive rates are on CSXT 142.9%, CN (US) 140.8% and NS 103.6%.   

To convert RVC’s in Table to rates, assume that the railroads average variable cost of moving captive and competitive carloads is $2,000. Table 2 shows that the average dollar per car increase for all railroads is $2,616.  

The average $2,616 captive rate increase, by itself, is greater than the total rate of $2,478 for railroads Competitive Traffic. 

Average Dollar Per Car Increase: Captive vs Competitive Rail Rates

The most significant captive rate increases, as compared to competitive rates, were observed on CSXT ($3,205) and CN (US) ($3,228). These are by far the largest dollar increase in captive rates. 

In order to obtain large rate reductions, shippers must make railroads compete for more of their traffic. There are several ways to accomplish this. With this in mind, Escalation Consultants’ next blog will address: Five Ways to Make Railroads Compete for Your Captive Traffic. 

Note – The US railroad industry is regulated by the STB. An RVC of 180% represents the Jurisdictional Threshold for rail movements. This is because the STB has no authority over rates with RVC’s below 180%. Moves with RVC’s above 180% have high levels of profit and are therefore considered captive by the STB. Rail moves with RVC’s below 180% have lower profit levels, and therefore, considered competitive.  

 

Rail Cost Control (“RCC”) is a program developed by Escalation Consultants, Inc. to help shippers reduce rail expenses by managing costs and empowering negotiations. Furthermore, for more information about RCC and other related articles, visit the RCC Blog.

Rail Cost Control

Rail Rate Benchmarking

Use Competitor Rates to Reduce Your Rates

Railroads do not mind a shipper saying they have high rates. What does have an impact is showing that a railroad’s rates are putting you at a competitive disadvantage in your markets.

What this means is, in order for a shipper to have reasonable rates, it needs to know something about its competitors’ rates.

Fortunately, obtaining information on competitors’ rail rates is easier than many shippers realize. Railroads are required to submit a large amount of data on their moves to the Surface Transportation Board (STB). This data contains costs, rates, volumes, and profit which helps shippers become more knowledgeable about the rates they compete against in their markets.

Two primary methods for benchmarking a shipper’s rates against competitors:

1) Public Use Carload Waybill Statistics (Waybill)

The Waybill is a large database, containing information on over 700,000 rail movements with detail down to the five-digit STCC. The Waybill provides information on where volumes going into a market originate. It also provides the rate levels moving the volumes.

2) Cost and Profit Benchmark Rates

Benchmarking shows the rate that gives the railroad the average profit received from all movements of your commodity on the whole rail system. No shipper wants to have above average rates which make this an important benchmark to understand. This benchmark rate is calculated using data railroads submit to the STB and is determined separately for captive and competitive moves as they have different levels of profit.

To get reasonable rates you first need to know what reasonable rates are. Railroads thrive on a lack of rate transparency which means it is up to the shipper to provide that transparency. Rate benchmarking provides ammunition that helps protect rail shippers from excessive rates from railroads that hold monopoly power over their traffic.

Railroads react differently to you saying you have high rates than they do to you showing that their rates are putting you at a competitive disadvantage in markets. If you can show railroads where their rates are putting you at a competitive disadvantage you will have much better success in rail negotiations. In addition, if you can show that high rates are causing both you and your railroad to lose volume in markets, you can accomplish a lot with your railroads. This all starts with rate benchmarking.

The types of rate benchmarks described above are automatically calculated for individual moves or on a macro basis in the Rail Cost Control program (RCC). Click on the link to learn more about the RCC.

 

Rail Cost Control (“RCC”) is a program developed by Escalation Consultants, Inc. to help shippers reduce rail expenses by managing costs and empowering negotiations. For more information about RCC and other related articles, visit the RCC Blog.

 

Rail Cost Control