Change Is the Enemy of Railroads
Escalation Consultants Inc. (EC) has been generating significant cost savings for rail shippers for half a century. What we have found is that things that work without much effort tend to generate smaller cost savings. Strategic negotiation strategies that work to generate large savings tend to follow the following rule:
CHANGE IS THE ENEMY OF RAILROADS
What this means is that railroads don’t like change as change makes them have to compete more for your traffic. For example, if you are requesting a railroad to provide rates to a destination from your plant as well as from a transload site with access to more than one railroad, then the railroad has some rate decisions to make.
Does your railroad:
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Not reduce its existing rates and potentially lose your business or
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Does it estimate a price for the move considering your cost of transloading as well as other railroads rates to the destination or gateway
Change is the enemy of railroads as the railroad must make new rate decisions which are filled with uncertainty. If you don’t create the potential for change then you don’t put anything at risk to a railroad and it will just do the same old same old and increase your rates every year.
A shipper needs to be able to show that a railroad is better off by doing what you need than by simply continuing to increase your rates. This is what effective strategic planning for rail negotiations needs to accomplish.
In working with hundreds of rail shippers over the last half-century Escalation Consultants has been involved in structuring numerous approaches geared to creating change. Some changes EC has used to effectively increases negotiation leverage with railroads follow:
- Importing a product into available maritime channels and bypassing the railroad
- How rail expenses impact where capital investment is be made
- Geographic competition from other plants
- Changing the location of warehouses
- Determining alternate production sights
- Transloading
- Building out to other railroads
- Sharing plans for future expansion
- Forward storage at a competitive location to avoid captive rail destinations
- Commodity swaps
- Trucking
Some of these approaches sound simple but operationally can get quite complex. They may require input from different disciplines within a shipper’s organization and sometimes require other disciplines participation in meetings with railroads. The credibility of the shipper’s position is paramount, and that dictates who is best to participate in railroad meetings.
It is important to note that no matter what your final logistics decision is, it’s always good to know the cost of alternate logistic options as they create the ceiling price for your movements.
RATE BENCHMARKING IS ALWAYS A PART OF THE PROCESS
Every company’s situation is different. However, benchmarking a shipper’s rates is always a recommended first step in strategic planning as it shows the markets where your rates are:
- Below average
- Average
- Above average and
- Significantly above average (Top 15% of all market rates)
To negotiate reasonable rates, you must first know what reasonable rates are. Rate benchmarking establishes:
- The rate levels you need to be competitive in markets
- The markets where your rate problems are most significant and,
- Where to allocate the most time in preparation for negotiations
The wealth of information generated by the rate benchmarking process has a very big impact on the strategic plan developed for effective negotiations.
Structuring an Effective Plan of Action with Railroads
Based upon Escalation Consultants’ experience over the last 45 years we have developed the Rail Negotiation Wheel which is used to improve shippers’ negotiations with railroads. The “Wheel” is used to:
- Ensure that a shipper is considering all options for increasing negotiation leverage with railroads
- Make your negotiation more important to the railroad and
- Guide effective cost reductions with railroads.
