Rail Cost Control Blog - Rail Rates

Rail Rates – When is Enough, Enough?

Carriers and shippers agree: railroads need to be profitable to have a healthy and vibrant railroad system. To provide the best service possible, railroads need to be able to make the capital investment needed to move traffic efficiently and that requires a good return on their investment in track, equipment, and facilities. Carriers and shippers, therefore, agree that railroads need to have a rate structure for their traffic that allows them to operate profitably and efficiently. 

The disagreement between carriers and shippers regarding soaring rates comes down to when is enough, enough? 

In other words, when are the rates and rate increases imposed on rail traffic excessive? This is an important issue as excessive rates can have many negative consequences. Excessive rail rates can be damaging to the U.S. economy, the economy of individual states as well as the financial strength of individual companies. The negative impact occurs because excessive rail rates can: 

  • Cause companies to move production off-shore; 
  • Result in an increase in imports into the U.S.; 
  • Cause bulk traffic to move from rail to already congested highways; 
  • Limit capital investment at operations subject to ever increasing high rail rates; and, 
  • Put companies at a competitive disadvantage in domestic and export markets. 

Shippers understand that rail rates which are too low can be damaging to railroads. Railroads do not, however, seem to fully recognize that excessively high rail rates are damaging to both rail shippers, AND the economy. The question that needs to be answered, is: 

What are “reasonable” rates for railroads to charge for moving their traffic? 

The level of rate increase for rail freight, compared to other benchmarks, is a good indicator of railroads concern about the impact of their rates on companies. The illustration below tracks the historical percent change in rail rates against rates for long-distance trucking and inflation. Rail rates are determined using Association of American Railroads (AAR) average revenue per car data.

Rail Rates Increased More than Inflation

The illustration shows that rail rates increased by 94.2 % over the fifteen years between 2004 and 2019 (2019 is the last year reported).

During this same time frame, Long Distance Trucking freight rates increased 31.7%. Rail rates, therefore, increased three times more than the rates for trucking which is the railroad’s primary competitor. Inflation, as measured by the CPI, increased 35.4%. Rail rates, therefore, increased 2.7 times more than overall inflation.

As a result of the change in economics between truck and rail, trucks are now competing against railroads for longer distance movements. The big increase in the cost of rail freight has made trucking less expense than rail for many movements. This has resulted in traffic being taken off rail which contributes to greater congestion on highways. The cost of moving traffic by truck no longer appears to be effective competition as railroads have increased their rates 63% more than truck rates over the last fifteen years.

The remarks in this article should be qualified by saying that we have the highest admiration for the management of railroads. They have been a huge success for their investors as shown by the increase in the value of their stock. Rail management has taken the advantages and disadvantages of the current regulatory system and used it very effectively to create value for its stockholders. That is what effective management of any company should do and the railroads have done it better than most. On the other hand, shippers are concerned that railroads have become too adept at using the existing regulatory environment to their advantage.

Shippers are concerned about the power of railroads to keep churning out rate increases even as shippers fight for survival during these troubled times.

In looking at the current railroad industry I am reminded of a negotiation I was involved in many years ago. In this negotiation I asked the question, “When is enough, enough?” The response was very honest, “It is never enough!” The troubling fact is that this appears to be the mantra when it comes to rail rates today.

 

Escalation Consultants, Inc. developed the Rail Cost Control (“RCC”) program 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.

 

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Benchmark to Reduce Rail Expenses

Benchmark to Reduce Rail Expenses

To reduce rail expenses and consistently improve performance, companies need to consistently benchmark. The reason for benchmarking is simple. If you do not benchmark, you will likely do things the same way next year as you did this year. This means the problems you have this year will not get corrected.

When negotiating with railroads that have monopoly power over your traffic it needs to be recognized that:

You will always tend to receive rate increases

IF

You do not know what reasonable rates are for your movements.

A comparison of railroad’s historical rate changes indicate that railroads are very active with rate benchmarking. The graph below provides an example of the results from railroad benchmarking. It shows the percent change in average rate per car for all Food Product (STCC 20) BNSF movements, versus UP.

Rail Rate Benchmarking Blog Illustration 1

The illustration shows that over the last five years the percent change in the average rate per car for all Food Product moves on BNSF are very similar to those of UP. The percent change in the average rate per car for BNSF and UP frequently separate, but they always tend to come back to the same type of rate change. The overall average rate change is similar for both railroads during most periods with the railroads exchanging places as to who has the highest rate increases from time to time.

Rail shippers should learn from the practices of railroads and use the data available to them to benchmark their rates against the rates of their competitors.

This is valuable information that will show whether a shipper is being put at a competitive disadvantage in its markets. This market intelligence helps shippers improve their competitive position in markets.

Benchmarking is just common sense. It is always important to find out how well you are doing in the market compared to other companies. To demonstrate, the chart below tracks Grain Mill Products (STCC 204) rates, for movements into the Dallas TX market from major origin locations. Rates are organized on the vertical axis and distance shipped on the horizontal axis.

Rail Rate Benchmarking Blog Illustration 2

The first thing to notice in this illustration is, that the miles for a movement do not necessarily determine the level of the rate for a movement.

For example, movements from Wichita, KS go the shortest distance to Dallas, TX (370 miles) and movements from Des Moines, IA go the longest distance to Dallas, TX (950 miles). However, many of the rates for both of these origins are similar even though Des Moines, IA moves go almost three times the distance. A similar relationship happens with moves from Kansas City, MO. All the rates from Kansas City, MO are similar to rates from Des Moines, IA even though Kansas City, MO moves go one half the distance to Dallas, TX. This shows that just because you have a geographic advantage in a market does not mean you have a competitive advantage in a market. This is important information for shippers marketing and sales departments to know.

When looking at this graph, assume a supplier to this market is located in Davenport, IA with shipments that travel 850 miles at a rate of $4,821per car, which is the average rate for all shippers from Davenport, IA into Dallas, TX. Some may say this shipper is getting the average rate from Davenport, IA and has nothing to complain about. But, from the shipper’s point of view:

  • Many competitors ship into Dallas, TX for considerably lower rates;

  • Most shippers from Des Moines, IA have significantly lower rates, while shipping a longer distance; and,

  • The average rate into the Dallas, TX market for all movements is $4,033 which is $775 less than this shipper’s rate.

If you are a Davenport, IA shipper with a $6,000 rate you would have even more important issues to discuss with your railroad. If you are a Des Moines, IA shipper with a $7,000 rate, then benchmarking will likely create substantial savings.

Once you know how your rate stacks up against competitors in a market, you have a different negotiation with railroads. You also have different preparation for negotiations, especially if this is one of your more important markets. There are a number of questions the benchmarking exercise raises:

  1. Are there other opportunities to reduce the transportation cost through a forward storage site, or transload?

  2. Can a commodity swap with another supplier be negotiated in exchange for supplying one of their customers at another destination?

  3. Can your competitive carloads be bundled with captive carloads to obtain better rates on captive traffic?

  4. What is the impact on the railroad if you don’t serve this market?

Benchmarking rates into a market leads shippers to explore other alternatives for reducing and evaluating rates. The carrier will always say your rate is a market rate; but the carrier’s interpretation of a market rate will include the highest rate any other shipper pays, not necessarily the average rate and certainly not the lowest rate. As long as there is one other shipper with a higher rate, then your carrier’s interpretation will likely be that you have good rates.

Benchmarking helps you educate railroads on:

  • The rates you need;

  • Why you need them; and,

  • The reasons a railroad should give these rates to you.

It is important to benchmark rates with railroads that have monopoly or duopoly power over your traffic. It is important because, this is how you determine what rates are reasonable for your traffic. Without the knowledge obtained from benchmarking you will always tend to get rate increases. Companies benchmark to cut costs and improve performance. Railroads do this and so should shippers!

Escalation Consultants, Inc. developed the Rail Cost Control (“RCC”) program 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.

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RCC Blog - Why Some Rail Shippers Get Lower Rates

Why Some Rail Shippers Get Lower Rates

Rail shippers that are smarter about their movements get better rates for their traffic.  

Escalation Consultants, Inc. is in a unique position to see this, as many shippers use our databases to get better rates for their rail movements. The fact is: shippers who know more about their traffic do better in negotiating rates with their railroads.  

Shippers least cost leverage for obtaining better rates from railroads starts with benchmarking and costing rates for their movements.  

The following are examples of how rail shippers have used Escalation Consultants’ market intelligence database to their advantage:      

 1. A Captive shipper showed the railroad the impact its current rate structure has on reduced volumes into major markets. Market intelligence showed the rates needed to protect this business.  

Result – Shipper’s rates were reduced more than 10% to pertinent markets.  


2. A railroad proposed a large rate increase on captive movements. The railroad was shown that its rates were already in the upper profitability quartile for moves in certain markets. Additionally, the railroad was shown that its proposed rate increases are higher than the average increase they are receiving from all movements of this commodity.

Result Railroad pulled back its rate increases, reduced rates on priority movements and signed a multi-year contract. 


3. A shipper performed an analysis of the profit structure for a company’s movements on its primary railroad. The analysis showed that the railroad was pricing its movements above competitors on both captive and competitive traffic. Rate Benchmark Analysis showed the rate structure needed to maintain and increase volumes in problem markets. 

Result – Rates were reduced in significant problem markets and the railroad increased the strike price for fuel surcharges without increasing the rates for movements.


4. The rates and the rail carriers’ profits on all movements from an important market area were analyzed. This determined the market price for the commodity and the impact of increased volumes and lower rates on railroads profit.

Result – Win/win opportunities associated with lower rates were put in place to the benefit of both the shipper and rail carrier. 


5. Rail rates for all coal movements originating in the PRB and terminating in a specific state were determined.  The range of rates being obtained by plants with and without competitive options was used to support the rates that were and were not reasonable for plants.

Result – Shipper obtained rates in line with its competitor’s plants.


6.The shipper determined competitors’ rates into markets to find out where its rail rates were putting it at a competitive disadvantage in markets.  

Result – Rates were reduced in primary markets to keep the shipper competitive.


7. Shipper determined the railroad’s cost and profit for movements and how its rates stacked up to others in major markets.   

Result – Rates in several primary markets were reduced to minimize the shipper’s competitive disadvantage in these markets. 


The common theme in these examples, is that the shipper was able to gather information on its markets.

This data allows shippers to clearly demonstrate a problem to the railroad and quantify the rate that provided an equitable solution. The point to be taken is that shippers who are well prepared for negotiations have better negotiations. They also get better rates than shippers that do not completely understand their markets. Rate benchmarking and the costing of rail movements provides ammunition that helps protect rail shippers from excessive rates charged by railroads. These resources are important to help counteract the monopoly or duopoly power railroads have over their customer’s traffic.

When railroads have monopoly power over movements it is up to the shipper to determine if the railroad is abusing this power. Thus, putting the shipper’s business at a competitive disadvantage.

Railroads are sensitive to hurting a companies’ ability to compete in markets. Therefore, benchmarking your rates against competitors is a productive exercise in preparing for rate negotiations. This can be the most productive and least costly option shippers have for obtaining competitive rates for their traffic. 

Uncovering, and quantifying rate problems is a major function of effective transportation departments! Many transportation professionals have found that determining reasonable rates for traffic is the first step in obtaining better rates.

Escalation Consultants, Inc. developed the Rail Cost Control (“RCC”) program 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

 

RCC Blog - Uploads to STB's Carload Waybill Sample

Updates to STB’s Carload Waybill Sample

Big improvements Coming to the STB’s Carload Waybill Sample

The best source for understanding railroad rates and volumes for commodities into specific markets is the STB’s Public Use Waybill Sample (Waybill). The Waybill contains information that can significantly impact a shipper’s rail negotiations. It can also positively impact decisions made in shipper’s marketing and sales departments. Improvements made to Waybill data are, therefore, important for shippers to understand.

There are two big improvements in the Waybill data for merchandise traffic that shippers must be aware of. The first improvement will go into effect later in 2021 or early 2022. The second improvement is still being studied by the STB.

Waybill Improvement 1

The upcoming 2020 Waybill will contain more rates, volumes, origins, and destinations for merchandise traffic rail movements. This means merchandise traffic will contain:

  • Increased number of origin and destination market areas.
  • More accurate estimates of specific commodity volumes going into markets.
  • More accurate estimates of where volumes into markets originate.
  • Improved information on rates shippers compete against in markets.

This increase in merchandise traffic data will be offset by decreasing the number of intermodal movements the Waybill contains. This change is being implemented because the Waybill is primarily used by merchandise traffic shippers. These improvements will go into effect with the release of 2020 Waybill data. The 2020 Waybill data is expected to be released in late 2021, or early 2022.

Waybill Improvement 2

If this improvement is implemented, the Waybill will be released Quarterly, not Annually. This improvement is still being studied by the STB. However, if this change is enacted, Waybill data will become much more current.

In the existing system, Waybill data is at least one year old. Much of the data is closer to two years old before the STB releases an updated Waybill. For example, if the Waybill data for year 2020 is released in December 2021, there will be a one-year lag in data for the fourth quarter of 2020. However, there will be close to a two-year lag for data from the first quarter of 2020.  The new quarterly Waybill system would only have a two-to-four-month delay in rate and volume information for all Waybill data.

Waybill Improvement 2 is important because the more current Waybill data is, the more useful Waybill data becomes!

Importance of Waybill Data

The importance of the Waybill data in determining reasonable rates for rail movements is shown in the following scatter graph:

Updates to STB’s Carload Waybill Statistics

The scatter graph is automatically generated through the Rail Rate Checker Section of the Rail Cost Control Program

The graph shows the following data:

  • Shipper’s rate of $4,000 for a 450-mile Plastic (STCC 28211) movements from Houston, TX to Jackson, MS (yellow diamond)
  • Waybill rates for Plastic moves to Jackson, MS from both Houston, TX (red circles) and Beaumont, TX (green triangle)
  • A $2,430 Average Waybill rate into Jackson, MS (refer to the red line)
  • $3,462 is the rate that is One Standard Deviation above the average Waybill rate (refer to the top blue line)

The graph shows the value shippers get from access to Waybill data. The illustration provides a clear picture of the problems with the $4,000 rate for the shipper’s Plastic movements. The graph shows:

  • The $4,000 rate is more than One Standard Deviation above the Average rate into Jackson, MS
  • Houston rates are $1,000 to $2,5000 higher than rates out of Beaumont, TX
  • The $4,000 rate puts the shipper at a competitive disadvantage in the Jackson, MS market
  • It is difficult for the shipper to compete in this market with a $4,000 rail rate

The Waybill is already a very valuable tool for rail shippers. The STB’s proposed improvements to timeliness and number of moves, will increase the value of the Waybill for rail shippers.

 

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 Control

RCC Blog - Historical Data Shippers Need

Historical Data Shippers Need

There is little information available on policies and practices shippers rail transportation departments are using to control their cost of rail freight. As a result:  

There is little direction for shippers to follow on changes that can be made within the transportation department to obtain better results from railroads. 

The results of the survey taken at Escalation Consultants’s recent webinar, “Creating Opportunities to Reduce Rail Expenses” are therefore very informative as they provide:

  • Information on the current state of the art in shippers rail transportation departments and 
  • Food for thought on changes that can be made in transportation departments to obtain better rates from railroads

One of the most interesting results was: 83% of shippers said that better access to historical results for their moves would improve negotiations with railroads. It is difficult to get people to agree on 83% of anything, so this indicates a real need for better access to historical rate and volume information.  

A reason for shippers wanting better access to historical results is found in the response to the question: 

“Do you feel railroads know more about your historical rates and carloads than you do?” 

55% of shippers answered YES!

This indicates that railroads frequently know more about how shippervolumes and rates have changed than shippers do. This represents a big problem for shippers. Your railroad knows how your rates and volumes have changed.  If past large rates increases are not addressed in current rate negotiations, this indicates one of two things: 

  • You have forgotten about the large rate increases of the past; or, 
  • Large rate increases are not causing you a problem. 

Either situation can be detrimental to a shipper’s rates. Silence is Not Your Friend! It does not send the proper message to a railroad. 

historical changes in rates and volumes - poll 2

Another interesting result is that 55% of the shippers answered that they do not have access to historical data that summarizes all the historical changes in their movements. This means that it is difficult for these shippers to demonstrate the problems that past rate increases are having on their current business. This also provides some context for why 83% of the shippers answered that better access to historical rates and volumes would improve their negotiations with railroads. This is what the Rail Cost Control (RCC) program’s Database Management System provides to shippers!

The webinar provided examples of the impact that historical changes in rates and volumes can have on your rate negotiations with railroads. To gain access to a recording of the webinar contact EC.

Another interesting response: Do you maintain historical bid rates for movements that did not win the award of carloads?

Only 33% answered YES!

It can be very helpful to know how much a railroad missed the award by in the last bidding cycle. Railroads always say that their bid rates reflect the current market. It is good to be able to point out how their rates have been above market rates in the past. This provides shippers more credibility when discussing the rates needed for railroads to be successful in the current bid solicitation. This is especially relevant if you are going to be proactively establishing rates for your movements with railroads by providing:

– The Rates you need,
-The Reason why you need them,
-And the Reason the railroad should give them to you.

historical changes in rates and volumes - Poll

In Escalation Consultants’ experience, negotiations with railroads dramatically improve, when you establish an informed narrative. 

This narrative refers to: the Rates you need, the Reason you need them, and the Reason the railroads should give them to you. Knowing how your rates have changed in the past, directly impacts the quality of your story. Leveraging this data dramatically improves your likelihood of obtaining better rates in the future. 

The source of this data was the first in a series of three webinars that will address industry trends, strategic planning, and specifically designed tactics shippers can use to improve their rail negotiations and decrease rail expenses.   

We hope you will join us again for Webinar #2 in May. This webinar will cover: Optimizing Your Spend on Each Railroad to Significantly Reduce Your Rail Expenses. 

 

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.

Database Management System

Database Manager System

Generate Maximum Savings Through Optimizing

The blog titled Optimizing to Reduce Shippers Rail Expenses showed the process shippers can use to reduce rail expenses by millions of dollars while, at the same time, increasing railroad profit by millions of dollars. This value is created by optimizing railroads rates during a shippers bid evaluation. Win/Win opportunities are created by understanding the relationship between: 

The Reduction in Spend a Shipper Receives from Reduced Rates 

in Relation to 

the Increase in Profit the Railroad can Receive from Obtaining Additional Volumes 

 

The question that needs to be answered is how does a shipper determine the maximum value it can create through the optimizing process? Determining maximum value from optimizing is important as it brings the rate level of captive movements into rail negotiations. To do this a shipper needs to know the Pivot Point for awarding competitive carloads on each railroad.     

The Pivot Point represents the point where a railroad makes the maximum profit from reducing a shipper’s rates. 

Once the Pivot Point is reached, it becomes less attractive for a railroad to decrease rates to get the award of more competitive carloads. The Pivot Point shows when a rate reduction for the shipper is no longer offset by railroad profit obtained from an increase in carloads.

Illustration 1 demonstrates what goes into determining the Pivot Point. Illustration 1 shows that a 12% decrease in bid rates for a railroad’s competitive traffic is the Pivot Point. This decrease results in a 30% increase in the railroad’s profit resulting from a 20% increase in competitive carloads for the railroad. To get the most out of rail negotiations it is important for shippers to know the Pivot Point for rate reductions on each of their railroads. 

Rail Cost Control Pivot Point

Calculating the Pivot Point is an iterative process that continues to reduce rates on competitive movements for a railroad. With each rate reduction carloads are then re-award based on the lowest bids for competitive movements to determine the impact on both the railroad and the shipper. 

These changes are continually calculated until the Pivot Point is determined. Illustration 2 provides the results of this iterative process for the railroad used in our analysis. This graph shows the dollar savings for the shipper in relation to the change in rail profit for the railroad. These changes result from rate reductions of 1% to 18% in a railroad’s bid rates.

(Note to visually see the impact on rail profit and shipper savings, all dollar values are shown as positive amounts)

A 12% reduction in competitive rates represents the Pivot Point, as this generates the maximum amount of profit the railroad obtains from the award of more carloads. Railroad profit starts decreasing with rate reductions greater than 12%. Shipper’s savings continue to increase with rate reductions but by a 16% reduction the benefit to the shipper is greater than to the railroad. The source for Illustration 2 is the Rail Cost Control Program (RCC).

Rail Cost Control Pivot Point Optimized

Initially, the Pivot Point normally generates greater value for railroads than shippers.

This is because it represents the maximum increase in profit a railroad can get from reducing its rates. The table below demonstrates this as it summarizes the results for the rail bids used in this article.

 

Table 1

Summary Results for a 12% Rate Reduction on a Railroads Competitive Rates  

Shipper Savings 

$6.7 million 

Increase in Railroad Profit 

$12.5 million 

Increase in Railroad Revenue 

$23.0 million 

Increase in Railroad Carloads 

5,100 

**Table 1 Source: Output Table from the RCC – Cost Optimizer**

Table 1 shows that the railroad makes out much better than the shipper. The railroad makes $12.5 million in additional profit, while the shipper receives savings of $6.7 million. This difference brings rate reductions for captive movements into the optimizing process. Rates for captive movements become part of an iterative process that determines the best split of the benefits between the shipper and railroad through the optimizing process. The source for Table 1 is the Rail Cost Control Program.

Table 2 provides the results from optimizing after rate reductions for captive rates are included in the optimization process. This table shows the shippers expense is reduced by $9.6 million while the railroads profit is increased by $9.6 million. This is a good deal for the railroad as it makes $9.6 million more in profit and $20 million more in rail revenue than it would receive based on its initial bid rates. This is also a good deal for the shipper as its rail expenses are reduced by $9.6 million.

Table 2

Change from Bid Rates Summary Results After Captive Rates are Included in the Optimizing Process

Shipper Competitive Spend Saving

-$6,814,188

Shipper Captive Spend Savings

-$2,826,917

Shipper Total Savings

-$9,641,105

Railroad Competitive Profit

$12,556,031

Railroad Captive Profit

-$2,904,317

Increase in Total Railroad Profit

$9,651,714

Increase in Railroad Spend

$20,135,460

Increase in Railroad Carloads

$5,100

**Table 2 Source – Output Table from the RCC – Cost Optimizer**

When shippers are armed with opportunities created by optimizing rail expenses, they create value for themselves and their railroads. Shippers reduce the rate structure for their movements, while substantially improving profit and carloads for railroads.

The best negotiations are win/win negotiations and optimizing creates this type of negotiation. Therefore, the question is, why haven’t more shippers used optimization to reduce their rail expenses?  The answer is complexity and time constraints. This was the reason for the development of the Rail Cost Control (RCC) Program. The algorithms in the RCC’s Cost Optimizer automatically determine the Pivot Point for each railroad and the results to expect from the optimizing process, for both the shipper and railroad. This is a game changer for many companies.

 

For more information on optimizing rail expenses, check out the Rail Cost Optimizer. 

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.

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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