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NEW YEAR’S RESOLUTION FOR IMPROVING RESULTS WITH RAILROADS

New Year’s Resolution for Improving Results with Railroads

As you start the year of 2022, it is good to consider a new year’s resolution that will make 2022 better than 2021. The best resolution for rail shippers to consider is to become much more proactive in rate negotiations with railroads. The reason for this resolution is that it will help reduce rail expenses by counteracting the substantial change railroads have made in how they develop rates for movements.

Railroads have changed how they develop rates which means that shippers need to change how they negotiate rates. This is why being more proactive in establishing the rate structure for movements is a great new year’s resolution for rail shippers in 2022.

Illustration 1 shows the impact of the change in railroads pricing practices on their revenue. This analysis was performed by Escalation Consultants for the Rail Customer Coalition in conjunction with the American Chemistry Council.

[Illustration 1]

Improving Results with Railroads 1

The graph shows that the total revenue from competitive rates (rates with RVC’s below 180%) was virtually unchanged over the last fifteen (15) years. However, revenue from rates generating monopoly level profits (rates with RVC’s greater than 180%) increased a whopping 231%. The graph shows that:

  • There has been a sea change in how railroads establish rates for movements; and,
  • Actions shippers are taking to control rail expenses have just not been very effective

The change in railroads rate making practices has resulted in revenue from rates generating monopoly profits being the norm and is no longer the exception.

[Illustration 2]
Improving Results with Railroads

Illustration 2 shows that in 2004 revenue from rates generating profits at monopoly levels represented 27% of all rail revenue. However, by 2019 monopoly profit revenue represented 50% of all revenue. Illustration 1 shows that the revenue railroads make from rates generating profits at monopoly levels continues to increase. It is unlikely that railroads will be satisfied with 50% of all revenue coming from monopoly profit rates. This is because two of the eight major commodities in the analysis had monopoly profit revenue, represent over 60% of all revenue. (Footnote 1)

To deal more effectively with the change in railroad pricing practices shippers need to be more proactive in establishing rates for their movements. A great new year’s resolution is therefore to be in the position to tell railroads:

  • The rates you need
  • Why you need them and
  • The Reasons a railroad should give these rates to you

There are many things that need to be considered in a comprehensive plan for reducing rail expenses. However, everything starts by understanding the rates you compete against in your markets.

As an example, Escalation Consultants is annually involved with more than a billion dollars in shippers rail spend. In reducing clients rail expenses, we look at numerous issues as well as the political environment at plants.(Footnote 2) However, we always start by understanding what our clients compete against in their primary markets. This allows us to be much more proactive in establishing reasonable rates with railroads.

There is a reason why Escalation Consultants is successful in reducing rail expenses for shippers that have never reduced cost before. The process for reducing rail expenses starts with a comprehensive strategy and includes:

  • Understanding and quantifying all your win/win opportunities
  • Understanding all your logistics options
  • A process for increasing your pricing options
  • Understanding all your sources of negotiation leverage
  • A process for making your movements more important to railroads
  • Having immediate access to market intelligence.

Not everyone can retain Escalation Consultants to assist in reducing rail expenses. However, everyone CAN use our Rail Cost Control Program (RCC) to become more proactive in rate negotiations with railroads. The RCC provides immediate access to rates you compete against in markets and identifies your primary competitors in markets.

The RCC does much more than determine reasonable rates for movements, it is a comprehensive database management system that offers shippers multiple valuable tools. These include: a bid evaluation tool that optimizes your rail spend. As well as an RFP generation tool that increases your pricing options and develops win/win opportunities that decrease your cost while increasing railroad profit and much, much more.

The change in railroad pricing practices demonstrates that shippers need the RCC program now more than ever. A good new year resolution is to know more about how the RCC will help you deal more effectively with the change in railroads pricing practices. This change is allowing railroads to obtain a significant increase in the number of rates generating monopoly level profit and the RCC is an effective tool for combatting this practice.

 


Footnote 1 – More detail on the analysis is included on the Rail Cost Control website under the blog titled “Impact of Consolidation on Freight Rail Rates.”

Footnote 2 – Several issues that need to be analyzed in an effective cost reduction strategy are included in Escalation Consultants Rail Negotiation Wheel which was shown in the blog titled “Obtaining the Rail Cost Reductions that Shippers’ Management Needs.” This blog is available on the Rail Cost Control website.

Track Rail Rate Increased Over Time

Use Past Rail Rate Increases to Reduce Current Rates

Would your position on a proposed rate increase of 3% for a rail move be different if that rate had already increased by 40% in prior time periods?

Many shippers answer this question with a resounding YES! The reason – Your railroad knows how its rates have changed.  If your past rate problems are not addressed in current rate negotiations this either indicates that:

  • 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, as silence does not send the proper message to a railroad.

If rates increased 20% over two bid cycles, it doesn’t matter whether the 2021 or 2019 rate increases caused the problem. The 20% rate increase is the problem!

Past performance can be a powerful source of leverage for obtaining lower rates from railroads. Unfortunately, it’s difficult to keep track of the impact past rate increases have had on current rates and volumes for specific moves. This is especially true when you have employee turnover as you lose the knowledge of people previously involved with your moves.

Large rail rate increases make an effective Database Management System (DMS) an essential tool for shippers. This is the reason for the DMS in the Rail Cost Control Program (RCC).  The DMS automatically identifies and quantifies past rate problems and establishes an effective source of leverage for shippers. The RCC makes rail negotiations more productive and helps better control the cost of rail freight.

 

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.”

Database Management System

Railroad Strategic Alliances

Creating Effective Alliances with Railroads

Develop Strategic Alliances to Create Greater Value for You and Your Railroads

The term partnering is overused. Many rail shippers refer to any contractual agreement with a railroad as a partnership. The term partnering is even used in agreements with high rail rates for moving shippers’ commodities with thin profit margins. To obtain a better rate structure from railroads, shippers should focus on creating strategic alliances with railroads.

Strategic Alliances establish a process with defined goals for improving revenue and profits for both shippers and railroads.

The alliance needs to detail what is expected from each party and the outcome (goals) each party will receive from the process. Strategic alliances that impact rail rates normally have little to do with the captive or competitive nature of movements. A strategic alliance starts by first identifying common goals between shippers and railroads. An effective alliance then works to better accomplish these goals.

Some alliances are simple while others are complex. A prime example of a complex alliance involves foreign imports. Greater value can frequently be obtained by working together than apart on import issues. This makes imports a prime candidate for a strategic alliance between shippers and railroads.

When imported products become a threat to a company’s domestic production, the shipper and railroad have the same goal – STOP THE BLEEDING.

Imports cause both shippers and railroads to lose volumes and revenue when they impact a company’s domestic production. Railroads have a lot to lose with imported products, as they:

  • Lose all inbound movements needed for domestic production
  • Miss out on outbound movements to customers
  • May not move imported products from the port

Consider the impact of each additional container of imported paper. The railroad loses inbound moves of wood chips, slurry, chemicals, and potentially, coal to the paper mill. This loss of business has a big impact on railroads, suppliers to paper companies, and of course the paper company on outbound moves. This scenario demands a strategic alliance amongst impacted companies, because everyone loses if the paper company can’t compete with imports. All impacted companies need to reduce their costs to stop the bleeding. It doesn’t matter whether a railroads moves are captive when high rates only lead to a loss of revenue. To protect the vested interest in the output of the paper company, rates are determined through the alliance, and not the competitive status of rail movements.

Dealing more effectively with imports is an example of a complex strategic alliance. There are, however, many less-complex types of basic agreements struck between shippers and railroads that accomplish a common objective. A shipper’s capital investment to maintain or improve plant output frequently results in an alliance with its railroad. Capital Investment that also benefits a railroad, should not be made without first receiving an incentive from the railroad to make the investment. This is best accomplished through a strategic alliance which details what is needed from each party.

Not all leverage with railroads stems from the operational parameters of a movement.

With smart people on both sides of an opportunity creating value, great things can be accomplished. Rail shippers need to identify these opportunities because they will determine the best rates and contract terms for moving rail traffic.

The path to a more reasonable rate structure frequently starts by understanding common goals you have with railroads. This process leads to more productive rail negotiations and the creation of greater value for shippers and their railroads.

 

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 Optimizer

Rail Negotiation Wheel

Obtaining the Rail Cost Reductions that Shippers’ Management Needs

“If YOU don’t change what YOU do, it will be difficult to get railroads to change what THEY do.”

Escalation Consultants, Inc. is regularly involved in assisting shippers in reducing their cost of rail freight. Furthermore, we frequently receive inquiries from companies asking how they can best achieve the cost reductions that management is demanding. This article provides some direction for transportation and logistics departments looking to reduce rail costs for their rail movements.

To start out the process of reducing rail expenses, there are two basic issues to keep in mind in getting a better rate structure from railroads:

  • You must do something different than what you are currently doing with … you guessed it… railroads! This is a pretty logical rule that people frequently try to ignore because of a resistance to change. To change your rate structure, you must change how you negotiate with railroads. If you don’t change what YOU do, it will be difficult to get railroads to change what THEY do.
  • Every company has a unique situation. Therefore, the specific process for reducing rail expenses for one company, will be different from what is most effective at another. However, the analysis of fundamental issues to determine the best path to reducing and better controlling rail expenses, are similar.

A number of the fundament issues that need to be analyzed and incorporated as part of a negotiation strategy that will create different dynamics in a rail negotiation are included in the illustration below.

Rail Negotiation Wheel

**Please note that many of the action items on the outside of the Rail Negotiation Wheel have been left blank. A review of ALL actions would be too large a topic for one article.**

These issues in the Rail Negotiation Wheel form the building blocks for strategic planning, designed to obtain better rates for rail movements.

Many things need to be considered in an effective rail negotiation. Not all of the issues that are analyzed, have the same objective. The Rail Negotiating Wheel demonstrates this. The outside of the Rail Negotiation Wheel has analysis that can be performed and actions that can be taken, and the results achieved are on the inside. 

For example, when you benchmark your rates (Position 2 “P2” on the wheel), you determine reasonable rates for your movements. If this analysis shows that your rates are higher than competitors’ rates in a market (P3), then these rates must be reduced as they are putting you at a competitive disadvantage in the marketplace. The results in the middle of the wheel demonstrate why rates must be reduced.

When multiple issues on the outside of the wheel support the same result, this increases your leverage for obtaining better rates for your traffic.

For example, if your rates are higher than your competitors’ (P3), your negotiation position gets even stronger if your rates impact your business in the following ways:

  • Loss of business to competitors’ (P5)
  • Loss of business to imports (P6)
  • Where you invest capital to maintain and increase capacity, and where you don’t invest capital (P7)

All of these types of issues demonstrate why rates must be reduced and increase a shippers’ leverage in negotiations with railroads. The more action items you can use to support your negotiation, the greater your chance of success in obtaining the rates you need for your traffic.

As a shipper, you have the strongest position when you can bring all of the items on the inside of the Rail Negotiation Wheel into your negotiation position with railroads. Those who have attended Escalation Consultants’: Rail Negotiation Seminar know that we are big on shippers developing their rail negotiation “Story.” The story contains a shippers’ position for why it needs rates at a specific level. It also needs to provide the reasons why a railroad should agree to those rates. The Rail Negotiation Wheel provides the roadmap for developing that story.

Effective negotiation positions address issues that support each of the results on the inside of the Rail Negotiation Wheel.

When shippers can demonstrate some or all of the following issues, they will have more effective negotiations with railroads.

  • The rates you need
  • Why you need these rates
  • Why the railroads should give these rates to you

Make your moves more important to railroads.

When your moves become more important to railroads your chances of success increase dramatically (P15 & P16) . If you have the ear of people that are important to railroads, you become more important to railroads. This makes it imperative for a railroad to act promptly on your problems.

These are the types of issues that are analyzed and acted upon in strategic planning. When the Rail Negotiation Wheel is used effectively, a shipper has more productive negotiations with railroads. As a result, a shipper increases its potential for obtaining a rate structure that will keep it competitive in its markets.

Addressing the actions and results included in the Rail Negotiating Wheel is an important concept for every shipper to understand.

The success of a rail negotiation hinges on shippers obtaining the results on the inside of the Rail Negotiation Wheel. Using the leverage you obtain from the Rail Negotiation Wheel is especially important, due to the drop in bulk rail volumes and employment. These changes are providing shippers with significant leverage. Moreover, the Rail Negotiation Wheel helps shippers utilize this leverage in a proactive process for establishing reasonable rates for their movements.

 

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.”

Database Management System