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Negotiating Multiple Gateway Rule 11 Movements

Negotiating Multiple Gateway Rule 11 Moves

Negotiating Multiple Gateway Rule 11 Rates for Movements

Imagine you’re in the market for a brand new [insert large ticket item]. You think you have a good idea of the price range, but how do you know for sure? Next, you shop around to compare prices, availability, included perks, and interest rates. All these factors are critical elements to be considered before making your purchase. Sounds logical, right?

If you were to replace the “large ticket item” with “Rail Rates,” does the same premise hold true? It should! Especially considering the monopolistic power that railroads have over rail shippers and their rates.

It is always good to get more pricing options from railroads. One of the best ways of doing this is to use Request for Proposals (RFP’s) that have railroads provide Rule 11 rates through multiple gateways. I know what you’re thinking: is the juice worth the squeeze? Is the potential savings enough to justify the time and effort needed to generate these RFPs and analyze the responses? Let alone rearrange the segments to complete the move? What if this was easy to do? What if the RFP and bid evaluation process could be done in less time? Then there would be no reason for NOT generating multiple gateway RFP’s. This type of RFP and bid evaluation process can be a game changer for shippers looking to reduce rail expenses. The barriers for doing this have been eliminated by the Rail Cost Control (RCC) program.

The illustration below provides a real-world example of the potential savings that can be generated for a captive movement by having railroads provide Rules 11 rates through multiple gateways. The total rate and mileage for this complete movement, through three different gateways, is shown below.

Mileage for the move ranges between 600 and 800 miles. The total rate using the existing gateway is $4,600, while the rate through the low bid gateway is $3,600.

Total Rate for a Captive Movement Through 3 Gateways

The difference between the rate through the existing gateway and the low bid gateway is $1000. This move is for 50 annual carloads, which represents a savings of $50,000 on this one move. The low bid move also travels a shorter distance [200 miles shorter] thus improving transit times. Applying the full effect of this process on all of a shipper’s moves can easily add up to millions of dollars saved.

If you don’t go out to your railroads with multiple-gateway RFPs, how do you know you are truly getting the best rates possible? However, there is a harsh reality to generating Rule 11 RFPs for multiple gateways … Shippers can’t generate, analyze, and optimize multi-gateway Rule 11 RFPs for ALL their movements in excel.

To generate and evaluate multiple-gateway Rule 11 rates you’ll need a robust program that automatically does the work for you. This is exactly what the RCC – Cost Optimizer program does for rail shippers.

This comprehensive program allows shippers to AUTOMATICALLY generate multiple-gateway Rule 11 RFPs for ALL their railroads, for ALL their movements. Then RCC analyzes, optimizes, and even generates counterproposals the very same day responses are received from the railroads. Too good to be true? It’s not!

The Cost Optimizer generates RFP’s, evaluates railroad responses, determines win/win opportunities for both the shipper and railroads, creates counter proposals, and tabulates savings for management. The Optimizer is a finely tuned program that seeks out and quantifies your best opportunities for reducing the cost of rail freight.

Generating multiple-gateway Rule 11 RFPs is just one of many functions that the RCC provides rail shippers. If you’d like to expand your rate options, reduce your rail spend, and obtain immediate access to all your current and historical rates with just one click, schedule a RCC demonstration.

There is a better way to deal more effectively with railroads in less time.

See for yourself! Click this link to schedule a demonstration of the RCC program today.


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RCC Blog: Impact of Consolidation on Rail Freight Rates

Impact of Consolidation on Freight Rail Rates

An analysis of railroad pricing practices shows that over the last fifteen years there has been a fundamental change in how railroads establish rates for movements. The analysis shows that rail movements with pricing considered potentially non-competitive by the Surface Transportation Board (STB) have become the norm and not the exception.

The analysis, performed by Escalation Consultants, for the Rail Customer Coalition, covers the change in railroad pricing for eight major commodity groups between 2004 and 2019. Table 1 shows these eight commodity groups. In the analysis, non-competitive pricing consists of revenue from rail moves with Revenue to Variable Cost Ratios (RVC’s) greater than the 180% RVC Regulatory Jurisdictional Threshold. Revenue from moves with RVC’s below 180% is considered competitive revenue.

(Table 1)

8 Commodity Groups Included in RCC Analysis

The analysis shows the following changes in railroad pricing practices between 2004 and 2019.

Revenue from rail moves with non-competitive pricing increased by an average of 230% over the last 15 years.
  • Half the commodities had non-competitive pricing revenue increase by more than 300%.
  • Commodity revenue from rail moves without non-competitive pricing either decreased, or had small increases over the last 15 years.
Moves with non-competitive pricing generated 50% of all 2019 railroad revenue (see Table 2).
  • Chemical movements are most significantly impacted, as 68% of all Chemical revenue is generated from rail moves with non-competitive pricing.
    • 64% of Stone and Cement revenue comes from non-competitive pricing
    • 56% of Farm Products revenue comes from non-competitive pricing
  • The percentage of total revenue from moves with non-competitive pricing increased by 23% over the last 15 years. While revenue from moves with competitive pricing decreased by 23%.

The large increase in non-competitive revenue caused the average RVC to increase from 134% to 165% between 2004 and 2019 for shipments of the eight commodities in the analysis.

 

Conclusions from Analysis

Illustration 1 shows the cumulative percent change in total non-competitive revenue and competitive revenue by year for these eight commodities. This shows that non-competitive revenue has consistently increased over time while competitive revenue has had little change. These historical changes indicate that the STB is regulating a very different rail industry today, than it regulated in 2004.

(Illustration 1)

Percent Change in Non-Competitive vs Competitive Rail Revenue

Based upon the large increase in non-competitive revenue, it would be logical to expect a large number of rate cases before the STB. This has not happened!

Many shippers believe that the existing regulatory process is weighted too much in favor of railroads. The large increase in non-competitive revenue, shown in Illustration 1, supports this contention. Non-competitive revenue has increased 230% over the past 15 years. This indicates that railroads are not worried about regulatory pushback from generating non-competitive revenue from a large portion of their rail traffic.

The analysis shows that commodities are not impacted by a railroad’s non-competitive pricing practices to the same degree. Table 2 shows that 3 commodity groups had non-competitive revenue representing more than 50% of all rail revenue:

          • Chemicals – 68% of all revenue

          • Stone & Glass Products – 64% of all revenue

          • Farm Products – 56% of all revenue

These are very large commodity groups, and they have a significant impact on the total non-competitive revenue railroads make from their pricing practices. These commodity groups benefit the most from an improvement in regulations that impact rates.

(Table 2)

Non-Competitive Revenue as a Percent of Total Revenue

Table 3 shows the largest increase in non-competitive revenue occurred in commodities with the smallest percent of non-competitive revenue in 2004. Paper, Wood, Food, and Transportation Equipment commodities make up a relatively small percentage of total rail revenue under non-competitive pricing in 2004. These commodities now have around a third of all revenue subject to railroad non-competitive pricing. The analysis demonstrates that railroad’s non-competitive pricing practices are widespread and affect more movements now, than they did in 2004.

(Table 3)

Impact of Railroad Non-Competitive Pricing Practices on Commodities

Summary 

The Rail Pricing Analysis indicates that railroad pricing practices have changed dramatically over the last 15 years. It also indicates that rail rate regulations have not kept pace with these changes. The 230% average increase in non-competitive revenue indicates that railroads do not appear to be particularly worried about existing rate regulations. 

If the pattern of change over the last 15 years continues, the majority of rail traffic will move under rates that generate non-competitive revenue for railroads. To change this, the potential for winning a rate case before the STB will need to be more favorable to shippers than it has been over the last 15 years. This will likely require a more effective and less expensive method to challenge non-competitive rail rates. 

Consolidation within the Transportation Industry is facing additional scrutiny as regulators contemplate additional rail mergers. Mergers that could have further negative impact on the competitive landscape and the affordability of shipping US goods by rail. This analysis indicates that regulators need to carefully consider the changes needed to the regulatory system to protect shippers from the impact of a smaller number of railroads competing for their business. 

Note – The STB Commodity Revenue Stratification Reports are the source for all data used in the Analysis of Railroad Pricing Practices. 

 

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 Carloads Rebound from Covid-19

Rail Carloads Rebound from COVID-19

COVID-19 has had a big impact on everything including rail traffic. The good news is that: 
  • Intermodal traffic has rebounded far above pre-COVID-19 levels; and, 
  • Bulk rail traffic has finally risen to pre-COVID levels.  

The graph below shows that weekly Intermodal traffic is up 11% from January 2020. It also shows that Bulk rail traffic has finally risen 1% above pre-COVID-19 levels. 

RCC Blog: Percent Change in Weekly Rail Carloads for Intermodal vs Bulk Traffic

The graph below shows that, except for Coal and Petroleum, Bulk rail traffic has increased for major commodities. Both Coal and Petroleum have factors other than the economy influencing their decrease in carloads. The largest increase in Bulk carloads has been in Lumber & Wood Product 31.4%, Grain 30.3%, and Metal Products 20.3%. Chemicals and Sand & Gravel have only rebounded slightly from pre-COVID levels. 

The increase in rail carloads paints a positive picture of the US economy. The rise in carloads for both Bulk and Intermodal Traffic indicate that the economy has largely recovered from the negative impact of COVID-19. 

RCC Blog: Comparison of Weekly Rail Carloads for Major Bulk Commodities

Weekly Rail Carloads comes from the Rail Rate Checker section of the Rail Cost Control program’s extensive database of rail cost, rates, volumes, and rail profit which is used by many shippers to determine reasonable rates for their movements. For more information go to RailCostControl.com. 

 

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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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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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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