How do your rail rates compare to your competitors? Or to the rest of your industry? How do you know? The best way to assess your rail rates is through rail rate benchmarking. Rail rate benchmarking gives you a comparative yardstick you can use to see where your rates rank compared to your competitors, the rest of your industry, and rail rates in general. Without benchmarks, it’s difficult to know where to start rail rate negotiations, or what to aim for. A reliable rail rate benchmarking process will not only help you pinpoint rail rates that are out of line, but also give you a reference point for negotiating.
What is Rail Rate Benchmarking?
Rail rate benchmarking utilizes commodity-specific yardsticks to evaluate your rates. Some of these rail rates may be substantially higher than what you are paying, while others may be substantially lower. Variances from those yardsticks can give you valuable insight into where you have the most leverage to minimize your overall rail spend.
Benchmarking Using RVC
To accurately benchmark your rates, it’s important to know exactly what you’re looking at. One of the most useful measures for rail rate benchmarking is the Revenue-to-Variable-Cost Ratio (RVC). The RVC is an internal metric used by the railroads to measure their profitability. It can be considered a lane-specific inverse to the company-wide Operating Ratio. The railroads strive to increase their RVCs when negotiating prices. Understanding how the RVC for your lanes compare amongst railroads and between your competitors gives you a frame of reference for what are reasonable—or unreasonable—rates.
The Surface Transportation Board data above, derived from US Rail Impact software, illustrates the variability that can exist with rail rates. Since the railroads price based on RVC, not miles, benchmark variances are derived from understanding your commodity’s RVC or revenue markup. Favorable variances may indicate market share growth opportunities, while unfavorable variances highlight areas in need of greater management attention.
By evaluating the railroads costs and margins, a shipper might be dismayed to find that their RVC is surprisingly high, and that competitors are paying rates comparable to shippers with half the distance. With this information, the shipper knows there may be room to negotiate lower rates. From here, the shipper might look at competing railroads, alternative routes, or transloading options.
Expand Your Data
With more data, you can make your rail rate benchmarks more accurate and derive more valuable insights. Expanding your benchmarking data set to include a wider span of time, comparisons across railroads, and different types of rates will help improve your rail rate negotiations.
Trends Over Time
The previous scatterplot shows that more distance does not always mean higher rates, and vice-versa. However, distance is not the main factor in determining rail rates. Different commodities are also shipped at different rates, and different railroads charge higher or lower rates at different times as they vie for position against competitors.
Source: USRail Impact
Your rail rate benchmarking data set is a snapshot in time. Taking a look at trends across railroads and commodities over years and quarters can show you if you’re missing out on competitive opportunities. The above graph shows which railroads’ revenue is trending upward, and which might offer lower rates in an effort to compete. Information like this can help you target the right alternative routes, lanes, and railroads. This can also give you more insight into why your rates may have changed, and whether or not these changes are affecting your entire industry, or just you.
Distance vs Location
Distance may be a measure of rail rates, but specific locations are also a factor. Some locations along a route give you competitive options, while others are captive to only one railroad. The total traffic to a location, as well as the infrastructure in place and management practices, also play a role in determining rates. When you can compare routes across different locations as well as distances, you can see where alternatives and opportunities exist.
The above chart shows how varying locations can impact rail rates. A shorter distance does not always mean lower rates. Comparing across locations as well as benchmarking against RVCs can help to show alternative routes and opportunities to negotiate rates.
Contract vs Tariff Rates
Contract rates—rates privately negotiated between railroads and shippers— represent a significant portion of rail shipments. However, tariff rates may be prevalent for your commodity. A sample of freight bill information must be reported to the Surface Transportation Board (STB), which provides some visibility across geographic areas and commodities. Add these to your total benchmarking datasets to see if your current rates are beneficial to you or not.
Without benchmarks, it’s difficult to know where your rail rates rank and whether or not you can, or should, negotiate. Finding where your rates rank and expanding your dataset can show you where to concentrate your negotiating efforts. Use the rate request tools in RSInet and cost analysis tools in USRail to get the information that you need. For more details about negotiating shipping rates and strategies, download the free Shipper’s Guide to Rail Freight Rates.