Strategies to Reduce Demurrage

No one likes to pay demurrage and storage. For some shippers demurrage charges are merely a nuisance. For others, demurrage is a seven figure annual expense. Many of our clients have found it to be a cost that can be quickly reduced or eliminated with the proper focus and attention. This article offers a number of strategies rail shippers and receivers can employ to control and reduce demurrage.


Contents

  1. Introduction
    1. Current demurrage and storage charges by Class I Railroads
  2. Steps to Control Demurrage
    1. Improve the flow of your cars
    2. Know the tariff rules
    3. Proper record keeping
    4. Analyze, find alternative solutions
    5. Optimize your fleet
  3. Links and References

Introduction

Let’s start by defining the three main terms you’ll see associated with demurrage charges and accessorial charges in general. While these are the technical definitions, in practice all three are commonly referred to as demurrage. This can lead to confusion because each has separate causes, rules, and penalties.

  • Demurrage: A charge that compensates rail carriers when railroad leased or owned cars are detained by shippers. It serves as a penalty for undue car detention in order to encourage the efficient use of railcars in the rail network.
  • Private car storage: A fee for privately owned railcars that have extended use of railroad owned tracks.
  • Customer detention: Also known as customer holding, this charge occurs when a customer detains a shipper’s cars for a longer period than agreed.

Each railroad has different demurrage and storage rules and regulations. Demurrage usually starts when the railcar is constructively placed by the railroad and ends when the railcar is released by the industry. There are a number of free days given by each railroad and debit days are the number of days after those credits expire. Demurrage is generally calculated by subtracting free and debit days.

Current demurrage and storage charges by Class I Railroads

Over the past several years, major rail carriers have levied more aggressive demurrage fees. In 2018, the major railroads in the U.S. collected approximately $937 million in demurrage fees. For one rail carrier, demurrage fees increased by 121% from 2017 to 2018 alone. In 2018 Class I revenue for demurrage and accessorial charges for U.S. operations totaled $1.2 billion.

These revenue increases are not due to an increase in railcars. From 2017 to 2018, volume remained steady, decreased, or increased slightly (maximum of 5%) for major carriers, while total accessorial charges increased for all but one major carrier in the same time frame. These charges prompted the Surface Transportation Board (STB) to take notice and schedule a hearing on the subject. Though this resulted in some encouraging changes, excessive demurrage charges are unlikely to go away on their own. The following steps can help to reduce demurrage and potentially avoid thousands in undue fees.

Steps to Control Demurrage

So, how can rail shippers manage and avoid demurrage? Here are four steps:

  1. Improve the management and flow of cars and align them with facility capacity.
  2. Know the railroads’ rules and your options.
  3. Maintain proper records, including daily rail orders and switching.
  4. Track the root cause and find alternative solutions.

 

1. Improve the Flow of Your Cars

The first step to reduce demurrage is to keep your car inventory from exceeding your spot and storage capacity. Accurate railcar tracking and visibility is a key part of this process.


railcar tracking guide CTA

Download our free guide to railcar tracking options to learn what to look for in a railcar tracking system.


Here are examples of railcar trace reports we typically provide customers with to manage demurrage:

  • Demurrage and Detention Reporting.  See when cars were shipped, constructively placed, actually placed, released, and days held. Charges can automatically be calculated taking into account credit days and daily rates.
  • Pipeline Reporting.  Allows you to plan the arrival of inbound railcars both short and long term to avoid demurrage charges.
  • Trace Reports.  Various trace reports are utilized.
  • Shipment Reporting.  Track inbound shipment volume so that it can be kept within capacity.
  • Transit Time Calculations.  Accurate forecasting requires accurate estimates for shipping cycle times.
  • Railcar Issue Logs.  Document railroad performance issues so that you can share with your carrier and also have ready for disputing demurrage charges.

Of course the best reporting in the world will only help if logistics staff have the time and attention to properly manage it. If not, you may want to consider outsourcing this rail logistics function. In addition to needing visibility, staff will need to be able to control car movements. Controlling the inbound flow of cars usually includes coordinating the timing of shipments with other parties such as suppliers, as well as determining when to move cars to storage tracks or other locations.

You may also need to look at operational issues to improve car throughput. If you use system cars or are charged for detention, you need to load/unload, and release or bill cars quickly. Yard management software can not only improve the efficient handling of cars onsite, it also provides corporate logistics staff with visibility of what is happening in the plant. It can also help ensure that you don’t release cars without billing instructions.

If you utilize system cars, equipment ordering needs to be accurate. Extra equipment sitting in the yard will accumulate demurrage charges. Likewise you also need to cancel requests for equipment not needed before they reach the serving yard or destination.

 

2. Know the Tariff Rules

A thorough understanding of the tariffs for each carrier you deal with is necessary for you to be able to effectively reduce demurrage charges. Charges are based on 24 hour periods and most railroads start the clock at 12:01 a.m. the day following placement. You also need to consider when the railroad’s crew services your facility. Take advantage of the clock by ordering or releasing cars at the earliest possible times to reduce chargeable days. Especially prior to a weekend.

Knowing your tariffs is also necessary for disputing demurrage invoices. Invoices from the railroads must be audited. Keeping accurate records can be a challenge for the railroads and charges are not always correct. There is a limited window that disputes need to be filed in and you need to follow the dispute process.

 

3. Proper Record Keeping

To dispute demurrage charges you will have to keep records of the order-in time, constructive placement time, actual placement time and release time. Be sure that you have a way to capture this information. You should also have a process for documenting railroad service issues such as delayed cars, switching failures, and cars ordered but not placed. An automated railcar tracking system is essential. Yard management software is useful for capturing daily yard history.

 

4. Analyze, Find Alternative Solutions

Besides the day-to-day work above, here are additional strategies that can fit certain situations to help you avoid demurrage charges:

  • Optimize Your Rail Fleet.  In working with customers to understand the root cause of demurrage and storage charges, we often find that optimizing the rail fleet is the answer. More effective utilization, being able to reduce fleet size, and improving fleet balancing across locations can lead to efficiencies that result in lower demurrage and storage costs. Railcar tracking software is an important part of the solution.
  • Use Private Equipment.  If you are collecting demurrage on system cars, leasing private cars may be an option to avoid demurrage charges on railroad controlled cars.
  • Review Railroad Spotting Instructions.  You may need to review the car placement instructions you have in place with your railroad (open or closed gate, spot-on-arrival or keep me full). Spot-On-Arrival provides a free flow of inbound cars but once capacity is met and cars are constructively placed, the customer is responsible for ordering in the oldest CP’d car. If the carrier can provide Keep Me Full logic, the customer is not required to track FIFO and order cars once they are CP’d.

If there have been any changes to your track capacity, make sure your serving carrier has updated their records.

  • Develop External Storage Capacity.  Leasing nearby tracks may be a lower cost alternative to the railroad private car storage rate.
  • Expand Plant Capacity. Is adding or reconfiguring track within your facility an option for increasing storage or adding efficiency? Perhaps investing in additional equipment or resources can reduce the time required to load or unload cars.
  • Negotiate a Private Agreement.  In some situations a private demurrage agreement with the railroad can provide more flexibility and reduced cost.
  • When It Is the Railroad’s Fault.  A shipper should not be required to compensate a railroad for a delay in returning the asset when the rail carrier’s performance is the reason for the delay. However, railroad tariffs assign demurrage charges regardless of which party is at fault for delay. In practice, railroads may provide relief if you can clearly prove their car handling caused the delay.

If demurrage charges are the result of a railroad missing a scheduled switch, you should be able to get a switch fail credit. Another complaint rail customers have is the bunching of railcars (rail car deliveries that are not reasonably timed or spaced). This can be a difficult issue to resolve. Some carriers refuse to provide relief for bunching, while others have guidelines in their tariff for when they will provide credit.

 

5. Optimize Your Fleet Size

In an effort to keep shipments on-schedule, many rail shippers increase their railcar fleets so they can have plenty of railcars on-hand when needed. However, increasing your fleet size too much can increase demurrage charges. If your plant is frequently full of empty railcars, empty railcars are stacked up outside your gate, or railcars frequently accumulate outside your customer’s facilities, it’s likely that your fleet is too large. Optimizing your fleet size and coordinating movements can help you control demurrage.

RSI’s Railcar Tracking & Management Software offers a Fleet Sizing Model to help you determine how many railcars you need based on actual transit times and shipping volume. This interactive tool allows you to adjust variables to determine how they affect the number of railcars you need. If your fleet today has too many railcars, the number of days that each railcar sits at your plant is likely exaggerated. If your actual transit data reflects that it takes your plant an average of 10 days to throughput a car, but you know that your plant can do it in 4 days, you can make that adjustment in the Fleet Sizing Model. You can also adjust for other factors, like seasonality and railcar maintenance requirements.

You can also use this software to make adjustments from your customers’ side. If your customers hold railcars for longer than you would like, you can push them to release the railcars back to you sooner. To determine the impact customer hold days have on your fleet size, you can adjust the variables in the model. If your actual transit data show that the customer holds your car for an average of 20 days, you can adjust to see the impact of releasing them in 15 days. From here, you can make the right adjustments to your rail fleet.

The software will also show you the effects that your shipper’s policies are having on your demurrage charges. It is important that you understand the transit time to ensure your supplier is not shipping too early. If they are, cars are likely arriving at your plant before you are ready for the material, causing you to incur demurrage charges.

The world we are living in today has resulted in fewer railcars moving on the rail network, and in most cases, reduced transit times. Now, more than ever, it is time to look at the impact reduced transit times are having on your fleet size. Optimizing your railcar fleet size means fewer empty rail cars sitting on the track, and lowering demurrage charges.

Demurrage charges are subject to Surface Transportation Board (STB) regulation under 49 U.S.C. 10702, which requires railroads to establish reasonable rates and transportation-related rules and practices. Demurrage cases are rare because carriers and shippers generally resolve these issues on their own. Shippers have also not had much success bringing demurrage cases before the STB. A better option these days may be the STB’s alternative dispute resolution process.

If your company is incurring significant rail demurrage charges, you have an opportunity to eliminate or reduce those costs. The complexities of shipping or receiving multiple products for multiple customers is difficult without an automated process. However, with the right tools and attention, you can achieve significant savings in a short period of time. Contact us if you would like to discuss how we may be able to help.

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References and Links:

Demurrage and Storage Tariffs for Class I Railroads:

Other References:

    • Surface Transportation Board Decision, Docket No. EP 707, DEMURRAGE LIABILITY. Decided:  April 9, 2014  Link
    • Surface Transportation Board Decision, STB Docket No. 42068, CAPITOL MATERIALS INCORPORATED–PETITION FOR DECLARATORY ORDER–CERTAIN RATES AND PRACTICES OF NORFOLK SOUTHERN RAILWAY COMPANY, Decided: April 9, 2004  Link