No one likes to pay demurrage and storage charges. 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 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. We’ve updated this post in 2022 to help refine your strategy.
- Steps to Control Demurrage
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 owned railcars are detained by rail shippers. It serves as a penalty for undue railcar 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 excessive 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 ordered in or released by the industry. There are a number of free days given by each railroad; debit days are the number of days after those credits expire. Demurrage is generally calculated by subtracting free and debit days.
So, how can rail shippers reduce demurrage fees? Here are four steps:
- Improve the management and flow of cars and align them with facility capacity.
- Know the railroads’ rules and your options.
- Maintain proper records, including daily rail orders and switching.
- Track the root cause and find alternative solutions.
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.
Download our free guide to railcar tracking options to learn what to look for in a railcar tracking system.
Here are examples of railcar reports RSI’s customers use to manage demurrage:
- Demurrage and Detention Reporting. See when cars were shipped, constructively placed, actually placed, released, and days held. Charges are automatically 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 utilized to monitor the flow of railcars.
- 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 utilize system cars, equipment ordering needs to be accurate and railcars need to be loaded/unloaded quickly. Excess 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.
If you are charged customer detention from your suppliers, you also need to unload railcars quickly to avoid excess detention charges.
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.
To dispute demurrage charges, you will need to keep records of the constructive placement date and time, order-in date and time, actual placement date and time, and release date and 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.
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 railcars, leasing private railcars may be an option to avoid demurrage charges on railroad-controlled railcars.
- Review Railroad Spotting Instructions. You may need to review the railcar 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 railcars but once capacity is met, railcars are Constructively Placed. The customer is then responsible for ordering in the oldest Constructively Placed railcar. If the carrier provides Keep Me Full logic, the customer is not required to order railcars once they are Constructively Placed.
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 (railcar 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.
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 reduce 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.
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 crucial to assess the impact reduced transit times are having on your fleet size. Optimizing your railcar fleet size means fewer empty railcars sitting on the tracks, thus 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. If a demurrage case should persist, shippers may follow 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.