The railroad barons who oversaw the railroad industry in the late 19th and early 20th centuries understood the importance of controlling geography and the industries within it. This highly competitive group also realized that they had to look outside their own defined markets to enhance their, and their customers’, growth. The only way to accomplish that was through switching and interchange agreements, many of which remain in place today. It can feel like the railroads hold all of the cards; however, the following tips may be useful to consider as you develop strategies to reduce your rail transportation costs.
Here are 8 Key Strategies to Reduce Rail Transportation Costs
1. Strengthen Relationships
Working with a transportation supplier that has so much market power can be a challenge. Developing a cooperative approach is important in dealing with the railroads’ sales, marketing, and operations departments. You may also be able to utilize the relationships that a 3rd party rail logistics provider may have. Strengthening these relationships can in turn lead to reducing rail transportation costs overall.
The rail operations within your facility and your fleet management play an important role in establishing your company as a preferred shipper. Plant switching difficulties, and excessive demurrage or storage charges can be a negative. It’s important to avoid incurring finance charges.
2. Strategic Alternatives
Approximately 70% of industry locations are served by a single carrier. If you are captive, working together with that railroad may help you grow your business, as well as theirs. Options to work with alternative carriers or modes should also be considered, especially when developing new production or distribution sites. Can your product be transloaded? Is pipeline or marine transport a possibility? Oftentimes, supply chain and logistics are not part of the up-front evaluation for new locations, but investment in these types of strategic alternatives can pay off by reducing rail transportation costs.
When we assist clients in evaluating the rail transportation for new locations we start by looking at:
- Which carriers can be accessed.
- Condition and operational limitations of the tracks.
- The railroad’s service plan.
- In-plant track considerations including staging, loading, unloading, inspection, cleaning and maintenance.
- Potential rail origins, destinations, routing alternatives, and cost estimates from/to intracompany facilities, suppliers and customers.
3. Rail Transloading
Transload terminals provide a way to ship by rail when a location doesn’t have direct rail services. Transloads can also be used to gain access to a competing carrier when there are no switching or interchange agreements in place. Depending on the commodity, transfer locations can range from a simple team track with space for self-transfer to a fully staffed terminal with specialized equipment and facilities for your commodity.
4. Control Your Inbound
Suppliers focus on providing products. If you receive them on a delivered basis, the supplier may not aggressively negotiate the most competitive rate, or the embedded transportation rate they pass on to you may not be what they pay. When possible, take responsibility for optimizing your inbound deliveries yourself, or find a savvy third party that can do it for you. Controlling your inbound over time can help you reduce rail transportation costs in a big way.
5. Rail Equipment
Fleet assets often compose a significant portion of the transportation budget. Optimizing lease and ownership decisions, fleet sizing, and railcar configurations are an important part of reducing rail transportation costs. Make sure your railcar tracking software captures the data and provides reporting to support this process.
6. Shipping in Blocks or Units
When the railroad moves groups of railcars, whether as “blocks” or “trainloads” on the same bill of lading, there are economies of scale that can translate into rail transportation cost savings for you. With multiple car shipments, the railroad switches the cars as a group rather than individually, lowering their costs and improving railcar turnaround. That equates to reduced per- diem costs for shipments in system cars. If private equipment is used, the improved car utilization could lower total lease costs when fewer railcars are required. With increased shipment sizes, the railroads’ cost savings can be in the range of 5% – 25%.
7. Evaluate Administrative Costs & Centralize Transportation Procurement
We see some shippers manage 10,000 railcar shipments per year with a rail logistics staff of 1 or 2 people, while other firms with similar volume employ as many as 8. One of the factors affecting staff size is the use of automated tools in combination with efficient processes. In client surveys, our customers report about a 25% reduction in administrative effort when converting away from a manual process.
Besides making railcar management as efficient as possible, shippers should also maximize their control and leverage by centralizing rail logistics functions. Some companies allow their plants or subsidiaries to negotiate their rail contracts independently. They may be missing some of the analytical, strategic, and relational advantages that a centralized approach can provide.
8. Stay Proactive, Analyze and Constantly Improve
Logistics departments are fast paced environments. Throughout the day staff are busy fielding a constant stream of requests from their business, executing shipments, tracking railcars, and resolving problems. That makes it hard to proactively identify root causes, and put long term fixes in place. This is another reason firms use a 3rd party to handle the clerical work. New insights and significant savings can often be achieved by taking a step back and analyzing current processes. Techniques including KPIs, kaizen blitz, and value stream mapping can identify significant opportunities for reducing your rail transportation costs.