Evaluating rail locations and their effect on your bottom line

Location, location, location.

This is the mantra of many real estate professionals, and the idea holds true for rail and truck shippers and receivers.

Many shippers are faced with transportation charges that range from a high percentage to a cost that far exceeds the value of the product they’re shipping or receiving. In some instances, the cost to transport a product can be egregiously higher than the value of the product.

OK, but what’s location got to do with this? Well, everything.

Why location matters

Most shippers and receivers are locked in to their location. The capital infrastructure, water and electrical requirements, permitting, current land restrictions and, in some cases, lack of available land resources restrict a potential shift in location.

Still, this doesn’t mean you can’t shift your transport options via a transload operation, rail buildout, a change in routing or through another means.

A competitive alternative is often worth hundreds to thousands of dollars per load transported. And there can be a difference of around 15 to 20 percent in the cost of transportation between competitive and captive options.

Rail rate cost alternatives

Let’s consider a real-life example of a few alternatives for a captive shipper. In this example, the rail shipper is captive on a major Class I and ships via Class I railroad interchange to another Class I, with a shortline railroad terminating the movement.

The origin of the product is not presently located on rail and is trucked to the originating Class I via the closest highway miles, minimizing trucking costs as much as possible. The movement has a host of interchange selections, but the actual interchange is driven by the originating Class I without regard to overall cost to the shipper.

The final rate is quoted on what is called a “through rate” basis where the originating carrier collects the transport costs for all three carriers and does an interline settlement with them. A “through rate” basis is defined as a rate applicable from point of origin to destination. It may be a joint rate with other carriers or a combination of two or more rates.

Here’s a look at the legwork taken to determine the options available to this shipper:

Option 1. Truck transfer to competitive origin rail location. After researching this option, a potential net savings of $1,650 per railcar, or 15 percent of the total rate, is discovered. This includes an extended truck haul of 234 miles, which lengthens the supply chain. This was a find, and most cases don’t turn out this positive.

Option 2. Determine Rule 11 pricing. Rule 11 rates should reflect the most competitive lanes of each carrier. In this real-life example, 25 percent on rates, or $2,750 per railcar load, can be expected to be saved on a total rate of $11,000 per railcar. Rule 11 rates require a lot of digging to understand the interchanges and routes available.

Option 3. Truck transfer to a competitive destination location. A truck transfer lowers the through rate by 5 percent, or $550 per railcar. The downside is it creates more work for everyone involved in the supply chain.

Loading and destination site alternatives

When it comes to sharing loading sites on most Class I railroads, there cannot be more than one shipper per private or railroad-leased track, unless the track is designated as a team track for use by multiple tenants who all agree on the use structure or an actual transload site.

What makes this problematic is there are very few unused tracks in today’s rail system, making access for a private shipper looking to ship from a private or railroad-leased track difficult.

Several alternatives are explored in our real-life scenario, though. For example, share a track nearby that is underutilized, transload at another industrial track that is privately owned, or truck to a transload site that’s a couple hundred miles away.

Another potential alternative: complete a track buildout. But at a cost of $1 million to $1.25 million per mile, that option might come off the table early. Still, there are options to consider.

Option 1. Contract for a private track to be built. The pros here are that the track gives unrestricted use to the customer and provides a railcar storage location that’s free of demurrage. This also simplifies OT5 registration and tells the originating railroad you’re serious about the traffic. A private track can also be designed to accommodate your loading requirements and stockpile infrastructure.

At the same time, that $1 million to $1.25 million per mile can be difficult to justify based on the volume of traffic.

Option 2. Attempt to use underutilized track that already exists. There are a few advantages here. This option brings more traffic to the location, thereby requiring more regular service. Also, the cost isn’t prohibitive, and lease rates when compared to alternatives are reasonable.

There are cons here, though. The steps required to enable sharing a track with an existing shipper are long and arduous, requiring many parties. This option also requires getting the railroad involved at the industrial products level, as well as at the marketing and sales level.

This route can be a time-consuming task requiring six months to get a project in place. Also, other shippers would potentially have OT5 storage issues.

Option 3. Research an offsite transload. Consider the pros of this route: negating any issue with track space or product storage capacity; lowering capital costs when compared with a build; and negating any track lease responsibility or liability.

One con, however, is that an offsite transload requires more coordination of resources. An offsite transload is also the second-lowest cost alternative and subject to moving variables such as truck capacity and railcars being out of position.

Takeaways

The examples listed here are from real-life scenarios. While it’s fun to look back and claim success, evaluating transportation options is very much an ongoing effort. Even after a plan is implemented, tedious care must be given to maintain transportation options.

Rates change, interchanges become more or less fluid, routing moves around and outside factors such as accessorial tariffs become more restrictive. Be sure to do an in-depth annual review of your situation – you might be surprised what you find out.

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Darell Luther is CEO and founder of Tealinc.