Dean Piacente, a PLG consultant and respected leader in the rail and intermodal transportation industries, shares his cost-savings and operational improvement tips for companies who utilize various transportation modes for their industrial commodities. His expert advice aims to help companies manage and/or eliminate costs during this recessionary period.
Tip #1. Leverage the recessionary market for more favorable freight terms
As the saying goes, “capacity is the enemy of price.” During a recession, capacity for an asset based modal carrier (truck, container, ship, rail, and barge) typically becomes readily available. Negotiating strength favors the shipper in this recessionary time, making it a potentially good time to negotiate new contracts, secure term (multi-year contract) agreements, and/or approach a modal carrier to reopen existing multi-year contracts.
Renegotiate Existing Contracts: In recessionary times, typical contract terms such as volume commitments can become very favorable for the carrier and punitive to shippers in the form of volume shortfall penalties. There are many times when carriers may be willing to consider reopening their contracts for more favorable terms now if there is a quid-pro-quo. Some approaches may include:
- Offer to extend the contract with additional commitments in the out years.
“For example, if your commitment was for hauling 100,000 tons each year for 3 years you may find the current environment will have you miss the current year commitment and your competitors who are not locked into contracts are getting the best lower freight prices in years. This can put your company at a significant competitive disadvantage.”
Approach your modal carrier and discuss an extension of the contract with potentially lower prices now and the ability to make up shortfall volumes later to prevent penalties. Your modal carrier may be willing to “pool” your volume commitment such that moving more volume in out years will make up for prior year shortages. In other words, a total contract volume commitment versus a commitment for each specific year of the contract is the optimal goal.
- Consider discussing out-year price escalators that are more favorable for the carrier in return for lower prices now. Alternatively, new volumes can be offered to the carrier in return for more favorable pricing.
- Exchange other contract terms that the carrier may not be pleased with such as performance guarantees with penalties for more favorable pricing now.
- Address the level of your volume commitment now to allow you to more readily take advantage of the spot market. Discuss key language in the contract that allows your company more flexibility. A barge contract, for example, that says 100% of the volume via all modes would be more restrictive than one that says 100% of the volume via barge.
- Negotiate a lower percentage commitment in a lane or overall with the carrier, thus allowing you to play the spot market and shift modes or carriers now. The carriers themselves may be interested in exiting certain lanes, and may be willing to forgive volume commitments on those lanes and allow you the flexibility to rebid them to other modes or carriers.
New Pricing and Contract Negotiations:
The current freight environment is a great time for shippers to secure favorable pricing and terms. For truck or barge centric lanes retaining a high percentage of the traffic as spot business certainly allows shippers to take advantage of lower pricing but there must be a balance with long term needs. Some approaches may include:
- In large strategic lanes it may make sense to lock in a higher percentage of volume with key carriers over a longer term but retain some significant percentage to play the spot market (60% term, 40% spot for example). As for new rail carrier contracts, carriers will be motivated to lock into term deals to secure more volume. Consider those terms important to your company and make a commitment to the carrier to secure those favorable terms and favorable pricing.
In many cases, the new era of emphasis on service reliability brings about favorable service in key lanes and carriers may be willing to include performance guarantees in return for volume and term. Just about everything is negotiable and this is a time where carriers will be flexible.
- Carriers may be willing to trade future price for additional volume. This may come in the form of a refund for stepped up volumes or lower prices for prior year increased volumes. Carriers will also find value in shipper commitments to spread volumes to high capacity days such as weekends.
“For example, customers using intermodal will find substantial yard and train capacity on weekends. There may be value you can negotiate if you can make this commitment.”
Tip #2. Monitor/meter inbound feedstock flows to reduce or eliminate storage and/or demurrage fees
- During a recessionary period where product sales slow or inbound feedstock is backing up due to slower manufacturing, railroad supplemental fees can add up quickly. A keen focus on shipment data, dwell in particular, will alert your logistics team to accessorial fees that can add up to tens of thousands of dollars per month very quickly.
- Close coordination between your logistics team and your internal sales team or procurement team can save thousands of dollars.
“There are many cases where a procurement team will buy a great deal of feedstock inventory ahead of an expected feedstock price increase from a supplier only to have rail cars backup “outside their plant fence” to the carrier’s rail yard for many days or even weeks exposing your plant to substantial storage or demurrage fees. For example, some carriers charge approximately $150/day for private car storage. Ten cars sitting for one week in a carrier’s yard due to congestion at the customer’s plant can incur over $10,000 in just one week.”
- Railroad yard space is scarce today and most Class I railroads fully utilize yards for through freight processing, so they do not want shipper cars sitting in valuable processing space. It is typically the receiving plant’s responsibility to control inbound flow and to pay storage and demurrage including on privately owned cars (e.g. tank cars, hopper cars).
“A typical box car receiver may also receive a small amount of privately owned tank cars. Storage fees on loaded hazardous material tank cars can be very high and can add up quickly. Ensuring plant personnel understand they are responsible for private car storage, just as much as they are for railroad controlled box cars demurrage, is important.”
- Forecasting arrivals can be very complex when numerous suppliers are used from many different origins, but this is where data tools and experienced logisticians can help control costs. Most transportation management systems provide this capability and most all rail carriers offer tools to assist as well.
- The most significant change you can make is simple coordination with internal parties and suppliers to ensure you are controlling inventory.
A best practice to consider is to have daily tracking reports established showing car inventory on-site, in the serving yard, and inbound to the plant from all suppliers, along with dwell alerts.
Tip #3. Re-optimize fleet sizing
- A recessionary period can bring about slower shipments and it can also bring about substantially lower rail car leasing prices and new car prices. It’s all about supply and demand as they say.
- In addition, most Class I railroads have promoted significantly improved line haul cycle times which could mean you have the ability to downsize your fleet to reduce costs. Your transportation management system should provide the facts on annual and monthly cycle times. If not, the railroads have tools to show you cycle times on a lane by lane basis by which to help make your fleet decision.
- Cycle times, lease rates, car specifications, volume forecasts, and network design are all critical elements for best practice in fleet sizing. Especially under the current economic conditions, rail shippers who depend on and manage private fleets need a sophisticated approach to account for all the variables and ensure that their fleets are “right sized” for business conditions and expenses are managed tightly.
Tip #4. Consider short-term modal conversions
- Most transportation providers are long on equipment. Railroads are no different. While railroads want contributory traffic on an “all-in” basis (including the ability to reinvest in their fleet), their fleets are a sunk cost and they may be willing to consider short term deals to earn revenue with deep discounts on the car costs.
- The same dynamic applies to truck and barge carriers. Shippers’ full portfolio of business, down to the lane-specific level, should be evaluated for savings and optimization opportunities through potential mode switching, to include transloading.
If this is the case, you would be wise to ensure pricing and term expectations on new lanes are clear and understand what the prices would be during more normal economic conditions.
Tip #5. Consider more distant markets or suppliers by rail
- Balancing your plant capacity with demand during slow economic conditions can be tricky. Railroads offer the advantage of capacity and cost effectiveness, hauling large quantities long distance at competitive prices vs. alternatives.
- Consider procuring your feedstock from alternative suppliers that have a lower price point and can be transported cost effectively and efficiently by rail. This cost effectiveness can also be an advantage for your outbound sales shipments. During times of economic change, commodity prices can fluctuate significantly which may potentially open up new sourcing locations. Such dynamics can sometimes leverage rail as well as be leveraged in order to obtain better negotiated rail rates.
In my experience there are always terms in contracts that carriers are not happy with and now is an excellent time to approach your carrier to identify areas where both companies can find a win. Carriers want you to remain competitive and be sustainable so there is motivation on their part to consider your concerns and needs. Be creative, be transparent, and be collaborative. Frequent and open lines of communication help build the relationship and trust, which is an essential component of securing the terms you want. The customers that are not willing to exhibit these qualities usually do not benefit from the best deals available which are achieved through negotiation. An environment of openness usually results in the most favorable terms and pricing.
Dean brings over 30 years of sales, marketing and financial planning experience to his teams, and was previously responsible for CSX’s largest industrial products segment. He is a respected leader in the rail and intermodal transportation industries and is experienced in strategies to help companies reduce costs, mitigate risk, improve service and gain competitiveness.
For over 15 years PLG’s team of experts have been providing logistics, design, operations, and strategy consulting for a wide range of clients. We have the most experienced team in the field of freight shipper consulting with the widest breadth and know-how covering all aspects of truck, container, ship, rail, and barge transportation. Our services include commercial negotiations, operations, engineering and design, costing, feasibility analysis, fleet sizing, and economics.