How Railroads Price Impacts Their Operating Ratio

The railroads always strive to lower their Operating Ratio, which is costs divided by revenue. This important metric, monitored closely by Wall Street, measures their efficiency through both decreasing total operating costs and increasing total revenue. Many cost-cutting efforts are underway, including the streamlining efforts of Precision Scheduled Railroading (PSR). To maximize their total revenue, the railroads focus on a different metric as they set their individual rates.

Revenue-to-Variable-Cost Ratio (RVC)

The Revenue-to-Variable-Cost Ratio or RVC is one of the most important calculations in understanding rail pricing. RVCs can help you determine how the railroads compare rates, and consequently how they price. This ratio can be thought of as the inverse of the Operating Ratio, but for a single lane and it is simply the railroad’s revenue divided by the operating cost for that lane. As we’ll explain, railroads use this ratio to help them set individual rates for differing lanes and commodities. Understanding what the railroads are using internally can help you assess your rates and see how they compare to others in the industry.

In the example below, the total rail revenue (rate plus fuel surcharge) is $8,331.67 and the railroads variable cost is $4,061.79. That equates to a combined railroad margin of $4,244.72 with an RVC of 2.05.

RVCs and Competing Rates

Of course, when setting rates, carriers consider factors other than cost, including risk/liability, modal competition, and rail competition. They will estimate what the market will bear, and pricing managers often have a desired return for each commodity.

A railroad’s targeted profit level will often be based on what it currently obtains from other similar traffic. For example, if a railroad has existing rates for a given commodity that produce an RVC of 2.0, the carrier is likely to require that same return on a new rate request, especially if new traffic could displace existing business. However, when making offers, negotiating rates, or changing routes, railroads may seek to exceed this ratio in a strategy called margin-plus pricing.

Margin-Plus Pricing

The railroads will strive to protect existing operating margins. When negotiating a rate, the railroad will consider how the traffic will affect their entire portfolio. Is it totally new volume, or does it displace other business? If a carrier is moving a commodity in one lane, and you request a rate for a new lane that would take volume away from their current business, they are likely to quote a rate to provide an equal or greater margin than they are receiving. This can be viewed as margin-plus pricing. Other factors such as traffic patterns and equipment utilization may also come into play.

Benchmark Your Rates

RVCs provide quick and easy comparisons for railroads to determine rates, but they can also be comparison points for you. After you have used RVCs to understand your rates relative to the railroads’ costs, you can use them to benchmark your rail transportation costs relative to your competitors.

Rail rate benchmarking utilizes commodity-specific yardsticks for evaluating rates. Variances from those yardsticks can give you valuable insight into where you have the most leverage to minimize your overall rail spend. Favorable variances may indicate market share growth opportunities, while unfavorable variances highlight areas in need of greater management attention. You do not have to gather this information yourself, either. The rate request tools in Rail Command® and cost analysis in Rail Impact organize this process and enable quick rate estimates.

You can also use sample freight bill data to make comparisons. The railroads are required to submit an annual sampling of their freight bills to the STB. The STB offers a public file of the data with confidential information removed. Railroads may mask contract rates, but not tariff rates. This data can provide useful benchmarks to negotiate better rail freight transportation rates depending upon the commodity and market size.

Captive vs. Competitive Lanes

As you might expect, railroad RVCs tend to be higher when there is no competition in the lane. Unfortunately, over 70% of locations are served by only one carrier. It can be difficult to negotiate pricing in these situations. Once you have analyzed RVCs across your route, you will be able to see where your rail freight rates are out of line. If you are being significantly overcharged, it may be time to explore other options.

There are a few other options available, even in captive lanes. Consider using a transload facility to expand your options. Or, compare other modes, or intermodal transit, such as trucking or marine transport, where possible. Strategic investment in alternative routes can pay off in the long run.

Bundled Pricing

Some shippers bundle their moves and ask railroads to bid on the entire package. Since rail rates are generally higher for captive locations and lower for competitive movements, it’s assumed that the overall railroad shipping rates will be lower. This also tends to simplify pricing, since it does not require analysis of individual lanes and moves. However, one railroad will probably control more of the route than another, and this carrier has the advantage in bundled pricing. Ultimately, the dominant carrier uses captive traffic to obtain more participation along competitive lanes. The largest railroads continuously drive up individual rates, while smaller carriers struggle to cover costs.

A more effective scenario is for shippers to use competitive traffic as leverage to secure better rail freight rates on their captive lanes. Evaluating current treatment by captive railroads can be a factor in determining which competing carriers provide the opportunity to bid on competitive lanes.

Another problem with bundling rates is that it enables rail carriers to include unreasonably high rail freight rates in the package. By separating and comparing individual railroad rates and possibly requiring them to be published in a tariff, the shipper retains the legal option to challenge them before the Surface Transportation Board.

Understanding railroad pricing can help you negotiate more effectively. In an environment with a significant amount of confidential contracts, comparing revenue-to-variable-cost ratios provides a way to evaluate rail rate reasonableness. Take a look at RSI’s Rail Impact software to understand RVCs and see where your rates rank.

Understanding Railroad Pricing and Reducing Rates

With an understanding of how railroads price, you can set up a strategy to better negotiate rail rates, and arrange alternatives where necessary. Data is a powerful tool in these negotiations. If your transportation costs are out of line, data can help you invoke strategies to reduce these costs. For example, assessing and reducing plant switching difficulties, and excessive demurrage or storage charges can be a helpful place to start. Assessing transloading options can also offer cost-saving alternatives. Railcar tracking software and proper fleet-sizing can also help reduce fees and delays. There are many options for reducing rail pricing and negotiating rates once you have a solid understanding of where your rates rank in comparison to others in your industry.

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In this blog we’ll take a look at three common reasons that businesses’ rail freight shipping strategy isn’t working – and what to do about that. First we’ll take a look at how inefficient planning and scheduling can impact your bottom line. Then we’ll transition into how rising costs, like demurrage or rail rates, can eat into your profits if you don’t manage them. And lastly, we’ll examine how neglecting versatile methods of rail shipping can see you missing out on opportunities for flexibility.

#1: Improving Freight Strategy through Efficient Planning and Scheduling

Understanding how to optimize planning and scheduling plays a vital role in improving your rail freight shipping.

Impacts of Inefficient Planning:

Poor planning can cause a domino effect:

Backlogged Tasks

Backlogged tasks can cripple your operations, causing delays and slowdowns. These slowdowns clog yards, disrupt schedules, and delay deliveries.

For instance, backlogged tasks due to poor planning and coordination can cause operational bottlenecks and lead to critical slowdowns in freight movement. Poor planning can cause car bunching and yard congestion, adversely impacting overall transit time and putting a strain on the entire operation, delaying deliveries, and disrupting the supply chain.

Missed Deadlines

Missed deadlines affect more than your schedule. They disrupt customer relations. Trust is lost, losing business follows, and costs to re-acquire those customers soar.

It’s not about missing delivery just once; the cumulative effect of delays can strain the relationship with customers. Lost trust leads to lost business, and replacing a lost customer can cost up to five times more than retaining a current one.

Poor planning in freight operations does have lasting implications. But there are solutions.

Strengthening Planning and Scheduling:

Optimize your operations with:

Logistics Software

One of the ways to mitigate the issues associated with inefficient planning and scheduling is by leveraging modern logistics software that enhances your scheduling process. Integrated digital tools can provide a complete view of the supply chain, enabling more intelligent rail shipping, real-time adjustments, and reducing the need to schedule truckloads to replace delayed railcars.

For instance, software like RSI Logistics’ Rail Command provides a comprehensive view of your supply chain. You can strategically plan your shipments and make real-time adjustments based on data-driven insights.

Predictive Analytics

Predictive analytics is another critical tool that can significantly enhance planning and scheduling operations. By accurately anticipating needs based on historical data and forecasting, businesses can optimize resource allocation, avoiding underutilization or over-shipping. This use of data analysis not only makes the logistics process more efficient but also reduces waste and boosts profitability.

Sensor data from trains and railcars, combined with AI-powered analytics, can provide actionable insights that can predict potential bottlenecks or disruptions and thus enable more effective planning and scheduling.

#2: Improving Freight Strategy by Managing Rising Costs

Rising costs, such as demurrage charges or rates, considerably affect operations in the rail freight industry. Understanding these charges and how to control them is crucial to improving your rail freight shipping.

Implications of Rising Costs:

The escalation of costs like demurrage or freight rates can lead to significant financial burdens:

Increased Demurrage Charges:

Excessive demurrage charges can direly impact your cost structure.

For instance, delays in loading and unloading cargo, resulting in railcars spending excessive durations on customer sidings, can lead to elevated demurrage charges from the railroads. These unexpected expenses can inflate operational costs and eat into your profit margins.

Escalated Freight Rates:

Rising freight rates can upheave budget forecasts and strain relationships with customers.

Higher rates mean increased cost of freight transportation, potentially leading to higher prices for customers. This sudden rise can strain customer relationships and potentially drive them towards cheaper alternatives.

Controlling these rising costs requires careful strategy and the right tools in place.

Strategies for Mitigating Costs:

Here’s how you can control these escalating charges:

Negotiating Rates:

Skillful negotiation with railroads can play a crucial role in controlling freight costs.

Before agreeing to any rate hikes, discuss these with your railroad representatives. You may be able to negotiate rates, adjust shipping routes, or at least gain a comprehensive understanding of any cost increases.

Streamlining Operations:

Optimizing your processes can help reduce demurrage charges.

For example, use software like RSI Logistics’ Rail Command to gain a clear view of your railcar utilization and storage. This helps in avoiding holding railcars longer than necessary and thus reduces demurrage charges.

Leveraging Data:

Harness the power of rail data to foresee and plan your freight movements effectively.

By using data-driven insights, you can optimize your planning and forecasting and manage your railcar inventory efficiently, helping mitigate the risk of inflated demurrage costs.

While escalating charges like demurrage and freight rates are challenges you’ll encounter, effective strategies can help in controlling these without compromising your operations.

#3: Improving Freight Strategy by Considering Versatile Transportation Methods

In the rail freight industry, the failure to consider and utilize versatile transportation methods can constrict growth and impede efficiency.

Consequences of Overlooking Complementary Transportation Methods:

Overdependence on a single transportation mode can bring about constricted flexibility and potential underutilization:

Restricted Transport Flexibility:

Total reliance on direct one mode can limit your transport flexibility.

For instance, being solely dependent on direct rail transportation might limit your flexibility to react to sudden changes or disruptions. Any hitches on the rail network would directly impinge on your operations, making it more difficult to swiftly adjust or modify transport plans.

Underutilization of Multimodal Transport:

Discounting the potential of multimodal transport can lead to missed opportunities to adapt to market dynamics.

For example, by neglecting the integration of other transportation modes like transloading to truck for final mile, you might be missing out on the chance to ensure smoother freight movement or the ability to service customers who are not rail served.

However, these constraints can be worked around with careful planning and strategic utilization of available options.

Strategies to Diversify Transportation Methods:

Consider the following to balance and diversify your transportation methods:

In-depth Evaluation:

Identifying the potential benefits of incorporating transloading into the operational system through thorough evaluation.

For example, conducting a comprehensive examination of your current operations can reveal potential areas where integrating transloading can lend benefits. Transloading, the process of transferring freight from one mode of transport to another, offers opportunities for increased flexibility, enhanced reach, and reduced freight spend on long-haul trucking.

Data-Driven Decision Making:

Optimize the selection and management of multi-modal transport pathways by focusing on data-driven decision-making.

Utilize the power of data to get insightful information on the efficiencies and potential cost savings of different transport modalities. For instance, analyzing historical transport data related to cost, time, and performance can help in identifying optimal multi-modal transport pathways, which could provide a significant edge in a rapidly shifting market.

Professionals operating in this industry should be focusing on improving their rail freight shipping. Undertaking a rigorous analysis of common challenges is not only a requisite to resolve pain points but also essential for ensuring profitable growth.

Three prevalent issues – inefficient planning and scheduling, rising costs like demurrage or freight rates, and neglecting versatile forms of transportation – each contribute significantly to reduced operational efficiency. As we’ve explored, the utilization of contemporary logistics software, data-driven decision making, effective negotiation strategies, and adopting a multi-modal approach can mitigate these issues.

Harnessing modern technologies and applying data analysis can yield operational improvements, enhance performance, and give you a competitive edge in this fast-paced industry. By addressing these problems, companies can improve rail freight operations, thereby reducing costs and enhancing customer satisfaction.

Remember, the key lies in implementing these strategic measures effectively and continuously monitoring, reviewing, and fine-tuning them to align with ever-evolving industry dynamics. As the saying goes, ‘knowledge is power’, so let the insights from this blog guide you on your journey to operational excellence in the rail shipping industry.

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The Imperative of Rail Freight Tracking and Tracing

In the realm of rail freight, the significance of proficient tracking and tracing operations cannot be overstated. While these processes may seem straightforward, they are, in reality, beset with a number of challenges that can hinder operational efficiency and profitability.

First and foremost, the sheer geographical expanse of rail networks makes it difficult to maintain visibility of all railcars. Traditional methods of tracking—while functional—often rely upon periodic updates rather than delivering a continuous stream of data. This lag in information can result in mismanaged resources, delayed operations, and ultimately, lost revenue.

Secondly, the industry grapples with the issues of manual data entry errors and fragmented communication platforms. Discrepancies in data analysis and reporting can translate into misinterpreted or delayed information, creating inefficiencies that can take a toll on operational productivity.

Lastly, the dependence on legacy tracking systems poses a challenge. Such systems often lack integration capabilities with modern technology platforms, constraining the rail freight operations to be reactive rather than proactive.

These challenges, if not addressed promptly, can have large cost and efficiency implications. Inefficient tracking systems can result in irregularities in the transit – such as delays and misplacements – and administrative errors. These operational setbacks not only disrupt service quality but also escalate operational costs including labor, fuel, and maintenance overheads.

Highlighting the financial impact, an inefficient tracking system can reduce a company’s efficiency, which can in turn directly hit its bottom line. Being competitively marginalized in an industry where speed, timeliness, and reliability are paramount can lead to lost business opportunities and severely limited growth prospects.

Data Analytics: Unlocking Advanced Tracking Capabilities

As we delve deeper into the era of digital transformation, data analytics becomes an essential player – a strategic enabler in the freight rail industry. But what is data analytics exactly in this context?

Data analytics, in the most basic terms, involves the study of raw data to uncover meaningful trends, patterns, and insights. By focusing on the freight rail industry as an analytical framework, we can tailor these insights to bolster the efficiency and effectiveness of rail operations.

Let’s explore the direct applications and how they can augment traditional tracking and tracing methods:

Predictive Analytics

Data analytics is not solely about understanding the ‘now’; it’s also about anticipating the ‘next’. Predictive analytics, leveraging machine learning algorithms, can identify potential issues before they emerge, allowing rail operators to make proactive, not reactive, decisions. For instance, by examining historical data, predictive models can alert rail professionals about possible component failures, railcar availability, or impending traffic bottlenecks, allowing for preemptive maintenance planning and optimal allocation of resources.

Real-Time Monitoring

When it comes to rail freight tracking, time is literally money. And real-time data analytics is a game-changer in clock-bound operations. By analyzing data as it is generated, real-time analytics enables constant visibility into the location and status of each railcar, fostering quicker decisions and immediate responses. No more waiting for periodic updates – this real-time data-driven approach ensures consistent up-to-the-minute intelligence, significantly reducing the risk of delays and their associated costs.

Benefits of Using Data Analytics in Rail Tracking

By harnessing the power of data analytics, the rail freight industry can unlock remarkable gains in efficiency, visibility, and cost control. These benefits can revolutionize the way organizations manage their railcar tracking and tracing processes, ultimately improving overall business performance.

1. Improved Efficiency

Advanced analytics algorithms, when integrated into existing tracking systems, can markedly enhance the efficiency of rail freight operations. By analyzing vast data sets related to routes, schedules, and cargo details, these algorithms facilitate data-driven decision-making in several key areas:

• Optimized Route Planning: Machine learning-powered algorithms can analyze historical data and real-time situational factors, such as weather and traffic conditions, to design the most efficient route for each railcar. This results in minimized transit times, better resource utilization, and ultimately, increased productivity
• Bottleneck Detection: By identifying potential chokepoints in advance, data analytics empowers rail professionals to take proactive measures to prevent congestion in their rail networks. This circumvents disruptions to service quality and helps maintain continuous operations.

2. Enhanced Visibility

The utilization of data analytics in rail tracking offers unparalleled visibility into railcar movement, granting industry professionals an in-depth understanding of their assets’ status and location. Real-time monitoring of railcars provides several benefits:

• Timely Decision-Making: With continuous access to up-to-date information, rail professionals can stay agile in their decision-making, responding promptly to unforeseen events or concerns.
• Improved Stakeholder Communication: Enhanced transparency through real-time analytics eases communication with clients, suppliers, and other stakeholders, ultimately fostering well-informed collaboration and stronger relationships.

3. Cost Control

Strategic employment of data analytics in rail tracking has a direct impact on cost savings and returns on investment. By streamlining operations and mitigating risks, rail shippers can unlock tangible economic gains:

• Reduced Operational Costs: Identifying inefficiencies in rail operations helps lower overheads related to labor, fuel, and maintenance expenses.
• Enhanced Risk Management: Mitigating risks through proactive monitoring and predictive maintenance reduces the likelihood of costly accidents and delays, safeguarding a company’s financial position.

The transformative power of data analytics in railcar tracking and tracing is well-documented in numerous case studies, proving its potential to generate tangible results within the freight rail industry.

Not Required, But Essential: The Case for Voluntary Adoption of Data Analytics

Even though data analytics may not be mandated by legislation in rail freight operations, its adoption offers innumerable benefits that can revolutionize the way businesses manage their supply chains. Data analytics delivers actionable insights, aiding in critical decision-making processes, thereby improving operational performance and maintaining cost control. Early adopters of this technology gain a significant competitive edge, allowing them to optimize operational strategies and surpass their competition in this incredibly complex transportation mode.

Leveraging the potential of data analytics facilitates real-time visibility, predictive maintenance, and enhances asset utilization across the rail network. By translating raw data into meaningful interpretations, rail freight companies can make informed predictions about potential problems or bottlenecks and address them proactively before they elevate into more significant issues.

Rail Command^®: Your Partner in Efficient Rail Freight Tracking

At RSI Logistics, we empower organizations with pioneering software solutions engineered to harness the full potential of data analytics, refining the art and science of rail freight tracking. Our platform, Rail Command^®, features comprehensive functionalities including real-time tracking and highly accurate analytics, designed to cater to the dynamic needs of the modern rail industry.

We employ advanced algorithmic models to analyze data, providing dynamic reports and delivering actionable insights straight to your dashboard. Thus, Rail Command^® acts as your knowledgeable partner, offering valuable insights and solutions, enabling you to tackle challenges head-on, and improving your operational efficiency, fleet utilization, and overall cost control.

Beyond these options, Rail Command^® offers a suite of services tailored to your specific needs. From shipment visibility, route optimization to fleet maintenance, our software solutions provide the data-driven insights required to streamline operations and enhance profitability.

At RSI Logistics, we focus on more than just offering an outstanding product—we are committed to creating a productive partnership with our clients, helping you navigate the labyrinth of rail logistics with confidence and precision. Our goal is to revolutionize the rail freight industry, by transforming complexity into simplicity, and challenges into opportunities.

Data analytics presents a valuable opportunity for rail freight companies to advance their tracking and tracing capabilities, driving efficiency, visibility, and cost control. By adopting these advanced solutions and partnering with knowledgeable experts like RSI Logistics, shippers can ensure a profitable future in today’s ever-evolving rail space.

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