For rail shippers, understanding the costs involved in your freight is vital to knowing how to reduce those same costs. Freight costs, which have risen exponentially the last few years, are influenced by factors such as route selection, fuel prices, accessorial charges, demand cycles, and much more. By considering the interplay of different cost drivers, you can better forecast expenses, negotiate favorable rates, and make informed choices about routing, scheduling, and carrier selection.
In this blog, our rail logistics experts take a look at nine vital elements of freight costing, what they mean, and how you can use them to improve your rail shipping costs.
How Freight Rate Costs Affect Rail Freight Costs
Understanding freight rate costs is pivotal if you rely on rail carriers for your shipping needs. Grasping the nuances of these costs not only enables you to effectively budget and plan but also uncovers opportunities for negotiation and cost reductions.
Rule 11 versus Through Rates
If your rail freight must be shipped on more than one railroad, this is known as a multi-railroad shipment. There are two different methods of charging rates with a multi-railroad shipment: Through Rates or Rule 11.
Rule 11 refers to the billing practice where each carrier involved in transporting shipments invoices you separately. Understanding Rule 11 is crucial because it can influence the total cost of shipping, because costs like handling fees and rates can vary between carriers. Through rates refers to when one rate is charged from the origin carrier; then that carrier is responsible for paying any other carrier(s) in the movement.
If you ship via more than one carrier, consider switching to Rule 11 for your rates. Although Through Rates reduce administrative burdens, you don’t receive as much information about how much you’re really paying. Furthermore, you lose the ability to negotiate individually with each railroad.
Fuel Surcharge and Rail Shipping Costs
Fuel surcharges are additional fees rail carriers impose to cover fluctuating fuel costs. These surcharges can significantly affect your freight costs as they are tied to variable fuel price indexes. RSI Logistics offers a data visualization of those fuel surcharges here, or you can find them in tools such as Rail Impact®.
To lessen the sting of fuel surcharges, you can:
- Opt for longer-term contracts to lock in rates.
- Consolidate shipments to maximize fuel efficiency.
- Stay informed about fuel price trends to better anticipate surcharge changes.
The Railroad’s Costs
Railroads expenses range from fuel, labor, and maintenance of tracks and trains to regulatory compliance and technology upgrades. These costs directly influence the pricing of rail freight services, as they pass along costs to freight shippers on their network.
Understanding these operational costs can help you better understand your freight costs, and even empower you during negotiations. For example, knowing when railroads might be more eager to fill capacity could lead to lower rates. Or you can leverage periods of lower demand to commit to long-term contracts, which might be more appealing for railroads looking to secure steady revenue streams.
Revenue-to-Variable-Cost Ratio (RVC)
The RVC is a key metric that the railroads use to measure how much revenue the railroad generates compared to its variable costs, which include fuel, labor, and maintenance directly associated with each journey. An RVC above 1 indicates that the revenue covers the variable costs, generating a profit margin, while an RVC below 1 suggests that the service isn’t covering its variable expenses.
A railroad typically sets its profit targets based on what it currently earns from similar traffic. For instance, if existing rates for a specific commodity yield an RVC of 2.0, the railroad will likely aim for the same return with any new rate proposals, particularly if the new traffic could replace current business. Railroads often aim to surpass this ratio through a strategy known as margin-plus pricing, where they seek higher than normal profit margins.
While you don’t want to discuss RVCs with the railroad, by understanding them, you can identify opportunities to negotiate better rates, especially if you know a rail service is operating efficiently with a healthy RVC. This knowledge can be leveraged during off-peak seasons or for routes where railroads are keen to increase volume.
Optimizing Transit Time
Optimizing transit times entails a strategic approach to routing, scheduling, and environmental concerns, all of which contribute to minimizing delays and ensuring goods arrive at their destination swiftly and reliably.
Transit Days
Transit days refer to the amount of time taken for goods to be transported from the point of origin to the destination. This measurement can heavily influence total freight costs, with longer transit times generally increasing costs due to storage, handling, and capital tied up in goods in transit.
To reduce transit days, opt for direct routes when possible and leverage expedited shipping options for time-sensitive cargo. Effective planning and off-peak scheduling can also avoid delays. For instance, choosing a slightly more expensive direct route can lower overall costs compared to a cheaper, longer route with multiple interchanges.
Carbon Footprint
Carbon footprint measures the amount of greenhouse gas emissions produced by rail operations, particularly the route your rail shipment takes. Longer transit times and less direct routes often result in a larger carbon footprint due to increased fuel consumption.
To reduce your carbon footprint, consider using the most direct routes and combining shipments to maximize load efficiency. For example, shipping full rail cars instead of multiple less than full rail shipments can cut fuel use.
Routing Options and Minimizing Rail Freight Costs
In rail freight shipping, a route refers to the specific rail tracks and connections selected for transporting goods from their origin to their destination, with each route varying in distance, transit time, and potential obstacles or considerations. Selecting the right route is crucial for minimizing freight costs. An optimal route balances shorter transit times with lower operational costs.
Utilize tools like Rail Impact to evaluate potential routes effectively. Rail Impact offers insights into multiple routing options from origin to destination, allowing for a comprehensive comparison of times, distances, and associated costs. By analyzing these options, you can choose routes that offer the best mix of efficiency and cost savings.
Market and Carrier Information
Leveraging market and carrier information is important to securing competitive advantages in rail freight logistics. By staying informed about market trends, rate fluctuations, and carrier capabilities, you can make data-driven decisions that optimize cost, efficiency, and service quality.
Serving Carriers and SCRS
A serving carrier is a railroad company that provides freight service to your shipping and/or receiving facilities. The SCRS (Serving Carrier/Reciprocal Switch) database, accessible through tools like Rail Impact or Rail Info, lists these carriers, offering critical data for strategic planning.
Utilizing the SCRS database enables you to identify all possible serving carriers to facilities, which provides leverage in cost negotiations. For example, if two or more carriers can serve your shipping needs, this competition can be used to negotiate better rates or service terms.
Market Analysis Impact on Rail Freight Costs
A market analysis involves examining the trends and patterns of commodities being shipped—such as grains from the Midwest or automobiles from manufacturing hubs—the volumes typically transported, and the railcar types most used. This information, available through platforms like Rail Impact or Rail Info, provides valuable insights for strategic shipping decisions.
Leverage market data to understand demand cycles and average rates for your commodities. This knowledge assists in forecasting costs and identifying the most economical rail cars for your shipments.
Navigating the intricacies of rail freight costs involves a keen understanding of the myriad factors that go into building these costs. By utilizing resources like the SCRS database for carrier options and leveraging market data to inform shipping strategies, you can significantly enhance your negotiation stance. Remember, every element from route selection to the type of railcar impacts your bottom line.
We encourage you to apply these insights and strategies to your rail freight operations; and if you need to talk to our rail logistics experts about how to apply the strategies explored in this blog, reach out to us, or come join our free webinar where we take a look at how to negotiate with the rail carriers. Empower your rail logistics and reach out now.
