One of the most critical yet challenging steps of any logistics professional’s job is securing favorable freight rates. This is especially true in the realm of rail transportation, where freight rate negotiation can be as complex as it is consequential.
Rail freight rate negotiation involves a nuanced process of discussions between shippers — who need to move goods — and rail carriers — the entities that provide the transportation service. This process isn’t just about haggling over prices; it’s an art that requires a deep understanding of numerous factors including but not limited to the volume of goods, the type of commodities being shipped, and the service requirements. Spending effort to research, analyze, and improve these factors can save you time and money in the long run.
This blog aims to demystify the process of freight rate negotiation in the railway sector. From here we’ll look at some insights into how you can prepare, strategize, and engage in discussions with rail carriers to secure the best possible terms.
What is Freight Rate Negotiation?
Put simply, freight rate negotiations refer to the process of discussing and agreeing upon the cost of transporting goods via carriers – in this case, rail carriers.
This process usually involves shippers (those who have goods to transport) and railroads (the service providers) trying to settle on a fair price for the movement of freight over rail lines. The negotiation takes into consideration factors such as the volume of goods, the distance traveled, the commodity type, and service requirements. However, though the discussion is based on these factors, it is still a negotiation, and approaching it as such can help you secure better rates and terms that align with your logistics needs and budget constraints.
During negotiations, several elements can play a crucial role, such as fuel surcharges, accessorial charges, payment terms, and escalators. It’s important for you to understand these elements, as they can have a large impact on the total cost of shipping freight beyond simply the linehaul rates. For example, fuel surcharges are additional fees to compensate for fluctuating fuel prices, while accessorial charges are fees for extra services not included in the linehaul rate. These, and other elements, are set by the railroad during the negotiations.
Data is a critical asset in these discussions, as it supports a well-founded case for you to negotiate. Pricing data — including tariff rates, contract rate data, and understanding the Revenue-to-Variable-Cost Ratio (RVC) — can provide insights into which rates may be inflated and what could be a reasonable starting point for discussions.
How Freight Rate Negotiation Works
The actual process of freight rate negotiation between you and railroads involves a strategic and multifaceted approach, where understanding each other’s needs and capabilities plays a key role. Before the process begins, you should take the time to prepare a compelling business case to present to the railroad. This involves gathering detailed data and insights, including tariff rates, contract rate data, historical rates for other lanes, and understanding the railroad’s pricing strategies.
Railroad’s Price Presentation
Railroads often begin by presenting their initial rates. They have based these on various factors such as the type of goods, volume, service requirements, and distance. They might base their pricing on targeted profit levels from similar traffic, using metrics to assess the profitability of new rate requests against existing business.
Shipper’s Response Options
Once the carriers have presented their price, you as the shipper have several strategies and tools at their disposal to negotiate better terms. These include evaluating rail spend by railroad, considering the competition and the rail market, and determining where leverage exists.
Strategies to Improve Your Freight Rate Negotiation
Now we’ll take a look at three strategies that you can get started on today:
- Evaluate Your Rail Spend by Railroad
- Understand your Competition and the Rail Market
- Determine Your Leverage
It is important to note that the strategies we will take a look at now are proactive measures, and usually prepared ahead of any upcoming negotiations.
Evaluate Your Rail Spend by Railroad
Determine Profitability and Your Value
To highlight your significance to the railroad’s business, start by analyzing the volume of goods you ship on each lane, as well as where your biggest spending lies. Estimating the profitability of these lanes for the railroads can provide leverage in negotiations, as it reveals how much they stand to lose if your business goes elsewhere.
Understand Rate-Setting and Identify Outliers
To understand various cost components like base rates and surcharges, break down your current freight rates and then compare these to the general market. This analysis will help pinpoint any rates that are significantly higher than what is standard, indicating areas where there’s room for negotiation.
Benchmark and Focus Negotiations
Assessing the quality of service you receive and how your rates stack up against industry benchmarks enables you to pinpoint where you might be getting less value for your spend. This insight helps in making informed decisions on which railroads deserve more of your business and guiding your negotiation efforts towards improving terms on critical lanes or rates that are out of line with industry standards.
Understand Your Competition and the Rail Market
Consider Car Ownership, Size, and Weight
Knowing the equipment and logistics strategies of your competitors is crucial. If they use private railcars, opt for larger capacity cars, or maximize each car’s weight load, they might secure more favorable rates. Analyze if utilizing similar strategies could lead to cost savings for your freight operations and create an edge over competitors in rate negotiations.
Determine Your Railroad’s Market Share versus Competing Railroads
It’s important to gauge your railroad carrier’s position in the market compared to its competitors. If the railroad you are negotiating with is experiencing a decline in market share, this could indicate a willingness to negotiate better rates to retain and grow their business alongside yours. Leveraging this understanding could give you a substantial advantage in discussions about rate reductions.
Communicate Competitive Factors to Railroads
When negotiating rates, it can be beneficial to explicitly communicate to the railroad how certain rate adjustments are critical for you to maintain a competitive edge. If they are aware that offering you more competitive rates could be the key to preventing a competing rail carrier from capturing your business, they may find it justifiable to provide concessions that align with your needs.
Determine Your Leverage in Rail Freight Negotiations
- Shifting Traffic Possibilities:
- Explore the feasibility of diverting your shipments to alternative rail carriers or different transportation modes (e.g., road, barge). If these competitors or other modes are feasible and cost-effective, having that knowledge will help in negotiations.
- Analyze the benefits of transloading goods to different carriers partway through their journey. Switching to truck to access another carrier can, in some cases, allow you to potentially leverage more competitive rates or services.
- Captive Lane Treatment:
- Keep in mind the premium pricing often associated with captive lanes (where only one railroad operates) when assigning lanes with competition.
- Use the potential of assigning competitive lanes as a bargaining chip, especially if your current provider’s rates in captive lanes are unreasonably high.
- Rule 11 vs. Thru Rate Position:
- Rule 11 rates pertain to interline shipments that don’t have “through” pricing – this means that each carrier along your freight’s route will create freight bills for its own portion of the movement. If it is a Through rate, you pay the origin carrier, and they are responsible for paying other carriers utilized in the interline shipment.
- Assess your company’s usage of Rule 11 rates versus Through rates to identify opportunities for direct negotiations and potentially better rates with carriers.
- Identify Target Lanes to be in an Informed Position:
- Pinpoint specific lanes where you aim to secure rate reductions, particularly when your contract renewals come due.
- We recommend focusing on lanes where you have substantial volume, lanes served by multiple railroads, or lanes essential to your operations. Making these a priority in negotiations could help you start to see savings quickly.
- After your analysis, start the negotiation process with lower, reasonable numbers based on being in an informed position.
Advanced Rail Freight Negotiation Strategies
If you’re a logistics professional in the rail industry, analyzing the minutiae of your rail logistics and strategically approaching your freight rate negotiations can be pivotal. The strategies that we have explored are a good starting point.
Furthermore, the strategies we have explored are intended to be proactive – done in preparation for negotiations. However, there are also strategies that can be employed reactively, in answer to rail carrier’s activities.
However, your negotiations and rail rates can be further optimized with the right tools and knowledge! This is where Rail Impact® and the rail experts of RSI Logistics can help. Utilizing Rail Impact makes exploring these strategies more efficient and effective, as it provides an in-depth analytics solution that is geared towards enhancing your rail rates knowledge and negotiation outcomes.
If you’re interested in delving deeper into these strategies, or exploring more advanced negotiation techniques, join us for our upcoming “Railroads Will Negotiate” webinar. Hosted by the RSI Logistics rail rate experts, this session will provide you with invaluable insights into freight rate negotiation strategies that can save your company money and improve your service agreements. Don’t miss the opportunity to learn from the best in the business.
Register now for the webinar and start transforming the way you negotiate in the rail industry.
Navigating the details of freight rate negotiation can be difficult, and being successful requires a strategic approach, as well as coming armed with in-depth knowledge and a good understanding of both your needs and those of the rail carriers. By thoroughly preparing, evaluating your rail spend, understanding the market, and determining your leverage, you can enter negotiations with a strong position.
Remember, the goal is not only to reduce costs but also to ensure that the service aligns with your logistical requirements and business objectives. Embrace these strategies, and you may find that your freight rate negotiations not only become more manageable but also more productive.
