A version of this article was originally published in Journal of Commerce.
Every one of the freight shippers we spoke with in a survey on freight preferences a few years ago preferred the truck experience to that of rail. These shippers, however, also unanimously voiced the desire to put more freight on rail, given its lower cost, enhanced sustainability, and capacity advantages. But while shippers have become increasingly sophisticated and demanding of their transportation providers, Class I railroads have failed to adapt and provide reliable, predictable service. The result? Shippers are choosing to divert mode-flexible freight to truck.
Balancing tonnage and costs through daily adjustments
At a basic level, there are two ways to run a railroad. The first is to build on the principle of planned operations, with execution relentlessly focusing on adherence to the plan. Currently, the most vocal railroad for this strategy is Canadian National (CN), with its “make the plan, run the plan, sell the plan” mantra. CN also is taking the most variable part of the traffic base — bulk or unit trains — and installing new processes with its customers to move these trains in concert with its intermodal and manifest scheduled trains (known as bulk train slotting).
Other railroads talk about scheduled operations, but not as the central tenet of their operating strategy, raising the question of where their commitment to “run the plan” starts and stops. Without tackling the problem of unscheduled bulk trains simultaneously, a railroad will face substantial challenges to delivering on-time service.
Just think about what would happen if unscheduled charter planes could simply show up and take gates at busy airports without advance notice or a scheduled arrival slot. It would not be a formula for happy passengers, and the ripple effect of gate congestion would be operationally devastating. Of course, airlines and their passengers would never tolerate that.
The second way to run a railroad is to adjust the plan each day in pursuit of cost efficiency and maximum tonnage. This can involve combining trains, canceling trains, or other adjustments that alter how railcars are handled, to save on crews and locomotives. But failing to reposition these assets in active service to their next assignment can generate excess delays and repositioning costs, lower overall asset utilization, and increase yard congestion and switching.
The perils of disrupting rail operations
The most troubling part of an operating strategy that constantly tweaks the plan is that it guarantees shipment transit time for any given dock-to-dock pair will be highly variable. This variation in transit time can span days, not hours. It’s not surprising to hear shippers say this is the result they are seeing, especially in merchandise networks. It is not a sustainable supply chain result for many commodities — making truck all the more appealing.
Understanding the true cost of variability in a highly interdependent, geographically dispersed network is difficult. Standard rail costing systems fail to capture the full downstream effects of disruption and randomization. What looks like a direct cost savings (for example, cutting four crew starts by canceling a train) can lead to a negative spiral of unintended consequences. In its worst form, this can drive business off rail, as well as raise network operating costs.
Railroads could unlock not just growth but greater productivity, velocity, reliability, and cost reduction by running truly scheduled railroads – not tonnage railroads in disguise. Continuing to rely on a tonnage rail operating strategy will further fuel the exodus of shippers to truck and increase total system costs. Over the long haul, railroads could be relegated to moving only low-value freight that has no other choice, while the shippers of such freight will need more costly supply chain strategies to absorb rail’s high transit time variability.
Read the original piece, here.