The relationship between railroads and shippers is “dysfunctional” and is not set up for 21st century transportation needs, according to a recent study, and reported by supply chain logistics publication DC Velocity. Following is the staff report prepared by DC Velocity:
The tension [between railroads and shippers] is hitting shippers’ costs, margins, delivery times, and inventory carrying costs, according to “Rail Optimization: Carrier/Shipper/Investor Relationships,” a white paper produced by the supply chain consulting firm Maine Pointe (downloadable from the link below) in association with the Center for Railway Research and Education at The Eli Broad College of Business, Michigan State University.
These transportation imbalances between carriers and shippers are caused by an array of factors: unpredictable economic growth, a shortage of truck drivers, increases in environmental restrictions and reduced capacity across North America’s truck and rail network, the study found. At the same time, [rail] carrier executives are loathe to commit scarce capacity in a controlled price environment for an extended period, even as earlier track and network reductions have left the system with insufficient slack to cope with upticks in demand or with increasingly unpredictable weather situations, the paper said.
Besieged by those forces, carriers, shippers and investors may face an uncertain future as the “Amazon effect” takes a grip and buyer behavior continues to change, along with freight traffic patterns and an increasing level of complexity in the supply chain, the researchers said.
“Freight tonnage will grow by 40% by 2045, and rail will have to play a significant role in creating this extra capacity,” Nick Little, director of Railway Education at the Center for Railway Research and Education at The Eli Broad College of Business, said in the report. “Yet over the past several years, the relationship between shipper and [rail] carrier has become increasingly dysfunctional.”
The paper found that a breakdown of communications between rail organizations and shippers often existed due to yards being closed or staff being reduced.* Meanwhile, shippers expressed a desire to have the same level of information and communication on their consignments as consumers can receive when ordering on line from Amazon.
An essential component in bringing rail transportation into the modern era will be digital transformation, specifically applied to data and decision-making, the paper said. According to the white paper, railway business models will need to move toward a more advanced supply chain management model characterized by end-to-end supply chain integration and value creation, as railroad leaders and managers acquire new skills and knowledge.
To correct the problems, carriers and shippers should take three steps, the paper concluded: First, drive collaboration and improve relationships, with a goal to find mutual cost savings, margin improvement and growth opportunities. Second, evaluate their buy-make-move-fulfill supply chains to eliminate bottlenecks, enhance throughput and optimize the size of shipments. Third, put these programs into practice across the entire supply chain, from the client’s client, to the shipper, through to the carrier and its supply base.
*Editor’s Comment: Yard closures and staff reductions are a significant component of so-called Precision Scheduled Railroading (PSR), meant largely to “increase shareholder value,” probably one of the most over-used Wall Street-friendly terms in the rail industry today.