How Well is Rail Intermodal Integrated into Supply and Value Chain Behavior?

Written by Nicholas Little, Director Railway Education, Center for Railway Research and Education, Michigan State University Eli Broad College of Business
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The container shortage Contributing Editor Jim Baze talks about in his commentary, “Enough Intermodal Market Hype!” is fast becoming a big issue. China’s box production lead time now exceeds three months and is growing. This may be in part due to the deficit of boxes going back East from West Coast ports, partly because they aren’t getting them from the Midwest, as his numbers show. “Why not?” is the important question.

My take on Jim’s commentary is that the disruption in supply from China during its early-year COVID-19 lockdown caused inventories to drop. This affected not just consumer durables and other FMCG (fast-moving consumer goods, also known as consumer packaged goods, or CPG) items. It reduced component availability. This was a problem at the time, because North American firms in non-essential industries were then in lockdown. However, supply chain managers wanted to protect future supplies, so they did the whiplash, knee-jerk reaction of over-ordering and building protective “safety stock” inventory for the future.

This increase in demand has been compounded by an expected earlier start to “holiday season” peak demand envisaged by many firms trying to learn how to manage production, distribution and inventory, let alone consumer delivery in a brave new world dominated by e-commerce and customers’ expectation of immediate fulfillment and instant gratification. There’s clearly a new marketing drive on the customer experience (CX) dominating CPG and service firms’ behavior. We also saw demand-pull impacts from the first round of stimulus checks making some electronic goods (e.g. flat screen TVs) scarce in retail outlets. On top of that, working from home has increased demand well beyond expectations for things as diverse as comfortable office chairs, webcams and printer cartridges.

Inventories are fluctuating, and sales of existing warehousing space exceed expectations. Some firms seem prepared to pay demurrage on containers as a cost-effective short-term storage solution. All this amounts to a significant disruption in short- and mid-term supply chains, making forecasting more difficult than in “normal” times. Predictions based on data and history-driven algorithms seem unreliable. On top of that, add in socio-economic issues we face in this unusual year, which just happens to include a Presidential election.

Increasing e-commerce is changing the mix of carload vs. LCL (less than carload) and LTL (less than truckload) traffic. Firms may also be shifting to containerization due to its flexibility. Distribution centers are being built with smaller footprints (Amazon in shopping malls as an example) to facilitate last-mile deliveries within smaller urban areas as the delivery economics and product mix change. They are restocked by different processes. In Michigan, Amazon has built large distribution warehouses in Grand Rapids and Detroit plus smaller last-mile fulfillment centers in cities like Lansing. Any drive along Michigan’s interstates leading to/from Chicago will reveal many Amazon liveried trailers and containers, as well as other intermodal containers moving between Chicago and Michigan’s major centers of Detroit and Grand Rapids.

Additionally, managing the trade-offs between local and global sourcing, secondary materials, sustainability and the circular economy to name but a few requires much more trust throughout the supply/value chain that can only be earned by the right openness and behaviors. As Jim Blaze suggested, we desperately need much more reliable and timely visibility and sharing of information throughout the supply chain.

The North American freight rail system is second to none globally with its ability to keep the economy moving without federal relief. However, it has to be more responsive to market changes if it is going to fully recover and grow longer term. Competing modes can react faster, especially trucking. However, even though trucking rates are up, orders for new trucks are not as high as they would normally be expected when trucking rates rise. That could lead to a capacity constraint. Truck capacity is tighter now than at any time since the 2008 recession.

Nick Little

Truck driver availability is getting tighter as well. Truck driver turnover isn’t showing signs of slowing. Driver rates are beginning to show upward trends for smaller carriers’ fleets. Are the freight railroads ready to grasp the opportunity? Beware the challenge from dedicated fleet trucking operations. Let’s buy trucking before Amazon buys us! Or at the very least, build a relationship that enables greater resilience for shippers and customers.

Stop thinking and behaving like a railroad or a logistics company. Instead, start thinking and learning how to behave like a critical part of the supply chain for everything railroads currently carry and what they could grow to carry.