Mediocre Performance—While Expecting Superior Results?

Written by Jim Blaze, Contributing Editor
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Leveraging/improving the role of freight railroads during the 2020-2021 supply chain crisis: What can be done better or at least differently?

The pandemic-associated supply chain problems have brought forward a long-anticipated shortage of truck drivers that was always going to power the shift to a more intermodal-like share of highway traffic. It might even help improve carload siding-to-siding traffic share vs. trucking or barges. But that doesn’t, from the available commercial statistics, appear to be happening. 

There is very little statistical evidence showing that railroad freight market share is now growing by taking away vast amounts of trucking business. There are a variety of sources for that slowing intermodal rail growth theory. Here is one graph covering the 2017 to current period 2021 timeline for international intermodal:

Meanwhile, there are selective assertions about how the North American railroad network is helping keep society supplied with essential goods. In part, that is true. However, a closer look at the available data suggests that this is mainly correct for heavy-haul commodity density products and resource materials, from chemicals to coal.

There are promotional statements about how rail freight railroads are essential to such growth sectors as e-commerce. One claim is that the freight railroads “enable” e-commerce. Upon closer examination, that bold assertion does not seem to be true.

First, let’s recognize that the term enables suggests a critical necessity as a first step toward e-commerce success. The phrase “enable” refers to the positive act of helping someone accomplish something that could not be done alone. There is little evidence to support such a theory that somehow intermodal rail is essential. Let’s therefore look closer at the railroads’ real role in container and high-priority freight movement.

E-commerce requires speedy delivery, constant reliability, and flexibility (resilience). Outright speed is not a freight railroad trait these days. In fact, there is evidence that, in some cases, the PSR business model has slowed some trains down. But let’s ask, “How reliable and resilient are railroads”?

Reliability from the market demand fulfillment perspective has to be measured at the destination (receiver) end. That’s where the essential market demand is most often located. Reliability in the e-commerce sector is measured in minutes or perhaps to just a few hours of final delivery reliability. Which of the seven Class I railroads meet that kind of precision-like final delivery performance?

From the published carload service and intermodal service report cards published by the Class I’s to their shareholders, few seem to display a consistent performance. At best, the jury is still out on their determination of e-commerce-like results. We are awaiting a stand-out report from customers that the railroads are specifically accurate to such minute-to-hour or two deliveries. So, what do freight railroads have to provide in a playbook for resilience? Can we agree that resilience has these four critical resiliency measurements?

  • The system can recover quickly from interruptions.
  • The system is flexible in resources and routings.
  • The system managers can intercede quickly with counter measures.
  • After a PSR asset and resource downsizing, the network services have the ability to as if spring back rapidly into shape (called Elasticity).

Do railroads using their current version of PSR (better described perhaps as a “Predictable Service Railroading” business model) satisfy all of these resilience definitions? The twin cornerstones of resilience and reliability effectively must be measured from the point of view of the shipper/receiver sector. That’s different than being judged from the financial or ownership sector. 

To a railroad owner (either as debt or equity), resilience means the ability to sell off unneeded assets, or to satisfactorily add back assets to secure marginal revenue and earnings gains. The current version of PSR seems mostly to adapt its ability to position income statement expenses as traffic declines. As in the original movie Top Gun, shippers seem to be waiting for “Maverick” to reengage with the enemy’s new threats—here described as “market opportunities.” 

To an economist like me, there should be a balance. Can we agree between the customer and the railroad management that there should be a benchmark of resilience and reliability performance? Let’s start that reconciliation search with two targets of best practices in mind.

  • Reliability for carload freight is set at 94% or better for the delivery day promised.
  • Reliability for intermodal rail is set at 98% or better within an hour of day and time promised.

How much more time before these reliability targets are regularly provided?

Here are best-in-class targets for rail freight resilience:

  • Network train speeds by class of value traffic can recover back to their prior best within three months.
  • Terminal dwell will not decay by more than 3% for more than a month’s time.
  • Railroad critical lanes will offer a 15% reserve capacity of all kinds to seize market growth.

It’s okay to disagree with these future benchmarks. But the minimum requirement is that we publicly discuss the expected metrics. Let’s declare them.

Failure to set target minimums and maximums means that the debate is not engaged, and the marketplace can’t rely upon what performance railroads are willing to commit to. The strategic question that shippers appear to be asking: “What scheduled precision and service reliability are you actually selling?” The answers we collectively agree to as reasonable about railroad resiliency and reliability are central to determining the role, responsibility, and yes even the capability of today’s railroads to directly help solve supply chain problems. Here are three different kinds of long chain logistics market disruptions. As you review them, consider how a railroad freight carrier in these long supply chains can play a service role that is both resilient and reliable.

Three Forms of Market Supply Chain Shocks

Let’s agree about some definitions of supply chain disruption:

Supply Shocks represent an unexpected sudden change in the availability of raw materials, parts and manufacturing capabilities. It is not just that prices may surge. Critical OEM might just become unavailable from classical suppliers.

Another form that supply chain shock takes is as a Market Demand Disturbance. Market demand shocks imply a sudden change in demand due to unforeseen circumstances. For items such as food, expectations can lead to hoarding that, in turn, may trigger a temporary surge in demand, with several items becoming unavailable.

Sequential supply chain distributions are a more complex pattern. It emerges occasionally (as is the case of 2020 into 2021—and perhaps 2022) when other resource and geo-political and pandemic conditions combine to make a recovery uncertain. Inventory re-stocking alone is insufficient as worker shortages and other circumstances become involved in the trek back to market “normalcy.” Researchers Notteboom, Pallis and Rodrigue (among others) saw this larger-impact sequential risk developing as early as the autumn of 2020. That complex disruptive pattern is now confirmed a year later as we are in the fourth quarter of 2021.

What we collectively have been hit with on a vast global front is continuing shock. Not something you can simply reroute around–like bridge collapse. It is not a single propagation like a weather event or a labor strike. Instead, we are witnessing a series of propagations and backpropagations that have simultaneously been taking place across a vast geographic stage. The sequencing of these “geographic hits” has been magnified by uncertainty as to what products to order and where to put them when they arrive. Some commodities are over ordered and thus must be warehoused. Filled warehouses add to the disruption as more goods arrive, with no place to store them. Other commodities like computer chips have been entirely disrupted–thus causing other larger components like car sheet metal to be placed into storage. 

Visual Maritime Impacts

Since well over 75% of all of the world’s logistics involves moving products by ships, the focus of the news reporting has shifted to the ships stuck in outer harbors, like that outside of Los Angeles and Long Beach. Something is definitely wrong when 70 or more vessels are waiting day after day—some as long as almost a full week—to reach their unloading dock. It is indeed a dramatic photo image. Now, late into 2021, it’s pretty clear to any casual business sector reader that there is a buildup of cargo that is difficult to even sort through in order to find a particular shipper’s most critical “stuff.” Even after a ship can reach the docks for unloading, the immediate problem becomes where to store the containers until drivers and container-chassis can be found to pick them up and move them out of the port toward either an intermediate warehouse or parking lot—or better, onto the final customer (the actual market demand location) by truck or intermodal double-stack train. 

Here is what disruption looks in delayed time on the landward side of ports:

Here is what it looks like in a table of delays caused at selected inland port that are rail intermodal served:

Here is another view from the independent sources of FTR. It’s a reminder that overall, the railroads do not control international container dwell times at most ports:

Slide courtesy of Todd Tranausky, FTR

To clean out the delayed containers, the logisticians and carriers need to team up with better container visibility IT hardware/software, a bigger reserve pool of chassis, and a larger (likely higher paid) drayage driver pool. This has to be executed across the supply chain, eliminating “black holes.”

Where do North American freight railroads play a role in all of this? To begin with, the quick solutions identified above require time: time for training, software creation, manufacturing of chassis, and prepositioning of resources. The so-called global intermodal “system” lacked preplanning investment for such contingencies. There is no quick fix. There are at best “work around” solutions. In effect, that suggests a triage-type selection process for treating that which is urgent and can in fact respond to emergency action. Some commodities won’t make such a triage cut.

Think of a battlefield, like the beaches of Normandy in 1944. Generals, colonels and captains who understood the landing field options are dead or dying on the beach from random but deadly enemy fire. Lieutenants instantly become brigade commanders. Battle-tested sergeants become Beach Commanders. Their instinct is to survive today on the beach to fight another day. The decisions are to boldly try anything that gets them and their men off the beach before they die. 

Like the beaches of Normandy, railroaders in the midst of these mode-to-mode transfer terminals (port or inland ports) struggle with the chaos of a beach front. They execute make-do actions to get things they can find into a storage and train loading position with imperfect intelligence. There is a “fog of war view today.”

Being somewhat like an intermediate agent with a trainload hook and haul major role, railroads today are not in control. Colleague Larry Gross described what so much of the general public thinks to be a well-lubricated system of long multi-carrier supply chains as something far different. Here is a paraphrase of Larry’s expert witness view:

The complexity of multiple-player logistics chains over time settles in and works well so long as there are only minor—or short term—disturbances. Containers are often leased rather than outright owned by carriers. Chassis are always in rather short supply in the best of times. Hours of service are limited and confusing at key terminals where container possession takes place. Long-haul truck drivers are not quitting their jobs in order to become drayman and get richer. Ships often dock with containers that are being hauled for another ocean line—and those containers are thus often in the wrong port location. In reality, there are actually a large number of independent business silos that function “intermodally okay” in normal times. But when congestion strikes unexpectedly, “stuff” just doesn’t get repositioned quickly or to the correct locations. The longer the disruption, the more the congestion builds up.

There is just too much friction under these 2020-21 circumstances, and too-few parking or warehouse spaces in which to try and recover. The seven big railroad companies don’t control or manage enough of these critical mass assets and point-to-point interchanges whereby they can control and repair the bogged down networks. Now, late into 2021, there will be regulatory agency reviews held that include the STB, which focuses mostly upon the rail sector. Railroads will be investigated as to responsibility. They might not be perfect, but it is tough to place a majority of the intermodal mess blame for the congestion on them. 

Suggested Railroad Market Challenges 

The railroads’ increases in intermodal volume year over year have tailed off. That’s important to recognize, since the industry goal has been to continue to gain market share as trucking growth continues.

Slide courtesy of Todd Tranausky, FTR

Given the leading market volume position of trucks, rail intermodal arguably has to achieve near-constant double-digit annual growth in order to gain share against the trucks. That’s a huge task. Here are the long-known challenges for expanding rail intermodal’s commerce role:

  1. Railroads need to penetrate the semi-trailer highway share and also enter the short-haul lanes in order to gain a market advantage over the coming decade.
  2. Railroads need to see evidence that e-commerce key players like Amazon, Target or Walmart are siting their distribution centers close to railroad lines or to intermodal terminals. 
  3. For assisting their maritime customers and port supply chain partners, railroads need to set up their role as either the short haul movement organizer or provider.
  4. Alternatively, Class I1 railroads could articulate their preferred business position of being willing to negotiate private train rates for those willing to take on the short-haul intermodal asset and operating income risks/rewards. It does not have to be open access. The railroads already move lots of private trains. They’ve been doing this since the 1960s.

My takeaway argument: Growth in rail freight is not mission impossible. But it will be difficult. Meanwhile, here is a short-term railroad playbook to try to clean up the disruption of the global container business.

  1. Continue to try and move those boxes that have a clear path toward a known destination.
  2. Continue to try and set aside track space for holding trains short of origins and destinations until those locations are cleared out.
  3. Recertify train crews to cover the hot spot corridors where more people are needed.
  4. Authorize TTX to order a reasonable number of doublestack railcars to cover the surge and act as a reasonable business reserve.
  5. Longer term, rethink the positioning and design of the intermodal yards.
  6. Determine, once and for all, are you going to be role players in short-haul intermodal as organizers? If not, who has to organize such a business function and then lease or negotiate train movement time for such independent short-haul trains? And what would be the railroad pricing scheme?

Recommended resource for further thinking and discussion: Theo Notteboom; Thanos Pallis; Jean-Paul Rodrigue, Disruptions and Resilience in Global Container Shipping and Ports: The COVID‑19 Pandemic vs. the 2008–2009 Financial Crisis. Published on line Jan. 4, 2021.

Independent railway economist and Railway Age Contributing Editor Jim Blaze has been in the railroad industry for more than 40 years. Trained in logistics, he served seven years with the Illinois DOT as a Chicago long-range freight planner and almost two years with the USRA technical staff in Washington, D.C. Jim then spent 21 years with Conrail in cross-functional strategic roles from branch line economics to mergers, IT, logistics, and corporate change. He followed this with 20 years of international consulting at rail engineering firm Zeta-Tech Associated. Jim is a Magna Cum Laude Graduate of St Anselm’s College with a master’s degree from the University of Chicago. Married with six children, he lives outside of Philadelphia. “This column reflects my continued passion for the future of railroading as a competitive industry,” says Jim. “Only by occasionally challenging our institutions can we probe for better quality and performance. My opinions are my own, independent of Railway Age. As always, contrary business opinions are welcome.”

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