Shippers find renewed interest in rail and intermodal shipping
Staff -- Purchasing, 6/17/2004 2:00:00 AM
The following excerpt comes from a chapter in PURCHASING's new book, "The New Logistics: Improving the Logistics Buy." This chapter focuses on trends in the rail and intermodal sector.
There has been a renewed interest in the rail industry and its intermodal cousin in recent years. As trucking industry rates fluctuate with fuel costs and the industry loses some carriers to financial issues, the rail and intermodal industries have focused on improving service levels and reliability rates. And the efforts appear to be winning shippers over.
According to a 2003 survey of Purchasing readers, respondents say they shipped an average of 14% of materials via intermodal. But 75% of those polled said they plan to increase their use of intermodal shipping in the future, citing increased trucking and fuel rates as a driving factor in the decision. And one in five respondents see intermodal service levels improving, driving even more volumes in that direction.
Statistics from the Intermodal Association of North America (IANA) and the American Association of Railroads also show that intermodal traffic on U.S. railroads grew 4.6% in 2002, despite a weak economy and the 10-day West Coast port shutdown. Without a doubt, something—or some things—are bringing shippers to rail and intermodal.
Rail and intermodal shippers continue to report consistent efforts and improvements in the level of service they receive from carriers and providers in these markets. Most notably, there appears to be more flexibility among rail carriers today to work with shippers in new and different ways than was present only a few short years ago and, while delivery time reliability may still be an issue, shippers are looking to build on the positive signs they see today and steer rail carriers further down the right track.
The railroad industry's era of mass consolidation has, by most accounts, come to an end, but left a serious scar. In 1980, there were roughly 45 to 50 class one railroad carriers in the U.S. By 2001, there were six. Perhaps the most glaring example of the effects these consolidations had on the industry was the declining rates seen after the 1999 breakup of Conrail's monopoly in the Northeast.
"In the past 20 years there have been a lot of mergers, many of which are in the public interest because there were just too many railroads and too much track," says Edward Rastatter, director of rail policy at the National Industrial Transportation League (NITL). "So shippers could more easily merge and rationalize their plans and equipment to get rid of excess cost."
Many shippers say the end of the mergers has also ended the ugly period of declining service levels and increasing occurrence of captive shipper status. But those same shippers say there is still a lot of ground for the rail industry to make up when compared to other transportation modes in terms of reliability and competition.
One of the largest rail shippers in the U.S. is Atlanta-based shipping giant UPS, which ships more than 800,000 trailer units by rail annually. UPS is moving more and more of its non-express shipping to the rails for intermodal shipments, but it wasn't always that way. Mike Martini, vice president of corporate transportation at UPS, says the lower service levels in the post-merger era are now on the mend. Martini says that service levels fell so low in the wake of the Conrail breakup in the late 1990s, UPS moved nearly half of its rail shipping to trucks at the time. But now, service levels at those companies are more reliable, Martini says.
Michael Erenberg, vice president of operations at CSX Intermodal in Jacksonville, Fla., says rail and intermodal service has been recovering since the late part of the 1990s. "Intermodal service is much more reliable right now than in the past," he says, adding that once you get the prerequisite of having reliable service, then cost is the deciding factor, which is good news for intermodal.
The Department of Transportation is playing a role in trying to keep service levels consistent in the evolving railroad industry. The Department of Transportation's Surface Transportation Board (STB) issued two Conrail Merger Oversight Proceedings to monitor the level of service seen in the post-breakup companies. The most recent report found that the railroads involved "have resolved the service problems resulting from the implementation of the merger, that there continue to be no competitive or market power problems stemming from it."
Joe Resendes is the North American logistics operations manager at chemicals giant DuPont of Wilmington, Del. and responsible for DuPont's domestic truck, rail, marine and air shipping. As one of the nation's largest shippers, DuPont ships close to $200 million in rail freight, mostly in North America, 50% of which is hazardous materials. Resendes says DuPont would like to do more of its shipping by rail, but the level of service seen following the mergers and industry shifts in the mid-1990s, including the breakup of Conrail, still leaves doubts.
"After the mergers and the Conrail breakup, service levels in the railroad industry really dropped," says Resendes. "Some of that has died down and we're seeing some consistency in the service now. The railroads are becoming more consistent around the average transit times, but the average travel times are still one to two days longer than they were prior to the Conrail split. They need to improve on the variability. If the average time is seven days, then all of the trips should be close to seven days instead of one trip in five days and another in 15. That reliability helps us plan our fleet size and inventory levels."
Resendes says one issue that is not improving is the captive shipper problem. He says 75%-80% of what DuPont ships by rail is served by only one railroad, leaving DuPont captive to the rates that carrier sets, as moving much of its hazardous materials to other modes is not a viable option.
"We estimate that the rates are anywhere from 15%-30% higher in these cases than if there was competition," Resendes says. "We work with our Washington people and are very active with the American Chemistry Council, the Alliance for Rail Competition, NITL and various other groups working to bring about regulatory or legislative change and increase competition in the rail industry."
The STB in December 2001 also asked the Association of American Railroads (AAR) to take the lead in addressing complaints about additional charges for interchange between railroads. The issue came to a head when some smaller railroads were attempting to charge Union Pacific (UP) for delays in accepting interchange, while UP says those charges, which may affect shipper cost in the long-term, cannot be implemented without agreement from both railroads or authorization by the STB. Tom White, a spokesperson for the AAR, says the increased consolidation of the rail industry has helped the interchange issue, as fewer carriers will mean fewer exchanges. And the use of interchange service agreements is more clearly defining what each railroad is expected to do at the interchange points, smoothing the process and minimizing delays at these points. And a project in the Chicago area encourages exchanges to take place outside the congested downtown area on lesser-used tracks, which is helping relieve congestion.
A 2002 survey of intermodal shippers by the IANA says service outweighs cost nearly three to one in evaluating and selecting a carrier. According to the report, "The organizers report a greater emphasis on tracking capabilities and on-time delivery than in previous benchmarking exercises."
"I think what shippers are demanding is what they have always demanded from intermodal," says Tom Malloy, vice president of business development at IANA. "That is a level of consistency now that allows them to compare their longer term cost in service implications."
Philip Evers, assistant professor of logistics management at the University of Maryland, says the trend of shippers thinking beyond mode and price in selecting a carrier goes farther back than 2000.
To read more of this chapter and others in "The New Logistics: Improving the Logistics Buy" go to the PURCHASING magazine bookstore at www.purchasing.com/bookstore.
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