Inbound Logistics | July 2007 | Digital Issue

10TIPS

STEP-BY-STEP SOLUTIONS

by Deborah Catalano Ruriani

Negotiating Rail Contracts

N egotiating with rail carriers has moved beyond difficult. Demand for rail services is high, and capacity constraints have caused carriers to pursue yield over volume. As a result, some shippers are experienc- ing sticker shock, with transportation rates increasing between 20 and 30 percent. If your rail freight moves on mostly “closed” lanes (no rail com- petition at origin or destination), you will be negotiating with a monopoly unless you can create the appearance of competition. Here is some advice from Kathy Langan and Gordon Heisler of trans- portation consulting firm Professional Logistics Group Inc., Oak Park, Ill. 1 Be prepared. Before you schedule carrier negotiations, gather all con- tract-related materials so you have everything at hand to start your anal- ysis. Accumulate all contracts, tariffs, rate benchmarks, and information from carriers in all modes regarding their fuel surcharge programs and

driver shortages. Also compile magazine and newspaper articles that discuss cur- rent rail events – derailments, hazmat shipments, rate increases, new rail con- struction, and service impacts. When developing larger contracts – $10 mil- lion and more – begin preparation and strategy development six to nine months in advance of negotiation meetings. 2 Know your industry and how it impacts the carriers you negotiate with. Compile industry facts and statistics that demonstrate to rail carri- ers that your business is desirable. Show them how your industry is growing, for example, and what new technol- ogy is available. Describe how imports will affect domestic movements. Also determine what value railroads place on moving your commodities versus other commodities and traffic types. 3 Understand the rail carriers’ key drivers. During the negotiations, try to draw out the carriers’ moti-

vations. What are their key drivers and pricing strategies? What are the railroads’ marketing and operating goals, and how can your business fit in? Knowing cur- rent market conditions, and how they may influence the carriers’ volume cycles, will impact their willingness to negotiate. 4 Leverage everything you have. Present your business as attrac- tive for the carriers to handle, and emphasize your competitive lanes and growth opportunities. Prepare data on potential truck conversions, plant expansions, transloading opportunities, recent or pending acquisitions, and process improvements in your own rail management operations. 5 Consider operations, not just freight rates. Are you a “problem” shipper with excessive demurrage, poor fleet management, or difficult plant switching environments? Do your plants offer the opportunity for priva- tized switching? Is adequate car storage

14 Inbound Logistics • July 2007

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