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Feeling Railroaded? You're Not Alone - The Role of a Supply Chain Consultant



Why is US Rail Shipping So Hard for the Supply Chain Right Now?

It can be somewhat difficult to find good information about the current market dynamics for US railroads so we leveraged our rail shipper network to tie together first-hand experiences with what we could find in the news and reputable internet searches, as of the writing of this blog post, May 20, 2022.

If you’re using the railroads to ship your goods in the US and you’re feeling frustrated at the level of service, you’re in good company, as many clients share similar experiences.

Approximately 28% of all US freight moves on the rail, with about 52% being comprised of agricultural, chemical and energy commodities, and the other 48% consisting of consumer goods and other miscellaneous products. https://railroads.dot.gov/rail-network-development/freight-rail-overview

The Brass Tacks

US Railroads are struggling with several dynamics that have rendered them short-handed for engineers, switch operators, and many other service-critical operations required for smooth rail service

According to our sources, the situation has been particularly acute for approximately the last 6 months, with the Eastern Class 1 railroads (NS, CSX) suffering in Q4 of 2021, and now the Western Class 1 railroads (UP, BN) struggling in Q1-2 of 2022. This impacts all rail-shipping types including bulk (agricultural, chemical, energy), boxcar, and intermodal (container on car). Achieving the right balance in staffing and operations is crucial for improving rail service efficiency.

Below we will review a chronology of key events, as well as the outlook for railroad shipping for the months and years to come.

A Chronology Of Events Leading to Current Logistics Challenges

  • 2017 – CSX implements Precision Scheduled Railroading (PSR) which significantly reduced labor, services (such as switch frequency) and quality of service in order to drive considerable profitability

  • 2018-19 – Other Class 1 railroads begin to follow the PSR model to drive profitability

  • 2019-2020 – Rail volume drops (first from PSR then from COVID)

  • 2020 – Railroads reduce labor and services further to offset reduced demand

  • 2021 – Volumes begin to increase significantly due to intermodal/container demand for consumer goods, increased shale oil drilling, lack of trucking availability, etc – largely driven by COVID

  • Railroads unable to hire the staffing they need to operate equipment, switching, and other services

  • Railcar transit times increase significantly

  • Shippers rush to get more private cars – but they’re not available due to production constraints and high demand

  • New car build leadtimes are 12+ months due to lack of labor and lack of components

  • 2022 – Large companies/consortiums begin to request the Surface Transportation Board to push railroads to improve service as it’s significantly impacting commerce

  • STB pushing railroads to review hiring practices and ensure competitive compensation, but the challenging lifestyle of train operators continue to present hiring challenges

In addition to these challenges, the effectiveness of related services such as supply chain consulting and logistics support plays a significant role in mitigating these issues.

Understanding Supply Chain Challenges

Supply chain challenges are a pervasive issue in today’s business environment, and rail shipping is no exception. The complexities of modern supply chains, coupled with the increasing demand for efficient and reliable transportation, have created a perfect storm of challenges for rail shipping companies.

One of the primary issues is inventory management. Effective inventory management is crucial to ensuring that goods are delivered on time and in the right quantities. However, many companies struggle with this aspect, leading to stockouts, overstocking, and other issues that can significantly impact rail shipping. For instance, a company that overestimates its inventory needs may end up with excess stock that clogs up the supply chain, causing delays and inefficiencies.

Another critical challenge is supply chain visibility. Without clear visibility into the supply chain, companies find it difficult to track shipments, manage inventory, and respond to disruptions. This lack of transparency can lead to delays, lost shipments, and other issues that directly affect rail shipping. Imagine a scenario where a shipment is delayed due to unforeseen circumstances, but the company is unaware of the delay until it’s too late to make alternative arrangements.

Logistics and transportation management also play a significant role. The process can be complex and time-consuming, involving multiple stakeholders and systems. This complexity often leads to inefficiencies, errors, and delays that can impact rail shipping. For example, coordinating the movement of goods from a manufacturing plant to a distribution center via rail requires precise timing and communication, and any misstep can cause significant delays.

Lastly, demand variability is a constant challenge. Changes in demand can be difficult to predict and manage, leading to fluctuations in shipping volumes and frequencies. This variability puts pressure on rail shipping companies to adapt quickly to changing demand patterns. For instance, a sudden spike in demand for consumer goods can overwhelm the rail system, leading to bottlenecks and delays.

Understanding these broader supply chain issues is crucial for companies looking to navigate the complexities of rail shipping. By addressing these challenges head-on, businesses can improve their supply chain capabilities and ensure smoother operations.

Exploring the broader supply chain issues that exacerbate rail shipping difficulties

What Lies Ahead?

Unfortunately, the outlook isn’t especially inspiring.  Even if more private cars were available to lease, adding additional throughput into already bottlenecked systems isn’t going to help the cars move any faster.  Improving hiring will help and it’s possible the high inflation and uncertainty about the economy will draw more job-seekers into the railroad profession. Supply chain consultants can provide valuable insights and strategies to help rail companies navigate these challenges and improve their operations.

As of the date of this blog post, the US truck market is seeing some softening likely due to rising interest rates and economic uncertainty, but since it takes 4 trucks to substitute one railcar, it’s generally not cost-effective to do so on a large scale, and there is not an abundance of trucks available for long-haul distances, generally carried by the railroad.

A Double-Edged Sword

The fastest way we will see rail service improve is far from an ideal solution: a significant drop in demand. It’s likely we will see some demand plateau and drop in the months to come but how much will depend on the severity of inflation-mitigation strategies and the consumer’s response. Supply chain consulting plays a crucial role in helping companies adopt these innovations and improve their supply chain operations.

Some larger rail-shipping companies have begun to work with the Surface Transportation Board to push for solutions to loosen the constraints, such as more competitive compensation, but similar to long-haul trucking, it’s getting harder and harder to attract new talent to the industry due to the requirements to be away from home for extended periods.

The general consensus with rail shippers we spoke to was that, unless there is a significant reduction in demand for industrial and consumer goods, they will likely feel the railroad pinch for another 12-24 months to come.

The Impact of Supply Chain Reinvention

Supply chain reinvention is a critical component of modern business strategy, and it has the potential to reshape the future of rail shipping. Innovations in supply chain management, such as the use of artificial intelligence (AI), blockchain, and the Internet of Things (IoT), can help companies better manage their supply chains, reduce costs, and improve efficiency.

One of the most significant impacts of supply chain reinvention is improved supply chain visibility. Advanced technologies like IoT sensors and blockchain provide real-time visibility into the supply chain, enabling companies to track shipments, manage inventory, and respond to disruptions more effectively. For example, IoT sensors can monitor the condition and location of goods in transit, providing valuable data that can be used to optimize routes and reduce delays.

Increased efficiency is another major benefit. Supply chain reinvention can help companies streamline their logistics and transportation management processes, reducing costs and improving efficiency. AI algorithms, for instance, can analyze vast amounts of data to identify inefficiencies and suggest improvements, leading to more efficient rail shipping operations.

Enhancing the customer experience is also a key advantage. By providing real-time updates and tracking information, companies can keep their customers informed and build trust. For example, a customer waiting for a shipment can receive real-time notifications about the status of their order, reducing uncertainty and improving satisfaction.

Finally, supply chain reinvention can lead to increased competitiveness. Companies that adopt innovative supply chain strategies can gain a competitive edge in the market, attracting new customers and increasing revenue. For instance, a company that uses blockchain to ensure the transparency and security of its supply chain can differentiate itself from competitors and build a reputation for reliability and trustworthiness.

By understanding the broader supply chain issues that impact rail shipping and embracing innovations in supply chain management, companies can improve their supply chain capabilities, reduce costs, and enhance the customer experience. This proactive approach will not only help businesses navigate current challenges but also position them for future success in an increasingly complex and competitive market.

How innovations in supply chain management could reshape the future of rail shipping

Limited Options for Industries

Unfortunately, there isn’t a great solution to this problem. Our recommendations are always to do your best to ensure multiple options, whether it be across modes (ensure you have trucks as an option for back-up), and be ready to substitute inventory to hold-over in case of delays.

In the world of unpredictable but almost-constant supply chain disruptions, understanding your risks and building mitigation strategies into the execution will continue to be a necessary capability to keep your service level on track. Supply chain consulting firms can offer specialized expertise and innovative solutions to help companies navigate these disruptions and optimize their supply chain strategies.

Our supply chain and operations advisors are experienced in many manufacturing and distribution companies. We help find the best way to optimize your supply chain management and get the results you want.

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