Certain North American freight traffic is likely always to be rail-centric, such as bulk commodities moving across the continent. But an increasing share of freight is up for grabs, with shippers more often than not leaning toward trucking instead of rail.
To the extent that society and investors are pressuring industries to reduce greenhouse gas emissions, rail continues to offer the most immediate returns, with the dual benefits of a lower carbon footprint per ton moved and reduced pressure on congested highways, creating benefits for commuters and lowering future infrastructure costs.
So why are railroads struggling to capture their fair share of freight growth? Oliver Wyman recently interviewed two dozen large shippers across seven key industries to understand how emerging supply chain shifts and a rising sense of frustration among shippers are impeding greater use of rail within today’s supply chain networks.
According to this research, rail is losing the battle for freight share for three main reasons.
First, the new supply chain has different needs and requirements. Shippers resoundingly confirmed that reliable transit schedules and accurate delivery windows are a must for highly engineered, cost-competitive supply chains, with trucking consistently outperforming rail in this area.
As such, railroads must look for new ways to stay relevant as shippers move closer to their customers, tighten up on precision, and further economize their supply chains. As it is, rail sidings and delivery doors are being repurposed for “higher-value activities” at existing facilities, and new facilities are being built without rail access or intermodal service being explicitly considered.
In addition, shippers and receivers are increasingly looking at a much more robust version of total landed cost models when evaluating shipping modes. Accessorials, damages, claims, tender rejections, timeliness and accuracy of shipment data, transport failures and delays, and problem resolution and recovery costs are now being formally accounted for in the decision-making process. Even when cheaper on the tariff rate or direct transportation charge, rail is not necessarily the lower-cost option when total costs are considered. On-time delivery also is a large lever in this equation.
Second, shippers said, the origin-to-destination shipping experience of intermodal rail must improve. Outside of price, respondents ranked transport reliability, shipment visibility, and equipment/capacity as the most important attributes for transportation service. They also rate rail as substantially inferior to trucking on all three of those attributes. The Class I railroads have roughly five years of precision scheduled railroading (PSR) under their belt, and while PSR has delivered impressive cost reductions and capacity dividends, rail is not yet at the point of delivering an acceptable — i.e., reliable, transparent, and responsive — door-to-door transport product for customers when compared to trucking.
Lastly, shippers said, railroads need to adopt a more customer-centric approach, particularly to support shippers that actively want to use rail more. It is not a sustainable strategy to expect customers to invest in the deep expertise and time required to navigate the mysteries of doing business with railroads. Both individually and as a network of interdependent providers, railroads must create an environment that makes it easy for customers to transact business. This is now a world of mobile apps and near real-time solutions, and railroads need to keep up.
On-time performance in the 70 percent range, which is common among the Class Is, will not win the day in supply chains that demand on-time performance in the high 90s. And when things do go wrong, shippers want carriers to be accountable and proactively resolve problems. For truck-competitive freight, railroads will be held to the standard of the truckload offering, the bar for which continues to rise.
There are many easy changes that railroads could adopt to improve customer perceptions. When rail handling clearly causes damages, for example, railroads could pay the claim quickly rather than forcing the customer to jump through hoops or take formal action. When there is an interchange mix-up, railroads could solve the problem among themselves, rather than making the customer arbitrate. If a needed car is buried in a side-track, railroads could dig it out right away and proactively give the customer a new ETA, rather than waiting days or even weeks. These types of problems happen way too frequently with railroads, according to shippers, who consistently cite a lack of alacrity and proactivity as major pain points.
Throughout their history, railroads have proven to be resilient and determined, and the industry has solved many difficult challenges. This next chapter will be no different.
Railroads can successfully grow their share of freight again if they are willing to understand the new supply chain imperatives. That means zeroing in on delivering high reliability, shipment visibility, and proactive problem resolution and creating a truly customer-centric mindset that rebuilds trust and lowers frustration among customers.