July 2007 | How-To | Ten Tips

Negotiating Rail Contracts

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Negotiating 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 experiencing sticker shock, with transportation rates increasing between 20 and 30 percent. If your rail freight moves on mostly "closed" lanes (no rail competition 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 transportation consulting firm Professional Logistics Group Inc., Oak Park, Ill.

1. Be prepared. Before you schedule carrier negotiations, gather all contract-related materials so you have everything at hand to start your analysis. 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 current rail events—derailments, hazmat shipments, rate increases, new rail construction, and service impacts. When developing larger contracts—$10 million 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 carriers that your business is desirable. Show them how your industry is growing, for example, and what new technology 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' motivations. What are their key drivers and pricing strategies? What are the railroads' marketing and operating goals, and how can your business fit in? Knowing current 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 attractive 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 privatized switching? Is adequate car storage available? Meanwhile, understand how railroad network design, local operations, and capital improvements affect your traffic. Operational factors can be either distractions or opportunities for leverage in the negotiations; account for them in your strategy and approach.

6. Develop relationships. You should not meet your railroad counterparts for the first time at a contract negotiation. Although rail carrier behavior and performance frustrates shippers at times, getting involved in transportation industry trade groups and cooperative joint initiatives will ultimately prove more useful than taking a hostile or combative approach. In addition, networking can help you better understand the personalities of the people you negotiate with.

7. Anticipate carrier positions and develop a sound negotiation plan. Using the intelligence gathered, formulate a picture of your business for the carriers. Have a plan to account for all possible objections, and response. Yes, you are developing a strategy for engagement, but you don't need to be contentious because that will not work to your advantage. Determine what you want to achieve from the negotiations. Be specific. Be realistic. Be organized. Be concise. Above all, be prepared.

8. Prepare a written bid package to present to the rail carriers. Make sure to present your written bid package in a clear format that does not overwhelm carriers with more information than necessary. Make it simple and easy for carriers to work with, so they can respond in a timely manner.

9. Utilize expert legal counsel for the final transportation contract review. Several highly reputable firms specialize in transportation law. They can work independently or alongside your in-house legal counsel to identify potential pitfalls or suggest additional language in the final document that will help protect your company.

10. Establish a long-term rail transportation strategy. Strategically located origin or destination points enable the best transportation rates and terms. Avoid siting new plants that depend heavily on rail at locations that don't provide competitive access to at least two Class I railroads. Also, consider build-out/build-in, short-line, and transloading strategies wherever possible.

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