September 2014 | How-To | Ten Tips

Negotiating Rail Freight Rates

Tags: Rail, Transportation

The best way to improve railroad contract negotiations is to understand the market and the opportunities to increase competition for your traffic. Jay Roman, president of Escalation Consultants Inc., Gaithersburg, Md., offers the following advice for reducing rail freight rates.

1. Shake off the rail monopoly power syndrome. Shippers sometimes hesitate to try to reduce costs because they fear railroads' monopoly power over their traffic. But you can't reduce rates if you worry about what you can't do.

2. Explain why you need a better rate structure. You'll be more effective during negotiations if you can outline how different freight cost scenarios affect the business your company can pursue, potential competitive options, and areas for capital investment.

3. Negotiate your entire rate structure—not just individual movements. To get the biggest bang from your business, take bids from railroads on all your traffic at once. This makes your business more important, and increases your leverage in negotiations, because the railroad has more to potentially win and lose in the negotiation.

4. Know where your competitors' facilities are located. Your competitors can be one of your best sources of leverage during negotiations. If their plants are located closer to current and potential customers, if they can truck shipments to your customers, or if you could potentially perform commodity swaps with them, you have potential win/win opportunities to explore with your railroad partners.

5. Understand your traffic lanes. Look at the competitive rail situation for all your shipping locations, and determine whether alternative logistics, purchasing, or production options exist.

6. Educate railroads when they are not pricing their movements properly. Provide direction to railroads on why their overall rate structure is a problem, and by how much they need to reduce rates in order to be more competitive. This type of analysis can be used to show the overall rate structure needed for a railroad to maintain and increase volumes.

7. Know the pivot point for each railroad in your bid evaluation. The pivot point represents the point where your railroad makes the maximum profit from reducing the rates for your competitive movements. It shows when a rate reduction is no longer beneficial for the railroad, as the profit the rail carrier makes from additional volume is no longer large enough to offset the reduction in rates it must give to get the traffic. Knowing the pivot point when performing a bid evaluation can keep you from leaving serious money on the table in rail negotiations.

8. Benchmark your movements. To secure reasonable rates, you first need to know what defines reasonable. If you can show railroads that their rates are putting you at a competitive disadvantage in specific markets, you will have much better success in negotiations.

9 . Calculate the railroads' cost and profit for all your movements. Knowing what it costs the railroads to move your freight means you can add or remove volumes during the negotiation to increase or decrease their profits.

10. Consider hiring a consultant to plan strategically. Reputable firms can maneuver you through the rate benchmarking and strategic planning process. The goal is to develop win/win opportunities that allow you to optimize your rail spend. Seek help early—at least six to nine months before your negotiations.