When Al Sauer first stepped into the GM's shoes at Pennsylvania's Gettysburg Railway (GBRY), he found that some customers had become accustomed to sitting on cars for months at a time. It turned out one in particular unloaded the cars only when there were no trucks to deal with. Since there were always trucks at the doors, the loaded cars sat idle running up the railroad's car hire bill and running down car utilization. And therein hangs the tale.
Here is a customer in need of help. If inventory management is so lax they can let 70 or 100 tons of product sit in storage for weeks then they have too much of it on hand. In late 1996 when this situation was discovered, raw material supply exceeded demand, so prices were depressed anyway, meaning first in was most likely most dear. Finished product prices were also feeling a pinch, so here we have a rail customer paying too much for inventory at a time when his margins are shrinking. Not a formula for success.
Moreover, excessive loaded car dwell time can drive up rates and drive down equipment availability. The originating carriers and the suppliers they serve have made a considerable investment in equipment for this traffic. Norfolk Southern, for example, has a fleet of more than 300 high-cube 100-ton boxcars. Other vendors have their own cars. And since a lot of this material goes prepaid -- the sellers have greater negotiating clout with the rails than do their customers -- the best equipment goes to the buyer who uses it best. It is doubtful Mr. Sauer's customer would have qualified.
There are certain shortlines -- and everybody knows who they are -- notorious for keeping too many cars too many days between interchange. The owning railroad really doesn't care whether the shortline or the shortline customer is at fault; it just sees cars being taken out of the supply chain and driving down productivity. One class I even goes so far as to include car replacement cost in negotiating allowances with its shortlines, and excessive dwell times are sure to send up warnings.
Of course, the vendor has other options, like transloads. At every shortline gathering you'll run into somebody crying the blues about how the class I transloads are stealing their business. If you look more closely, though, you find car dwell time on the shortline is beyond what's usual and customary. The car replacement component in the rate to the shortline point gets so high the spread between the rail direct rate and the rate to the transload is greater than the transload cost. So the business moves off the shortline.
The car owner wins because the asset turns more quickly and the class I to the transload wins the business. However the shortline loses the traffic altogether and the shortline customer's landed costs go up. And things begin to cascade down. As customer costs go up, margins shrink, and with them the ability to compete in its markets. So, when you see, as Al Sauer did, cars piling up at a customer, it's often a signal that the customer's logistical process is out of control and your own future may be at risk. Maybe it's time to go calling.
Readers of this column will recall we've written a number of pieces on using demurrage as a management tool. Just a year ago, I wrote, "The need to charge demurrage can be used as an opportunity to refine service offerings. You can find out why cars are backing up and work to eliminate the cause. If a plant slowdown and decrease in raw materials used is behind it, you can go back through the chain to slow the order process. If a shortage of storage space to supply a growing process is at fault, you can work with your customer to extend the track or build more inventory handling capacity. Whatever their cause, use the event of excessive dwell time to solidify the customer/carrier partnership."
On the GBRY, it was essential they get the customer to pay attention for the sake of the railroad's costs, if not their own. Ten day's car hire on a decent boxcar can put an awful dent in your allowance, and it's not something you can do for long and still stay in business. (Note that GBRY with Al Sauer as GM is "under new management.")
And so Mr. Sauer went calling and explained to the plant manager the realities of car supply, car management, shortline margins, the customer's total freight costs, and of shortline margins. Demurrage, he said, would have to be charged as long as the use of the car was being denied other customers. And so the demurrage clock was started. Unfortunately total charges ran to five figures before finally getting somebody's attention.
The story does have a happy ending, however. The demurrage was paid and changes were made to improve the process at the plant. As a result, traffic is up, dwell time and car hire are down, and profitability has improved all around. It's clear that Al Sauer's new broom swept clean as he took the time to manage his customer.Return to: