Having enough railcars or the right mix of railcars has always been a challenge for those responsible. It’s rare that you’re right. Too many railcars and you’re spending money and resources you could use elsewhere. Too few railcars and you’re impacting production, operations, sales and overall profitability. Often times marketing or sales will pass down their railcar requirements on an ongoing basis. As logistics professionals we’ve often found ourselves in no-win situations. Responses to marketing and sales organizations are not always productive, “do you want railcars at all costs or do want a railcar at a cost that can support the business? You can have one but not both!”. It’s a fine balancing act and it seems as though there’s no way to win! Our suggestion, take a holistic approach.
Holistic as defined by Merriam-Webster’s dictionary; 1: of or relating to holism 2: relating to or concerned with wholes or with complete systems rather than with the analysis of, treatment of, or dissection into parts.
Holism is a noun which is a study or method of treatment that is concerned with wholes or with complete system, a holistic study or method of treatment.
To take a holistic view of an industry’s manufacturing and product storage and distribution one must look at the complete system. That system which includes railcars, must be employed in the context of the complete manufacturing, operations, sales projections and overall strategy in which a company engages to economically and safely manufacture, store, sell and transport their product to a destination location for consumption or further processing. Railcars ultimately define the product pipeline required to meet production and sales needs.
Focus on the Holistic Approach to railcar planning.
The railcar plan is simply the plan of how many railcars you’re going to buy or lease to fill production and sales requirements. It is important to identify production and shipping data which supports the railcar requirement and identifies the variability one expects in the railroad operations plan. You can use leased or owned railcars or you can use railroad supplied railcars or a combination thereof to support your shipment plan. To get to this point a shipment plan must first be produced involving the production, operations and sales side of the company. That’s the holistic part of the equation, include everybody! It’s imperative that the rail fleet planning team be involved with this process as early in the process as practical. An interactive process between the stakeholders is the primary key in developing a dependable shipment plan and identifying the rail resources required to support it. The process should include:
- Who has skin in the game? Identify stake holders – include everybody that has skin in the game.
- What are each stake holders’ goals? Develop common goals among stakeholders. What are the goals and do they conflict with each other? E.g., reduce costs, meet shipment needs, be extremely flexible in manufacturing, shipping, and warehousing, support margin optimization, promote satisfied customers.
- What is the capital verse operating trade-offs? Where can you spend capital dollars and get a better long term trade off than spending operating dollars? Where does it makes sense to spend operating dollars and yield a better trade off than capital dollars?
- Are your resources aligned with your goals, human and otherwise?
- What external resources are you counting on to make your plan work flawlessly? Railroads, trucking firms and external contractors should also be considered in the holistic planning process.
We work with many clients, just like you, who say but there are so many externals factors that can’t be controlled. This is what makes planning difficult at best and near impossible when you throw in something like the Corona Virus impact. They’re right! It’s difficult but there are strategies you can employ to right size the fleet to counter act cyclical demand requirements.
Consider a combination of leasing or buying railcars and consider using railroad supplied railcars to fill in the gaps. There are good points and bad to each. If you buy or lease railcars you have either tax offsets or operating cost offsets that can positively (or negatively depending out your situation) effect your company’s bottom line. Most likely you can negotiate a better freight rate for supplying your own equipment. If you use railroad supplied railcars, you’ll be drawing from either a fixed pool which means the same railcars will come back to you to load each time, or you’ll get a general assignment in which you’ll utilize whatever railcar is available nearby at the time you request a railcar.
Railcars even those that carry the same commodity have physical structure variances. A box car has many heights, width, door configurations, etc. a mill gondola has several cubic capacity options and gross weight on rail capabilities, a covered hopper can be had in 2700 cube to over 6000 cubic feet capacity and so on. Whatever the railcar type consider that the trend is to more and more private ownership of the U.S. railcar fleet.
Statistically approximately eighty percent of the 1.6 million freight railcars in circulation are privately owned. There’s a couple of reasons for that. One is railroads are focused on their primary business which is to pull your railcar from point a to point b. Another is railroads have huge capital investment requirements of there own to keep track and infrastructure in good condition. Railcars are a floating asset sometimes short and other times long in supply whereas railroad track, ties, yards, locomotives, personnel are all basic needs of the rail industry to stay profitable and make shareholder acceptable returns.
When fleet planning, consider a combination of the three railcar supply options – private owned, private leased, railroad supplied.
When participating in the holistic company wide planning efforts you’ll most likely identify variability in the shipment plan that will indicate what requirements are necessary for the short term, e.g., less than one year up to three years, mid-term, e.g. three years to five years and long term e.g. seven years plus. Provided you’re confident in the plan you can now lay in the pieces to your railcar requirements by combining short term, mid-term and long-term leases and or railcar purchases for the longest term and the use of railroad equipment where it supports your plan.
Try to see as far as you can into the future before finalizing any railcar deals. This long-range view will better help you position your company’s commitment to a railcar fleet that is the lowest cost yet remains flexible to the vagaries of the market in which you participate. Combining railroad supplied railcars and short and long-term leases often yields the best results for cost benefit trade-offs. Leasing a portion of your fleet for one year, three years, five years and thru the end of railcar life is strategic and should match your business planning process. Remember the shorter the term the more engaged you’ll need to be in the process.
While you are working thru the process build in natural check points with your team. Often these are just before key decision-making points in any part of the process. By taking a company-wide holistic view you can support a railcar plans’ holistic view which will drive the most efficient plan to optimize shipments to yield expected customer results.