2022 was, in many regards, a year for the record books. Supply chains were more fractured than ever, and no link was left untouched by disruption. One of the most important disruptive inputs as of late that could make or break the supply chain’s recovery has been the rail negotiations. Looming rail chaos was averted not once, but twice in late 2022 – and while tentative agreements are in place, the issue is not exactly resolved just yet. Recent hearings on some railroad’s increased use of embargoes touched on other key issues as we go into 2023. Amidst the disruption, there are three main questions that rail shippers should consider in the new year:
- What action will the Surface Transportation Board (STB) take following the recent hearings?
- In early 2023, will rail workers leave their jobs after receiving the lump-sum back raises and bonuses from the recently negotiated labor contracts? This could further strain rail labor.
- Will rail congestion get worse as winter weather conditions intensify over the next few months or are railroads adequately prepared?
Rail challenges: Embargoes and labor woes
In December, the Service Transportation Board held a hearing on Union Pacific’s (UP) substantial increase in the use of embargoes as a method of reducing rail traffic congestion. In just five years, the number of embargoes issued by Union Pacific increased from 27 in 2017 to over 1,000 issued in 2022. While the issue was examined from both sides, the STB was clear that the levers the rail carriers have are price and demurrage, not embargoes, and Union Pacific argued that the “excess inventory” in serving yards resulted in the need for these embargoes. Ultimately, Union Pacific is “pausing any additional embargoes under the pipeline inventory management program” after the hearings and will continue their required bi-weekly service progress reports at least until May 2023.
Rail shippers participating in the hearing made some needs clear: finalization of reciprocal switch rules, review of embargo practices on private equipment, panel discussions between shippers and railroads, prioritization of shipments that are critical to health and well-being, and appropriate timeframes on embargoes. Most importantly, what the shippers really need is improved service from the railroads to meet their business requirements.
In addition to the embargoes, another key point from the STB’s hearing was labor. There was much discussion about whether Precision Scheduled Railroading (PSR) practices cut the labor force too drastically, with the ultimate goal of a 55% operating ratio. This raised the question – which was asked during the hearings – whether the root cause of the rail congestions was, in fact, labor.
There is some concern that in 2023, once rail workers receive back raises and bonuses as part of their new labor contracts, there will be an exodus of rail workers. Additional workers leaving could be detrimental to the market as rail companies have already struggled to find employees over the past year. As a Union Pacific customer participating in the hearing noted, the “root cause of the congestion is labor,” so the potential for further disruption is not yet dissipated.
While there are concerns going into 2023, there are actions that rail shippers can take to limit the impact of rail congestion:
- The STB is an advocate for shippers – utilize their assistance if needed
- Think twice about being “all aboard” the train
- Don’t forget about those contingency plans made during the rail strike!
The STB is an advocate for rail shippers
The STB is a regulatory agency charged by Congress with the fundamental missions of resolving freight railroad rate and service disputes. As a rail shipper, the STB is an advocate for when issues cannot be resolved between you and the railroad. They quickly acted on the shipper reports of embargo use and appear to have gotten railroad companies’ attention – policies of pausing congestion-related embargoes were announced in the same week of the STB’s December hearing.
As we look towards 2023, we may see the STB make decisions on reciprocal switching if they find it necessary to allow rail shippers more flexibility during times of poor rail service. But, in order for the STB to help resolve service disputes, they must hear about them from shippers.
Think twice about being “all aboard” the train
With the uncertainty around rail labor and winter weather impacts, it is key for shippers to have mode diversification if possible to limit interruptions to supply chains over the next few months. This will put shippers in a better situation against competitors if there are further rail disruptions driven by rail labor issues. Diversification will result in better service provided to existing customers – and potentially gaining new customers dissatisfied with their previous supplier.
On a temporary basis, mode diversification will help allow you to reevaluate the situation in a few months to determine if rail service will meet your business needs. Of course, this recommendation isn’t as easy as it sounds – and may come with some higher costs.
Don’t forget about those contingency plans made during the rail strike!
Finally, don’t let the dust settle on the contingency plans you previously considered for the potential rail strikes. It’s time to review them again and make any changes based on learnings from 2022. Do you feel adequately prepared to act and implement those plans if needed?
While supply chain disruptions are no longer constant fixtures in the headlines, AlixPartners’ fourth annual disruption index found that they are still a huge concern to the executive suite. In fact, more than half of business leaders say supply chain disruption is more of a challenge for their company than it was a year ago. Rail shipping stands to be a big disruptor in 2023 if companies are not adequately prepared.