Parcel volumes are on the rise as noted in recent earnings reports from the two largest U.S. based parcel carriers, FedEx and UPS. Ecommerce is driving much of this growth and both parcel carriers, along with the USPS, regional parcel carriers and others couriers are looking for the most efficient and cost-advantageous means to transport these growing volumes. Intermodal shipping is one option that parcel carriers are utilizing, helping drive an 8.2% increase in Q2 2014 North American intermodal volume over the same time period in 2013.
At the CACH Hub in Chicago, UPS’ largest U.S. Ground Hub, nearly half of the incoming and outgoing volume is moved by rail, with the other half transported by trucks (these percentages can fluctuate depending on service levels, capacity, etc.). UPS relies on the major U.S. Class I railroads — BNSF Railway Co., CN, CSX Transportation, Norfolk Southern Railway and Union Pacific Railroad as critical spokes in its distribution network. In many cases UPS will try to use rail if a shipment is traveling 400 or more miles.
FedEx also utilizes the major railroads. Back in 2011, the company expanded the use of rail through its revamped FedEx Freight offerings noting Norfolk Southern as its preferred eastern rail carrier. At that time, the company noted intermodal represented about 10.0%-12.0% of FedEx Freight’s total line-haul mileage. FedEx Trade Networks is also a heavy user of the rails and has recently publicly commented that they are monitoring the US West Cost longshore labor negotiations very closely to protect their customers.
Clearly, the use of intermodal has greatly increased for many shippers. According to the Association of American Railroads, 2013 U.S. rail intermodal volume totaled a record 12.8 million containers and trailers, up 4.6% or 564,276 units over 2012. Much of this increase was due to the railroads catching up on cargo backlogged during a rough winter, an acceleration of imports through the U.S. West Coast and steady domestic intermodal growth.
In fact, this “catch-up” and increase in demand is now having a negative effect on railroad operations. A shortage of trains, tracks and rail workers are producing sporadic supply chain disruptions for a number of industries. UPS commented on its Q2 2014 earnings call that "very poor" railroad performance resulted in it utilizing a secondary operating plan which in turn, increased its purchased transportation expense. This deterioration of service has many shippers concerned that the major railroads won’t be able to handle the peak shipping season in advance of the winter holidays.
On average, the major railroads plan to re-invest 18% to 20% of 2014 revenues on new terminals, tracks, sidings and equipment to help boost capacity and efficiency. However, shippers maintain that spending has not been sufficient to meet demand, especially in inclement weather. Also, many investment projects are multi-year improvements that cannot quickly fix capacity issues.
This situation may be further exacerbated as distribution centers and manufacturing plants are increasingly being built around U.S. intermodal terminals. According to CenterPoint and The Boyd Company, estimates now forecast as many as one third of all new U.S. distribution centers are located near an intermodal rail terminal. Both companies also note the pressure on retailers to provide next-day or even same-day delivery to end customers is driving them to seek industrial space near intermodal terminals.
The railroads are also struggling to keep pace with growing demand for intermodal services as well as transporting higher volumes of industry goods for agricultural, oil, and gas. Shippers that rely on rail intermodal need to be prepared for potential disruptions as rail capacity is expected to tighten through the last half of 2014. This combined with the uncertainty of the West Coast ports labor situation has created a very challenging intermodal environment for 2014 peak season.
For retail shippers, drop shipping may be an option worth exploring. This fulfillment solution is one in which goods are shipped directly from a wholesaler or supplier to the customer. Other options include using a pure trucking network or even upgrading to air shipments for critical items — however these options are generally more expensive.
One thing is certain — shippers should be closely monitoring the service levels of their carriers across all modes on a daily basis as we move into peak season 2014. Careful contingency planning and pro-active measurement of carrier service levels are critical for a successful peak.
At the CACH Hub in Chicago, UPS’ largest U.S. Ground Hub, nearly half of the incoming and outgoing volume is moved by rail, with the other half transported by trucks (these percentages can fluctuate depending on service levels, capacity, etc.). UPS relies on the major U.S. Class I railroads — BNSF Railway Co., CN, CSX Transportation, Norfolk Southern Railway and Union Pacific Railroad as critical spokes in its distribution network. In many cases UPS will try to use rail if a shipment is traveling 400 or more miles.
FedEx also utilizes the major railroads. Back in 2011, the company expanded the use of rail through its revamped FedEx Freight offerings noting Norfolk Southern as its preferred eastern rail carrier. At that time, the company noted intermodal represented about 10.0%-12.0% of FedEx Freight’s total line-haul mileage. FedEx Trade Networks is also a heavy user of the rails and has recently publicly commented that they are monitoring the US West Cost longshore labor negotiations very closely to protect their customers.
Clearly, the use of intermodal has greatly increased for many shippers. According to the Association of American Railroads, 2013 U.S. rail intermodal volume totaled a record 12.8 million containers and trailers, up 4.6% or 564,276 units over 2012. Much of this increase was due to the railroads catching up on cargo backlogged during a rough winter, an acceleration of imports through the U.S. West Coast and steady domestic intermodal growth.
In fact, this “catch-up” and increase in demand is now having a negative effect on railroad operations. A shortage of trains, tracks and rail workers are producing sporadic supply chain disruptions for a number of industries. UPS commented on its Q2 2014 earnings call that "very poor" railroad performance resulted in it utilizing a secondary operating plan which in turn, increased its purchased transportation expense. This deterioration of service has many shippers concerned that the major railroads won’t be able to handle the peak shipping season in advance of the winter holidays.
On average, the major railroads plan to re-invest 18% to 20% of 2014 revenues on new terminals, tracks, sidings and equipment to help boost capacity and efficiency. However, shippers maintain that spending has not been sufficient to meet demand, especially in inclement weather. Also, many investment projects are multi-year improvements that cannot quickly fix capacity issues.
This situation may be further exacerbated as distribution centers and manufacturing plants are increasingly being built around U.S. intermodal terminals. According to CenterPoint and The Boyd Company, estimates now forecast as many as one third of all new U.S. distribution centers are located near an intermodal rail terminal. Both companies also note the pressure on retailers to provide next-day or even same-day delivery to end customers is driving them to seek industrial space near intermodal terminals.
The railroads are also struggling to keep pace with growing demand for intermodal services as well as transporting higher volumes of industry goods for agricultural, oil, and gas. Shippers that rely on rail intermodal need to be prepared for potential disruptions as rail capacity is expected to tighten through the last half of 2014. This combined with the uncertainty of the West Coast ports labor situation has created a very challenging intermodal environment for 2014 peak season.
For retail shippers, drop shipping may be an option worth exploring. This fulfillment solution is one in which goods are shipped directly from a wholesaler or supplier to the customer. Other options include using a pure trucking network or even upgrading to air shipments for critical items — however these options are generally more expensive.
One thing is certain — shippers should be closely monitoring the service levels of their carriers across all modes on a daily basis as we move into peak season 2014. Careful contingency planning and pro-active measurement of carrier service levels are critical for a successful peak.
