Freight tariffs too high? Tips for negotiating rail freight contracts

Dive Brief:

  • A recent study by the U.S. Government Accountability Office (GAO) revealed most freight is shipped under contract rates, although some shippers are concerned about how railroads negotiate contract rates for multiple origin-to-destination routes, American Shipper reported Thursday.
  • Tariff and contract rates both reflect shipment origin, destination, route distance, and competition factors yet tariffs tend to be more expensive than contract rates. Contract shipments have been on the rise, but shippers complain the costs sometimes outweigh the benefits without a guaranteed volume.
  • The Surface Transportation Board can resolve tariff disputes, but not contract disputes. Railroad officials told the GAO the sheer volume of contract negotiations and discount benefits are encouraging railroads to standardize contract terms, however.

Dive Insight:

This is all about commitment, scale, and seeing where the money is spent.

Shippers who look at freight management as an opportunity to save money will negotiate contracts with all major carriers that they use, including railroads. But, there are two requirements for a successful contract: enough freight to make the contract worthwhile to the shipper and the carrier, and the ability or wherewithal for the shipper to undertake the modeling, analysis, contract negotiations and internal routing procedures and enforcement necessary to make it all work. Some fall short here.

For some shippers there may be a happy medium between tariffs and contracts. But first, put onus on the carrier to help analyze the spend. Shippers should work with their largest carriers, in this case railroads, to determine patterns of shipments and monies spent. Any carrier will certainly be willing to provide that data. Discussions can then continue and a contract may be established covering the freight volume already established and potentially more. The carrier may relish the opportunity to consolidate shipments and grow their business. 

Shippers can continue with the tariff approach for smaller shipments, but if a pattern emerges, they should be prepared to work with the shipper on a potential contract. While all freight may not be able to be contracted, most should. Don’t be afraid to negotiate. Your carriers may be enjoying the fragmented approach and higher margins.

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Filed Under: Freight Procurement
Top image credit: Ron Reiring