Optimizing railcar fleets by reducing excess detention

By taking some time to manage the excess time customers take to unload your railcars (i.e. detention), you will be well on your way to optimizing your railcar fleet.

In this article, I will share ideas about how to determine a reasonable grace period, the best way to measure detention time, and how much to charge for days beyond the grace period.

Detention is often used interchangeably with demurrage and vice versa. One definition of demurrage goes like this: “…the charge on detention of [railcars]…to encourage speedy unloading and return of empties to improve utilization of [railcars].” Demurrage is the result / cost of too much detention. So if you want to increase the utilization of railcars, reducing excess detention is a great place to start.

How can excess detention be reduced? If you have been shipping via rail for a while, you are familiar with railroad demurrage (aka private railcar storage) charges. These charges get your attention right? I’m not advocating that you just send an invoice to your customers or the parties that unload your railcars because raising the blood pressure of your customers and partners may not be the best way to preserve and win business. However, mimicking how the railroads manage detention of their railcars will work well for you too.

For an article that discusses the basics of railroad demurrage, go here.

One of the shippers I work with gives their customers a 14 day grace period to unload the railcar and get it back to the railroad empty or face a $75 charge for each day beyond the 14 day grace period. What I really like about how they manage detention is that they give the excess detention report to their sales people first. The sales people share the report with the customer and use it as a basis for a discussion about getting the railcars back in a more timely fashion. This gives the customer an opportunity express ideas about special circumstances that may have caused the extensive detention. It is then up to the sales person, who is the the manager of the account, to make the call on what specific charges to eliminate, reduce and maintain unchanged. This process also gives you and your customer a chance to learn more about working together harmoniously and ideally eliminating excess detention through a better understanding of each other’s processes.

How do you determine the grace period (i.e. the time allowed for unloading railcars) before charges are levied? It depends. Here are a few ways to determine it if you are drawing a blank:

1. Look at past performance. How long on average is it taking your customers to unload? You may also want to consider using the median, which is the number where 50% of the detention measurements are above and 50% are below.
2. Talk to your sales people and have them talk to your customers (or have your sales people talk to them) to see what they think is reasonable.
3. Let your demand forecast, loaded transit time, empty transit time, loading time and fleet size constraints determine it. For example, you may not be able to add any railcars to your fleet until next year and this year your largest customer wants to increase their orders. Something has got to give and getting the railroads to reduce load and empty transit time may be difficult. To read more about how to use a simple formula to size your railcar fleet based on forecasted demand go here. Rearrange the formula a little to solve for the unloading (referred to as layover in the formula) time required with a static (non-changing) count of railcars. You can use the results as as leverage to get the customer to unload faster. Most companies respect management by data these days and they will appreciate the time you have taken to thoroughly analyze the situation before asking them for something.

If you are still not sure, draw the initial line somewhere based on your gut instinct. Then based on feedback from your customers, you can decide to adjust it later.

A word from the sponsor

Keeping track of and preparing reports showing how long it is taking railcars to get unloaded and the demurrage required for excess detention can be time consuming and tedious work as your railcar fleet grows. If you would like some help with a cost effective, easy to use and powerful system designed to do just this, contact Railcar Tracking Company.

How is the detention time measured? Typically from actual placement (when the railcar is delivered by the railroad to the spot requested by the unloading party / customer) of the load to release of the empty railcar back to the railroad. The exception to this is if the unloading party was not able to accept the railcar from the railroad when the railroad wanted to deliver it, so the railroad reports a constructive placement sighting event. In this case, the detention time should begin at constructive placement. Of course, if the railroad delivered a bunch of railcars a couple days late and then another bunch arrived on-time on the same day – you might decide to give the customer a break in this situation. To keep things simple, charge whole days only and start the measurement at 12:01am the day after the constructive or actual placement (whichever comes first). Most railroads measure this way as well, so it will be easier for your customer to understand. Demurrage is charged for the detention days beyond the grace period.

How much should you charge for each day beyond the grace period? At least charge an amount that will cover your daily cost of a railcar. If you take into consideration railcar purchase, tax, lease, repair, test, and clean fees you should be able to get pretty close.

I hope this article has given you some ideas about how to optimize your railcar fleet by reducing excess detention through the assessment of demurrage. If you have other ideas that you would like to add, please comment and start the conversation!

All the best,

Jim

Categories: Railcar Fleet Management Tips

Post by Jim Dalrymple on February 27, 2012

Learning Center Categories

All Learning Center Posts

Demurrage is the result / cost of too much detention. So if you want to increase the utilization of railcars, reducing excess detention is a great place to start.