September 18, 2016 Eric Kogelschatz

Railroads weigh insourcing terminal operations

It’s long been believed that three sets of analyses will always guarantee an outcome different from the current state: own vs. rent; build vs. buy; and in­source vs. outsource. A look at today’s intermodal industry may underscore this rule.

The intermodal industry was essentially built on outsourcing of producers and consumers. The core transaction consisted of railroad linehaul substituting for truck. The appeal was the ability to provide door­to­door service between points where regulatory permission (“operating authority”) was lacking. It was also less expensive for motor carriers to use rail than Teamsters labor.

Although the railroads originally provided a door­to­door product within a vertically integrated enterprise (often with their own Teamsters labor), the intermodal product quickly became a compendium of disaggregated service providers, which relieved the railroads from performing services they couldn’t perform efficiently. Drayage, equipment, and ramp operations all became core suppliers to the nascent intermodal industry. Shipper agents evolved to compile a truck­like door­to­door product from the disparate pieces. As the business grew and evolved, they became known as intermodal marketing companies — and subsequently third­party logistics providers.

Although intermodal has become a rail industry behemoth over the past 20 years, for the previous 40 years, it was regularly starved of internal support and capital. Most original intermodal terminals were hand­me­downs from obsolete carload and passenger operations. Terminal improvement was justified primarily by cost savings resulting from consolidating multiple locations, which often resulted from cascading mergers; or transportation savings (eliminating switch crews necessary to ensure all cars faced a single direction for “circus” loading and unloading, for example). The handful of new facilities usually resulted from a more pressing need for the existing terminal real estate.

Railroads’ intermodal outsourcing enabled major breakthroughs, without which the modern intermodal industry wouldn’t have been possible. The industry’s recent growth, however, may have changed the historical value propositions.