Introduction: "Our objective is clear" said Janet Knox, Vice President for the War Eagle Railroad (WERX). "We have an opportunity to displace a high volume of truck shipments with intermodal rail service between Canyon City and Plainview. Of course, the lower we price our service the more volume we'll get and bigger trains equal lower average costs. Where is the sweet spot- what should our price be? Rob Law knew a challenge when he saw one. As Marketing Manager -Intermodal for WERX he had responsibility for the intermodal service linking Canyon City and Plainview. Fortunately, he had plenty of data to work with. WERX had recently commissioned a traffic study that had provided an unusually detailed view of the market. But there were many variables to consider "Our preliminary budget for next year is due in two weeks," Janet said. I'll need a week to pull together your figures with those of the other managers, so please let me have your plan a week from today. Because of the tight timeframe, I've allocated the budget for you to utilize our internal consulting team Feel free to make use of their talents." Background Plainview and Canyon City are two major traffic generating points on the WERX rail network. As the crow flies, the center of Plainview is about 750 miles from the center of Canyon City. The two cities are connected by a limited-access four-lane highway. While there are a number of towns lying between the two cities, they are relatively small and don't generate much freight volume. There is no other railroad running between Canyon City and Plainview. The competitive battle, therefore, is only with truck transportation. Canyon City Plainview Northwest 12 North North Miller River 15 17 20 Northeast 10 Northeast Northwast Center 14 6 West 12 843 17 City Ter 10 15 12 East 7 12Terminal 720 East 10 20 Southwest own 12 12 12 Sautheast Atlantic Western Railroad Canyon City Line South Southwest Beltway Center City Expressway Southeast 12 South 12 Atlantic Western Railroad- Main Line Beltway The Freight Survey A market research study was available to the team that detailed the freight flows moving between Canyon City and Plainview. The survey had identified that there were about 84,240 dry van truckloads per year moving from the Plainview North location to the Canyon City South location and essentially no freight moving in the opposite direction. The Trucking Competition Truckers maintained an active presence in the Plainview-Canyon City market. Market intelligence and communication with customers revealed that headhaul dry van rates averaged $2.70 per mile (net after fuel surcharges and discounts). Truckers were running empty backhauls on all these trips. The Intermodal Landscape As is typical of railroad intermodal practice in the United States, WERX wholesaled its intermodal service to firms that provided the retail sales effort and presented intermodal's face to the ultimate customer the BCO (Beneficial Cargo Owner, aka the shipper or receiver). These entities in turn purchased line-haul transportation from WERX. The intermodal retailer owned its own fleet of containers and chassis. The intermodal retailer also arranged for the local trucking that was required to move the container between the origin/destination points and the intermodal terminal. WERX charged the retailer a wholesale rate for moving containers from terminal to terminal. Rail Costs The cost of operating an intermodal train consisted of several "buckets". The first was the "Train Start" cost which in essence was the cost to simply operate one locomotive with crew over the rail. This cost included the cost of the train crew, the ownership and maintenance of the locomotive, the fuel it consumed moving itself along the line as well as an allocation for track occupancy and the signals, train dispatching and other associated costs. If the weight of the train exceeded the trailing tonnage rating of a single locomotive, one or more additional locomotives might be required. The cost of each additional locomotive was calculated on a per-locomotive-mile basis, and included the ownership and maintenance of the locomotive and the fuel it consumed moving itself down the track. There was a third "Per Ton-Mile" cost category that covered the cost of towing each intermodal double-stack car added to the train, which was based on the ton-miles generated and paid for the fuel required to pull the car and the track maintenance the car's passage generated, which was typically allocated by ton mile by the railroad costing department. Fourth, there was the lease cost of the double-stack railcars, and fifth, their maintenance. For intermodal shipments, WERX used 3-well railcars with double-stacked containers, so each railcar had a capacity of 6 containers. Finally, there was the terminal charges to lift the container on and off the train, allocated per lift. Below is a summary of the train costs including fuel Train Start: $15.00 per train-mile Additional Loco: $2.50 per locomotive-mile .Per Trailing Ton-Mile: 2 cent per ton-mile Double-stack railcar lease cost $14 per trip in either direction Railcar Maintenance $0.08 per mile Terminal Costs: $35 per lift (includes capital cost allocation) In order to determine locomotive requirements and ton-mile costs, average weights needed to be determined as well as additional data on car and locomotive capacity. These are presented below: Weight of each railcar: 72 tons Railcar capacity: 6 containers Weight of empty domestic container: 5.2 tons Average cargo weight per loaded container: 17.0 tons Maximum trailing tonnage: 2,900 trailing tons per locomotive "Per Trailing Ton-Mile" railroad cost calculated on basis of total weight of railcars and loaded containers (but not locomotives). . . Drayage The intermodal retailers arranged for local truck transportation, also known as drayage, to move the containers between the origin/destination points and the intermodal terminals. Typical drayage rates consisted of a starting charge of $75 per load plus $1.50 per running mile (loaded or empty), plus a fuel surcharge of about 11% at a diesel price of $3.00 per gallon. Because of the short distances and timing difficulties, drays involved a round trip between the terminal and the shipper/receiver with one leg loaded and an empty return. The Intermodal Retailer As previously mentioned, the intermodal retailer was responsible for putting together all the pieces of the intermodal door-to-door move and paying the various providers. This included the railroad providing the line-haul transportation and the drayage carriers. The retailer also provided the domestic container and container chassis. The typical retailer maintained a margin of 12% of the total door-to-door rate to the customer. The Intermodal Schedule The railroad makes one trip each way between the two cities Monday through Friday. No train departed on Saturday or Sunday. Truck to Rail Conversion Shippers would utilize intermodal if it offered an attractive combination of service and cost. Intermodal rates needed to be lower than truck in order for shippers to convert from truck to intermodal. From previous market research, wERX estimated that shippers would convert 1.65% of their volume from truck to rail for every 1% reduction in their shipping costs. The containers available for use on the railroad have approximately the same capacity as the dry vans used by the trucking companies The Assignment Your assignment is to determine the optimal rail line haul rate. Develop an Excel spreadsheet that shows your calculations, including profit, drayage cost, train costs, and intermodal marketing commissions. Build a graph that shows how the revenue per container (x axis) relates to the annual profit (y axis). Make sure to consider the following: . The higher the rate the more revenue per box but the lower the intermodal market share All equipment including double-stack cars and containers must run a round trip (the trains in each direction are the same size). Fractional stack cars are not permitted. Assume that the 3 well cars are all loaded to their capacity of 6 containers. Assume volume is distributed evenly throughout the year, with the same volume each workday. Daily RR Costs (260 days per yr. basis) Headhaul RR operations Carloads Containers % Converted % Savings RR Rev. Cont. Tons # extra locos Train start Add. Locos S0 Per trailing t-m Lifts $865 $14$67 $420 Car lease Car maint. 0$12,645 1.85% 1.12% $2,066.35 205.2 Profit/Yr Rev /Yr Total Cost/Yr. IM Comm /Yr Drayage/Yr. RR Op cost/yr Lifts Daily RR Op. costs Car maint Car lease Train start. Add. Locos S0 per trailing t rn Tons 103.2 # extra locos S67$420 0$12,645 Introduction: "Our objective is clear" said Janet Knox, Vice President for the War Eagle Railroad (WERX). "We have an opportunity to displace a high volume of truck shipments with intermodal rail service between Canyon City and Plainview. Of course, the lower we price our service the more volume we'll get and bigger trains equal lower average costs. Where is the sweet spot- what should our price be? Rob Law knew a challenge when he saw one. As Marketing Manager -Intermodal for WERX he had responsibility for the intermodal service linking Canyon City and Plainview. Fortunately, he had plenty of data to work with. WERX had recently commissioned a traffic study that had provided an unusually detailed view of the market. But there were many variables to consider "Our preliminary budget for next year is due in two weeks," Janet said. I'll need a week to pull together your figures with those of the other managers, so please let me have your plan a week from today. Because of the tight timeframe, I've allocated the budget for you to utilize our internal consulting team Feel free to make use of their talents." Background Plainview and Canyon City are two major traffic generating points on the WERX rail network. As the crow flies, the center of Plainview is about 750 miles from the center of Canyon City. The two cities are connected by a limited-access four-lane highway. While there are a number of towns lying between the two cities, they are relatively small and don't generate much freight volume. There is no other railroad running between Canyon City and Plainview. The competitive battle, therefore, is only with truck transportation. Canyon City Plainview Northwest 12 North North Miller River 15 17 20 Northeast 10 Northeast Northwast Center 14 6 West 12 843 17 City Ter 10 15 12 East 7 12Terminal 720 East 10 20 Southwest own 12 12 12 Sautheast Atlantic Western Railroad Canyon City Line South Southwest Beltway Center City Expressway Southeast 12 South 12 Atlantic Western Railroad- Main Line Beltway The Freight Survey A market research study was available to the team that detailed the freight flows moving between Canyon City and Plainview. The survey had identified that there were about 84,240 dry van truckloads per year moving from the Plainview North location to the Canyon City South location and essentially no freight moving in the opposite direction. The Trucking Competition Truckers maintained an active presence in the Plainview-Canyon City market. Market intelligence and communication with customers revealed that headhaul dry van rates averaged $2.70 per mile (net after fuel surcharges and discounts). Truckers were running empty backhauls on all these trips. The Intermodal Landscape As is typical of railroad intermodal practice in the United States, WERX wholesaled its intermodal service to firms that provided the retail sales effort and presented intermodal's face to the ultimate customer the BCO (Beneficial Cargo Owner, aka the shipper or receiver). These entities in turn purchased line-haul transportation from WERX. The intermodal retailer owned its own fleet of containers and chassis. The intermodal retailer also arranged for the local trucking that was required to move the container between the origin/destination points and the intermodal terminal. WERX charged the retailer a wholesale rate for moving containers from terminal to terminal. Rail Costs The cost of operating an intermodal train consisted of several "buckets". The first was the "Train Start" cost which in essence was the cost to simply operate one locomotive with crew over the rail. This cost included the cost of the train crew, the ownership and maintenance of the locomotive, the fuel it consumed moving itself along the line as well as an allocation for track occupancy and the signals, train dispatching and other associated costs. If the weight of the train exceeded the trailing tonnage rating of a single locomotive, one or more additional locomotives might be required. The cost of each additional locomotive was calculated on a per-locomotive-mile basis, and included the ownership and maintenance of the locomotive and the fuel it consumed moving itself down the track. There was a third "Per Ton-Mile" cost category that covered the cost of towing each intermodal double-stack car added to the train, which was based on the ton-miles generated and paid for the fuel required to pull the car and the track maintenance the car's passage generated, which was typically allocated by ton mile by the railroad costing department. Fourth, there was the lease cost of the double-stack railcars, and fifth, their maintenance. For intermodal shipments, WERX used 3-well railcars with double-stacked containers, so each railcar had a capacity of 6 containers. Finally, there was the terminal charges to lift the container on and off the train, allocated per lift. Below is a summary of the train costs including fuel Train Start: $15.00 per train-mile Additional Loco: $2.50 per locomotive-mile .Per Trailing Ton-Mile: 2 cent per ton-mile Double-stack railcar lease cost $14 per trip in either direction Railcar Maintenance $0.08 per mile Terminal Costs: $35 per lift (includes capital cost allocation) In order to determine locomotive requirements and ton-mile costs, average weights needed to be determined as well as additional data on car and locomotive capacity. These are presented below: Weight of each railcar: 72 tons Railcar capacity: 6 containers Weight of empty domestic container: 5.2 tons Average cargo weight per loaded container: 17.0 tons Maximum trailing tonnage: 2,900 trailing tons per locomotive "Per Trailing Ton-Mile" railroad cost calculated on basis of total weight of railcars and loaded containers (but not locomotives). . . Drayage The intermodal retailers arranged for local truck transportation, also known as drayage, to move the containers between the origin/destination points and the intermodal terminals. Typical drayage rates consisted of a starting charge of $75 per load plus $1.50 per running mile (loaded or empty), plus a fuel surcharge of about 11% at a diesel price of $3.00 per gallon. Because of the short distances and timing difficulties, drays involved a round trip between the terminal and the shipper/receiver with one leg loaded and an empty return. The Intermodal Retailer As previously mentioned, the intermodal retailer was responsible for putting together all the pieces of the intermodal door-to-door move and paying the various providers. This included the railroad providing the line-haul transportation and the drayage carriers. The retailer also provided the domestic container and container chassis. The typical retailer maintained a margin of 12% of the total door-to-door rate to the customer. The Intermodal Schedule The railroad makes one trip each way between the two cities Monday through Friday. No train departed on Saturday or Sunday. Truck to Rail Conversion Shippers would utilize intermodal if it offered an attractive combination of service and cost. Intermodal rates needed to be lower than truck in order for shippers to convert from truck to intermodal. From previous market research, wERX estimated that shippers would convert 1.65% of their volume from truck to rail for every 1% reduction in their shipping costs. The containers available for use on the railroad have approximately the same capacity as the dry vans used by the trucking companies The Assignment Your assignment is to determine the optimal rail line haul rate. Develop an Excel spreadsheet that shows your calculations, including profit, drayage cost, train costs, and intermodal marketing commissions. Build a graph that shows how the revenue per container (x axis) relates to the annual profit (y axis). Make sure to consider the following: . The higher the rate the more revenue per box but the lower the intermodal market share All equipment including double-stack cars and containers must run a round trip (the trains in each direction are the same size). Fractional stack cars are not permitted. Assume that the 3 well cars are all loaded to their capacity of 6 containers. Assume volume is distributed evenly throughout the year, with the same volume each workday. Daily RR Costs (260 days per yr. basis) Headhaul RR operations Carloads Containers % Converted % Savings RR Rev. Cont. Tons # extra locos Train start Add. Locos S0 Per trailing t-m Lifts $865 $14$67 $420 Car lease Car maint. 0$12,645 1.85% 1.12% $2,066.35 205.2 Profit/Yr Rev /Yr Total Cost/Yr. IM Comm /Yr Drayage/Yr. RR Op cost/yr Lifts Daily RR Op. costs Car maint Car lease Train start. Add. Locos S0 per trailing t rn Tons 103.2 # extra locos S67$420 0$12,645