Supply Chain Train Wreck

“This world is a place of business. What an infinite bustle! I am awaked almost every night by the panting of the locomotive. It interrupts my dreams. There is no sabbath.” – Henry David Thoreau.

Some 16 million freight cars will transect the country this year, delivering critical and desired goods to consumers and manufacturers.  The railway system is a vital link in the supply chain, and if it isn’t functioning correctly, the systems which are dependent upon it would collapse. 

In this blog, we will examine where trains fit into the supply chain puzzle, the four major supply chain issues hampering the efficient functioning of the rail systems, the solutions that have to happen and the conditions under which they need to occur, and the startling vulnerabilities to this system that we aren’t properly acknowledging and addressing but could lead to a total collapse.  I will tell you what to watch for to know if this critical artery of goods is about to fail.  So, let’s talk about it.

WHERE DO TRAINS FIT?

U.S. railroads handle more than 300,000 containers and trailers per week right now.  That’s a level much higher than anyone expected when the pandemic began and currently a higher volume than pre-pandemic weeks.  It’s almost 16 million containers per year lumbering across the landscape in unceasing caravans.  Trains are running continuously.  While they only have a current average speed of just over 20 miles-per-hour, they aren’t stuck in traffic and are unceasingly moving to their inland destinations.  They don’t have to stop for mandatory rest periods.  Rail cars can be disconnected at larger warehouses or loaded for their final trucking of 100 feet, 100 miles, or 1,000 miles away.  Meanwhile, the rest of the train continues, possibly picking up a few empty cars at each stop.

In a perfect world, manufacturers produce products, fill containers, and ship those products to top-consuming countries via ocean freight lines.  The containers are offloaded at ports.  In less than seven days, the container is loaded onto a truck or rail line and is on its way to warehouses, distribution centers, and retailers across the globe.  The container is often taken to a facility and unpacked because it comprises a multitude of shipping orders, and the container isn’t all one order.  Wherever it gets unpacked, it needs to get to that location and its final location via a truck, van, or train.

Not all port terminals are connected directly to the rail system.  Some are.  Some are connected by their own internal rail system that connects to intermodal rail terminals.  Some have an on-dock or a near-dock rail facility. The near-dock ones require drayage, or trucking, to transport containers to rail terminals or distribution centers.  Distribution centers are their own unique thing.  Trans-loading facilities primarily transfer the contents of maritime containers packed with multiple orders to multiple destinations into domestic containers or smaller truckloads. It is common to have three smaller 40-foot marine containers, unpacked, palletized, repacked, and transferred into two 53 foot domestic containers for shipment to larger warehouses, distribution centers, and larger retail customers.  To fully understand how systemic this supply-chain congestion is, there is also a shortage of pallets.  There was a lumber shortage in the U.S. due to COVID-19 shutting down the lumber mills for weeks. The surge in new house and renovation construction is consuming most of the wood available from the mills, resulting in a shortage of all pallets.

Railways, as an integral intermodal piece of the supply-chain house of cards, are bulging with the orders of consumer demand as economies struggle to regain footing from the COVID years.  CSX, one of the largest Class 1 freight companies operating over 21,000 miles of track, reports Intermodal travel is up 22% over pre-Covid years, so some of the rails are being utilized more than in previous years, as some companies rise to try and meet the demand.  That’s not the case across the system, though.  According to the Association of American Railroads, in September 2021, U.S. intermodal traffic was down 7.3% year-over-year.  Part of this sizable reduction at a time when operations need to be ramped up is due to a labor shortage of rail workers and conductors.  There was already a steep decline beginning in late 2018.  Pandemic layoffs and furloughs exacerbated this decline, and the industry had lost 40,000 jobs by December of 2020.  Some of these job losses are permanent.  Railway companies are having a hard time enticing jaded workers so quickly released and furloughed at the first sign of dipping profits back to long hours, possible relocation, and low wages.  

Even before the pandemic, railway companies were downsizing to streamline operations by running fewer trains with more cars, changes that already had resulted in fewer workers.  In the interest of tighter margins and higher profits, older locomotives were decommissioned and scrapped before the demand surge being experienced now.  With fewer workers and fewer trains, the result is later deliveries and service cutbacks.  So, imagine your only grocery store in town working with fewer checkers, receiving dock workers, stockers, and fewer shopping carts while the customers are trying to stock up and the trucks are parked, unpacked at the receiving dock.  That’s where the railway industry is at this moment– a critical link in the supply chain understaffed and under-equipped, with deliveries stacking up.  Demand is very high, but the products aren’t making it to their final destination.

The entire railway system depends on consistent speed.  With box supply reduced, the port and trucking speeds slowed, the warehouses and distribution systems hampered by labor shortages, simply increasing train speed isn’t a solution.  Getting trains onloaded and offloaded is the central issue.  In addition to the labor and equipment issues, four primary problems in the supply chain all directly impact rail freight operations.

4 MAIN SUPPLY CHAIN PROBLEMS

Four main problems persist for the whole supply chain and specifically for the rail industry: chassis shortage, a shortage of drayage capacity, intermodal terminal congestion, and slow container returns.  

There is a shortage of chassis.  The trucking trailers, known as chassis, and used to ferry containers from dockside terminals, have become difficult to find at the ports and rail yards. Typically, there are enough chassis in the finely-tuned supply chain to handle the thousands of containers moving through the system.  Surging demand, heavy flows of containers through ports that began in the middle of 2020, and the labor shortages being experienced by warehouses, distribution centers, and other cargo handlers have resulted in chassis being at their endpoint destinations and unavailable at the needed ports and intermodal rail terminals.  There are dedicated, company-owned chassis, and 1/4 to 1/3 are available for lease by independent truckers, and it is a fine-tuned and delicate system when working correctly.  A lack of chassis means containers don’t either move to the intermodal railway system or off the system to their next destination.

This is where the second problem comes into play– drayage.  There is a shortage of drayage.  Drayage is the transport of goods over a short distance in the shipping and logistics industries.  It is an essential service that involves shipping goods over a short distance between the long intermodal transport hauls.  You can check out my other videos on the labor shortage and the trucking problem to better understand how this piece of it all isn’t fitting neatly into the supply-chain puzzle right now.  I will link to that video at the end of this one.  Normally, a trucker picks up a chassis at a site near the ports, drives to a terminal to have a container loaded, takes it to a warehouse within a 100-mile radius, and then returns to repeat the operation.  The problem with this system right now is two-fold.  First, the pay for this short mile drayage is low compared to the hassle and responsibility at an average of just $26 an hour; and many of these truckers don’t get paid for the time they are waiting on a load which can stretch out over several hours.  Imagine having a chassis, waiting in line for 4-6 hours and not getting paid, finally getting a load for delivery to a warehouse or railyard just 50 miles away, then offloading or parking your chassis indefinitely.  It’s a full day’s work, with traffic, and other hassles, for what might only amount to a few hours’ pay.  Second, many warehouses are overwhelmed today, resulting in delays in unloading the container. The trucker often leaves the box atop the chassis for days longer than usual at a receiving facility.  This locks up the chassis, and the trucker is not making any more money off the delivery of that load.

This is also the third major problem right now, intermodal congestion.  At ports around the world, containers aren’t moving fast enough. These are the high-profile stories you see of container shifts stacked up and adrift off the coast.  These are the long lines of trucks awaiting access to a port and a load to haul away.  These are the warehouses reporting too few workers to meet demand.  It is a system bogged down by congestion, low velocity, operational constraints, regulations, soaring prices and costs, and a shortage of equipment.  The containers are slowed getting to the railways, or they are slowed after leaving the railways.  Many port and shipping owners are realizing higher profits from demurrage and detention charges.  This is, basically, renting space for parking containers or chassis.

It is also the fourth major problem– slow container returns.  In the shipping process, once a delivery order has been issued for a container, and the customer has unpacked it, they are required to return the empty container to a depot nominated by the shipping line.  Failure to return the empty container within the free time allowed for the customer and shipment may result in the client incurring demurrage or detention charges.  That charge can eat into profits when it is an average of $75 per day.  Still, that chassis is needed, and in short supply, so the container may be dumped somewhere.  Some companies specialize in trying to street turn a chassis or container by rerouting it to another closer destination and shipper.  However, to accurately meet rising consumer demand, that chassis needs to get back to the intermodal port or railway yard.  That empty container needs to get from Kansas City or where its final destination was to Shanghai or some other sizable exporting city in the Pacific Area.  It’s not very profitable to ship empty containers, and imports still far outweigh exports.  So the container sometimes doesn’t make it back to the railway or the shipper’s point of origin. Some large exporting countries have recently spun up operations to build their own containers, solidifying the one-way trip for good. 

A chassis shortage, a reduction in drayage, congestion, and slow container and chassis return all combine to make it difficult for railway companies to increase operational momentum even if they wanted to.

SOLUTIONS

Some solutions can and are being implemented to confront diminished capacity in the face of rising demand. Still, the solutions require each segment along the way to do its critical piece of tightening up and appropriately expanding operations in the correct direction.  Picture the railways from a physiological perspective.  They are the arteries that carry vital blood and oxygen to the body that is the consumer.  Consumer demand is exceedingly high right now.  That’s like the body physically working out.  But those arteries, the railways, aren’t very flexible right now and can’t expand to accommodate the higher blood volume.  The capillaries– the drayage– that get the oxygen-rich blood cells to the end cells that require it need to increase capacity to accommodate the arteries.  At the other end of the physiological network where the blood is produced, it’s being backed up and can’t get into the narrow arteries of the railways.  So it pools.  It pools up off the coasts and in the shipyards and parking lots, wherever it can accumulate.  At the heart of it all are the workers.  The heart is running at decreased capacity, so it can’t pump harder and faster to flood the arteries.  The result of all this is that the body gets tired.  Starved for oxygen, it yawns, but it can’t get up to speed to accommodate the exertion, and it’s bloated with undelivered blood.

Each piece needs to do a little.  Railroads specifically need to increase storage capacity to offload intermodal containers.  Many railroads operate via a system that simply passes containers through, but there now is a need to temporarily and intentionally hold a container until it can get a proper slot on a train.  Recently, Union Pacific held thousands of containers on rail cars in Chicago. At the same time, ocean carriers dealt with equipment and workforce shortages and warehousing constraints that slowed their ability to outgate containers from the ramp.  Railroads need to increase coordination and efficiencies across all rail systems and rail hubs.  They need to direct traffic better and more efficiently.  They need to press back into service decommissioned or previously deemed inefficient and idled locomotives.  

In some cases, they need to reopen previously closed intermodal terminals.  Railroads need to partner better with ports and trucking to move containers more efficiently.  They need to staff up and recall workers from furlough while enticing new workers.

It’s a considerable challenge that the railroads can’t solve alone.  Some companies like Walmart have launched pilot programs to produce their own freight cars.  The sub-privatization of the industry disrupts all rail freight operations.  It’s a solution for some that creates an even more significant problem for many.  If the trucking industry and warehouses continue to have a shortage of workers, nothing will change.  If consumer demand remains high and unmet, delivery times increase, and panic buying could occur, making things even worse.  If the trade equation remains lopsided with more goods coming in than are going out, things will resemble more late-stage capitalism than they will ever restore to normative economics.

WHAT YOU NEED TO KNOW AND WATCH FOR

Assuming you are not a captain of industry or barron-executive of the railways, there are things you need to know and watch for.  Understanding that almost all goods, parts, equipment, even Christmas gifts you don’t truly need are going to come to you by railway at some point along their transit, you need to know how things can get worse and what you can reasonably expect to become unavailable in the short-term.  So much depends on the rail system: wheat, coal, televisions, fertilizers, smartphones, oil, chemicals, raw materials, vehicles, medicines, and just about anything you can think of that is vital to your life.  If this critical artery of transport doesn’t flow more efficiently and at a greater capacity, expect fewer choices on everything from groceries to hardware to vehicles and more.  As mentioned earlier, shortages can ignite panic-buying, and that can cause flare-ups throughout the system.  Beyond the consumer, though, critical infrastructure systems will be poorly and shoddily maintained if parts and equipment are slowed or halted.  This could result in failures that require shipments of new parts manufactured overseas before they can be restored to operation.  Power, gas, or water system failures will go from a few hours of interrupted service to maybe days or even weeks.

Watch for inclement weather, storms in the south and midwest regions, or blizzards in the north to further complicate the railway system.  Tornadoes, wildfires, blizzards, and floods can shut down lines for hours or days, keeping your shipments from reaching their final destination.  Know that any natural disaster will automatically halt the railroad flow of goods.  Perhaps the most significant threat, though, that nobody is really acknowledging right now is that the railways run on antiquated computer systems.  It’s not always one guy manually working a railroad switch to allow a train to switch tracks, though sometimes it still is.  It’s a fragile computerized system that hasn’t kept up with technology upgrades.  As such, it is highly vulnerable to cyberattacks.

In July of this year, in perhaps an early warning to the rest of the world, Iran’s national railway system suffered a cyber-attack.  Train service, both passenger and cargo, across the nation was canceled or delayed.  It is thought that Israeli hackers conducted the cyber-attack.  Iranian hackers are accused of having attempted to hack and interfere with Israel’s water treatment systems, and that this railway attack was in retaliation for that.  A cyber war rages on, be it from hackers in Russia, China, Israel, or even here in the United States.  The railway systems are a ripe and vulnerable target. A minor problem created by a ransomware cyberattack would reverberate across the much larger system and bring all traffic to a standstill.

Rail systems both in America and in Europe have already been subject to several significant attacks.  Attacks on railway systems occurred in 2016 in San Francisco and 2017 in Germany.  The rail network is so vulnerable and in some places archaic that a teenager in Lodz, Poland, altered a television remote control and took over the industrial control systems managing light-rail track points in the city. Four trains were derailed, and 12 people were injured as a result.  The rail systems here aren’t that much more advanced, and they are susceptible to attacks and failures at several points, junctures, terminals, and control rooms all along the route.  Watch for any significant attack on our railway systems at this tenuous time.  It’s a sign that things are about to get dramatically out of control. 

CONCLUSION

Trains are part of the problem, and they are also the solution.  It’s a system that’s lumbering along at not a tremendous speed but moving nonetheless.  A lack of truck drivers, truck chassis, and warehouse workers are the most significant failings in the industry right now, but some believe that if wages were raised and systems built out, reconfigured, and invested in, the whole system would not only correct itself, it would boost the economy and prevent future bottlenecks.  Fortunately for you, if you have been striving for a more prepper-like, more self-sufficient lifestyle, you can remain somewhat insulated from the worst of it all, and the supply chain may correct itself, barring further complications.  Reduce your needs, don’t be a part of the panic buying by your efforts now to prepare what you need.  Find local sources to replace things you currently rely on from overseas.  Prepare for the genuine possibility of extended outages, delayed deliveries, and system failures.  There is an awful lot that needs to go right for the system to correct itself at this point, but there’s even more right now that can go wrong with it still.

Do you see the supply chain restoring itself, or are we only at the beginning of this crisis that will get much worse before it gets any better? Do you agree that the railway system is one of the most vulnerable links in the supply chain? 

As always, stay safe out there.