Densified distribution

Densified distribution

The big word for railroads these days is "densification." It's an awkward term that describes the rails' efforts to consolidate freight on main routes where they can develop and apply economies of scale.

Railroads spent a century building and serving a complex network of mostly low-volume routes. Since the deregulatory Staggers Act of 1980, they've concentrated their efforts and investment on busier lines where they have a fair shot at a reasonable return on investment.

That's what is behind the stepped-up competition between the BNSF Railway and Union Pacific for freight headed to principal U.S. inland distribution hubs. As Bill Mongelluzzo reports this week, the dominant western railroads are working to encourage companies to establish distribution centers near cities such as Chicago and Dallas-Fort Worth.

The stakes are high. If a railroad can persuade a potential customer to put down roots in a DC on one of the railroad's main routes, the customer is likely to funnel cargo over that route for years to come. And because the line will have high traffic density, the railroad's unit costs for handling the freight are likely to be lower.

What the railroads are doing is mirrored by the closely watched initiative that Maersk Line unveiled a couple of months ago for international intermodal shipments. Maersk, the largest container carrier, is restructuring its intermodal network by eliminating service to some points and concentrating its service on high-volume corridors, many linked to terminals operated by sister company APM Terminals.

These developments are likely to spread, and they have enormous implications for supply-chain planners.

Carriers traditionally have gone where the shippers are. They've followed customers who have based their selection of distribution-center sites on cheap land or labor. Now it appears that transportation is becoming a more important part of the logistics equation.

As transportation service providers have gotten a better handle on costs, they're using price and service incentives to attract business to their optimal, high-volume routes.

The increased concentration of traffic raises the possibility of congestion, but railroads and developers of industrial real estate already are looking to secondary hubs in places such as Memphis, Kansas City, and even Meridian, Miss., where an increasing volume of east-west intermodal traffic connects with Norfolk Southern's main route.

For cargo interests, the changing distribution environment can be a problem or an opportunity, or both. If a shipper has designed his supply chain around a DC that's off a carrier's beaten path, it's a problem.

But the changes also provide an opportunity for shippers to take a fresh look at their supply chains. If the resulting adjustments also help a carrier operate more efficiently, both sides can benefit.