Railroad economics are difficult to model. A large proportion of railroad cost structure is fixed and must be allocated. Variable costs are shared across multiple shipments and are difficult to attribute to any one carload. For these reasons, it is often a challenge for rail operators to clearly understand the bottom line impacts of changes in traffic mix and new business, as well as the impacts from car storage and switching requirements.
Gilbert Sachs Group recently delivered a rail costing model to a highly respected and innovative shortline railroad looking for a solution to this problem.
Working closely with the operations, sales, and finance teams, GSG developed an ABC (activity-based-costing) system that ties asset and crew cost drivers to financial results. The system is able to calculate the operating ratio for each customer and assess the cost and profitability impacts of changes in the operations. Using the tool, the client was able to stratify its customer base, determine which accounts were unprofitable, and begin formulating strategies to improve financial performance.