Pains, Trains and Automobiles

Apr.19.11 | About: Union Pacific (UNP)

By Marty Lariviere

We haven’t talked about logistics in a while, but here’s an interesting story that is impacting US automakers. Car makers, all things consider, have been enjoying a good year (at least until the Japanese quake whacked component supplies).

Sales in the first quarter were up over 11%. The problem is that it is getting hard to get cars from factories to dealers. The Wall Street Journal reports that railroads idled a lot of freight cars during the recession and they have been slow to respond to the surge in car shipments (Rail Woes Hit Auto Deliveries, Apr 13).

As the U.S. economy contracted during the recession, railroad operators put hundreds of thousands of rail cars into storage and cut their staffs. Now that shipments of autos, coal and consumer goods are rising again, the nation’s railroads don’t have enough rolling stock for fast deliveries. …

“Rail companies are good at delivering a high volume at a consistent rate,” Mr. Mims said. “Where they have the problem is responding to a surge in demand. We will know if it’s a seasonal or systemic problem if it drags into April.”

The shortage of freight cars has added anywhere from a few days to a few weeks to the time it takes for new cars to reach dealers, forcing auto makers to park finished vehicles near plants around the country.

The graph below shows that even though some freight cars have been pulled from storage, more than usual remain mothballed. This has impacted Ford (NYSE:F), General Motors (NYSE:GM), and Chrysler. Indeed, the article describes car makers finding lots at places like state fairgrounds where they can stash spare vehicles.

(Click chart to expand)

Railroads are trying to respond but there are limits to what they can do given their networks and commitments to other customers.

Union Pacific Corp., (NYSE:UNP) which ships 75% of all the new vehicles moving to Western states, is attempting to address the problem by adding more locomotives to its lines, said spokesman Tom Lange. UP is also re-rerouting empty freight cars so they get where they are needed faster, and mechanics are doing some repairs on site rather than waiting for a rail car to be sent to a central maintenance facility, Mr. Lange said.

An obvious — if more expensive — option would be to ship more vehicles by truck. The kicker there is that both GM and Chrysler have been duking it out with one of the trucking firms that hauls cars for them. (See, for example, Chrysler cars pile up over hauling dispute, Mar 31, CBC.)

More realistically, they will probably just have to ride this out. Trains are simply the best option for moving lots of stuff. What this emphasizes, however, is a challenge in the auto industry’s dream of moving to a pull sales model (which we have written about in the past). Trains are not the most flexible way of transporting stuff. (If they were, they wouldn’t be as cost-effective.) If the idea is to allocate production to where it will sell, that could be challenging to do via rail if there are shifting regional imbalances in sales rates.