Supply Chain

Derailed: What it would mean for the supply chain if freight rail traffic abruptly stopped

A halt to rail traffic would devastate the American economy.
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· 4 min read

It’s October, and there’s a scary event on the horizon, and we’re not talking about sugared-up kids in costumes or urban legends about dangerous treats. The already beleaguered US supply chain is teetering on the edge of catastrophe, with a potential strike by rail workers back on the menu.

Members of the Brotherhood of Maintenance of Way Employes Division last week rejected the White House-brokered labor contract with the railroad companies over concerns about working conditions and time off, resurrecting the possibility of a national railroad strike.

Any sustained interruption to the rail system would effectively kneecap the American economy, and supply-chain experts told CFO Brew there may be nothing companies can do to deal with the potential disruption.

“There will definitely be shortages of things,” said Dawn Tiura, president and CEO of Sourcing Industry Group, which represents sourcing, procurement, and risk professionals in Fortune 500 companies and other major enterprises. “It would be so ugly, especially this time of year, right before the holidays.”

Railways play a central role in the logistics of the American supply chain, an intermodal combination of ocean shipping, rail, air, and trucking and the other cogs are also in deep trouble right now; there’s a shortage of truck drivers and barges are running aground in the Mississippi River. So if the railroads shut down, companies have no reasonable alternatives for getting essential parts and inventory.

Take out any one piece, and the whole system risks collapse, according to Tiura.

“There’s no backup. Railway and trucking are the only way to get over ground,” she said. “What else is there? We’re back to horse and wagon; there’s nothing left that you can consider.”

If railroads and labor can’t come to an agreement, the disruption to rail traffic would lead to critical supplies of many essential consumer goods suddenly becoming scarce, said Dr. Nada Sanders, distinguished professor of supply-chain management at Northeastern University.

Gas prices would likely spike, since railroads carry much of the ethanol that goes into gasoline, and transport 300,000 barrels of crude oil a day, according to the trade group American Fuel and Petrochemical Manufacturers. Agricultural groups warned Congress in September that a slowdown would cause “devastating consequences to our national and global food security.”

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“Bottom line is this would be extremely detrimental to businesses and consumers,” says Sanders. Not only would grocery-store shelves quickly become bare, but there’s potential that feed for livestock, coal for power plants, and chemicals used to clean drinking water would fall short or even run out altogether, Sanders added.

Railroads carry one-third of all exports and 40% of long-distance freight volume in the US, according to the Association of American Railroads (AAR).

But even if companies can’t get goods delivered because of a railroad shutdown, there are a limited number of strategies that companies can employ to cope, including looking for local suppliers that don’t require rail delivery, changing products to fit available materials, or switching to more expensive trucking or air-freight options, according to Sanders.

Companies resorted to these kinds of strategies during the Covid-related supply-chain disruption, Sanders said. But such tactics would be mostly ineffective if the nation’s freight rail shut down because of the totality of the disruption.

And companies may not be able to offer substitute products if the supply chain is shut down, according to Tiura. “Product substitution— everybody always thinks about that—but certain things just can’t be substituted,” she told CFO Brew.

One area where Sanders says companies may be able to mitigate some risk is technology, especially supply-chain analytics.

“We’re really seeing companies moving to technology—digital, and in particular, analytics—to look at the data and mine the data a lot better, both in supply and demand and to be able to understand their markets better,” she said. “And then also query the data so they can understand when they don’t have enough supply, how they can innovate their product offering with what they have.”

While this all feels very doomsday, there is still a chance that the railroad companies and workers can come to an agreement. Rail workers and operators have until November 19 to renegotiate the contract, and there may be changes that both sides can agree on.—DA

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CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.