Decentralised pricing and costing in the railways

By Krassimir Angelov, M.Eng.Sc.

BDZ EAD

Freight services of BDZ EAD cover three main market segments: domestic services, domestic services for import-export and transit goods via ports, and international import-export and transit services via inland border crossing points.

Depending on the quantities and type of cargo or the type of deal, each of the above three main segments can be additionally subdivided into two segments each:

- relatively ‘mass’ cargo transport, which holds greater potential for a successful offer of the railway service ‘train consignment’ (block-train);

- smaller batches or sporadic cargoes, which are best serviced as ‘wagon consignments’ (including smaller consignments, parcel consignments).

The marketing concept for decentralised pricing and costing is aimed mainly at the wagon consignments in domestic service.

Need for coordinated grouping

The railway is a high-potential system, the major competitive advantages of which are the lesser unit costs in the conditions of a more intensive traffic. These advantages can be manifested only if the on-going objective is the coordinated grouping of cargo in particular locations at particular times. From a marketing point of view it is highly important to offer competitive prices and conditions for consignment grouping to customers, based at various locations and wishing to have their cargo transported at various times.

Initial costs and entrepreneur’s risk

The level of initial and constant costs of the railways is high. In order to reduce the risk of not covering these costs, railways aim at negotiating whole trains (train consignments, block-trains) with their customers in advance.

The decentralised pricing and costing allows a very particular ‘hedging’ of risk in the origin/destination sections of the relevant railway transport, where traffic is relatively less intensive and the initial and constant costs are quite significant.

Economic performance

Any particular solutions for the operation of a particular train/shunting in real time terms should be based upon the budget projection results from the particular costing after a general model, relative to costing. Decentralised pricing-costing is aimed at the identification of economic performance of particular shunting work and the delegation of rights to commission additional, economically-efficient local or shunting trains.

Public and ‘internal tariffs’

The promotional prices and conditions for railway services play the role of ‘internal tariffs’ because for the forwarder they represent the low level (the level of costs), which is the level that should be covered by free negotiations with the customers.

The marketing concept for decentralised pricing and costing is in itself a relatively transparent way of internal accounts settling in the cases when tariffs are only partially made public.

Partial decentralisation

As far as there is no budgeting system in BDZ and internal accounts settling between subdivisions and information systems, for the time being, it is impossible to introduce entirely internal (non-public) tariffs and general management of the revenue-expense ratio of particular wagon consignments.

Decentralised pricing and costing should be applied in a differentiated and gradual manner.

Changes in BDZ

After the institutional separation of operations and infrastructure management, BDZ EAD has functioned in an entirely different environment. The character and amount of infrastructure charges have a strong impact on the efficiency and organisation of freight services.

Decentralised pricing and costing is a natural consequence and continuation of the reforms under way in Bulgarian railways, aimed at a more flexible market adaptation and commercialisation.

Shunting operations model

The Shunting Operations Model (SOM) is a new economic information system for decentralised management of shunting activity. This system can be introduced either globally or gradually and partially - on particular line sections and/or for ‘additional’ shunting operations. While SOM is coordinated centrally, it functions in a decentralised way. The Shunting Operations Model is the initial stage of the process for the decentralisation of pricing and costing.

Stations provisionally open for wagon consignments

With a view to the reduction of costs incurred by BDZ, the undertaken actions aim at the reduction of the number of freight trains and the closing-down of stations, which have hitherto accepted wagon consignments. The current ‘centralised’ criterion is based upon the average volume of cargo handled at a particular station, in comparison with the existing possibilities for the provision of trains and shunting operations to service this cargo. The approach of comparing average revenue with average expenses is not sufficiently precise and should therefore be replaced by the decentralised pricing and costing of particular shunting operations along ‘critical’ line sections and for local trains and their shunting.

Regular timetables for freight trains

The wagon consignments from/to stations which are (unconditionally) open for their acceptance, shall be serviced by freight trains (direct, local, shunting), operating in accordance with a regular timetable.

The operational regularity of freight trains with wagon consignments (i.e. ‘fixed’ freight trains, which service these wagon consignments) is considered in four aspects: economic, operational, marketing and ‘grouping’.

Conclusions

In their endeavour to preserve and further develop the traffic of wagon consignments, the railways undertake both operational optimisation measures and targeted pricing measures. For example, the German railway project MORA C (which stands for Market Orientation At Cargo - i.e. for the market orientation in respect to freight) represents a systematic and centrally-coordinated operational optimisation.

Via its shunting operations, the railways come into almost direct contact with their customers. With only few exceptions, the current revenue (or to be more precise - the benefits) from shunting operations remain an unidentified portion of the overall revenue. The analysis of costs for stations shunting operations, shunting and local trains shows that these amount to tens of millions of leva in annual terms.

The introduction of the shunting operations model to cover all shunting operations and local train operations would imply an economically efficient and market-compliant management of revenue and expenditure, incurred by shunting operations. This is a systematically correct approach for the decentralisation of pricing and costing in the railways, because it dynamically clarifies and manages the revenue-cost parameters of particular wagon consignments at the immediate customer level.

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