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January 2 2023

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98 Journal of Commerce | J anuar y 2, 2023 EXECUTIVE COMMENTARY ANNUAL REVIEW & OUTLOOK 2023 Surface Transportation service through future operational and economic disruptions, so our customers can build their supply chain strategies around us with confidence. Partnerships across indus- tries can also play an important role improving customer service. Recently, we collaborated on an innovative solution called OceaNS Bridge Express in response to supply chain dislocation. Hapag- Lloyd ships now arrive at the Port of our customers to achieve substan- tial reductions in carbon emissions when they ship by rail. To serve these customers, we need to offer a level of service the market values. Our strategy at Norfolk Southern is to be a customer-centric, operations-driven service organization. That means we will maintain a relentless focus on service quality so that it becomes an enduring competitive strength. It also means offering more resilient product and innovative solutions that help customers navigate an evolving supply chain. We talk with our customers every day about what they see. Fac - ing pressure from inflation and interest rates, they want to shift more of their business from highway to cost-effective rail. Trends such as e-commerce and the shift from "just-in-time" to "just-in-case" inventory strategies are also driving demand, as is the opportunity for Oliver Wyman Adriene Bailey Fred Duiven, Partner The pandemic recovery supply chain surge has once again demonstrated the vulner- abilities of the US surface transportation system, with participants long on placing blame and short on finding solutions. Con - gestion, reduced fluidity, and equipment shortages are effects, not causes — but they are easy to identify as targets for immediate action: Increase capacity! Add equipment! Add labor! Unfortunately, these short term "solutions" mask and distract from the root causes of systemic supply chain issues and incremental costs. Greater collaboration between shippers and carriers is needed to address system - wide inefficiencies and prevent history from repeating itself. Nowhere is this truer than for rail intermodal, where the congestion and disruption of freight during the pandemic and recovery have caused material share shift to truck, as well as extreme frustration, substandard service, and excess costs for all stakeholders. Two examples illustrate how independent behaviors by shippers and a lack of cooperative action have impacted system performance: 1. Container and chassis dwell times: Street dwell time more than tripled during the pandemic and remains elevated today. Congested terminals are capturing headlines, but the real issue is the extended usage time outside the terminal. Pandemic-challenged shippers unable to unload containers and keep equipment moving have caused a ripple effect that has severely hampered the entire intermodal network — backing up terminals and forcing containers to the ground. Right now, there is no greater motivation for increasing intermodal system effi - ciency than to clear excess inventory on the street and in the terminals and return chassis to active service. 2. Peaky demand at intermodal terminals: Shippers and dray providers produce an arrival pattern of containers at terminals with hour of day and day of week peaks. In a typical week, Oliver Wyman estimates 35 percent of all containers are ingated between 10 a.m. and 3 p.m. Monday– Friday, peaking between noon and 1 pm. That leaves 40 percent of the terminal's daily capacity unused outside of the peak window. The cost to railroads to design gate, parking, lift, and train capacity against this peak-driven demand curve results in either: 1) greater-than-needed inter - modal terminal capacity, at much higher operating costs; or 2) smoothing demand after ingating — resulting in higher service variability for some shipments (think left-behinds) and higher driver wait times. Neither outcome is optimal. If shippers could collectively flatten demand arrival peaks, the value creation would accrue to all. Ultimately, tradeoffs among stakeholders will be necessary, but the benefits for the system are compelling (better service, higher productivity, reduced costs, higher asset utilization). A few ideas for cooperation that we believe could make a difference for rail intermodal include: 1. Share data in real time: Better visibility and accurate advance notice of important events (inbound gate arrivals, estimated pickup dates/ times, estimated time of grounding, etc.) will help all constituents plan and execute better. Integrating data and providing advance visibility between stakeholders is an important step to helping the overall perfor - mance improve. 2. Reward "virtuous" network behaviors: Carriers could offer benefits to shippers and dray providers that demonstrate a sustained ability to help the railroads maximize capacity utilization across the week and across seasonal variation. 3. Incentivize shippers to protect network and equipment performance: Levers include escalating daily equipment use charges — especially for excess outgate chassis usage, charging for dray and off-site grounding for long-dwelling containers; providing rewards for consistent volumes that take advantage of off-peak times; and designing mecha - nisms to prevent volume surges that degrade terminal performance. All shipper supply chains are different, and some long dwells or volumes surges cannot be avoided — but the system must be able to prevent dete- rioration of performance for everyone. Changes such as these would benefit shippers, dray providers, terminal operators, and rail carriers by unlocking incremental value in rail inter- modal and avoiding costly capacity expansion when there is latent capacity available. We consistently underreport, underestimate, and undervalue the col- lective impact of individual shipper decisions on overall system efficiency and reliability. The industry needs more mechanisms that incentivize and protect shippers who have network-enhancing shipping patterns, as well as operating and commercial policies that prevent or minimize the impact of individual shipper behaviors that damage the overall performance of the network for everyone. "Greater collaboration between shippers and carriers is needed to address systemwide inefficiencies and prevent history from repeating itself."

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