Navigating the rough waters of capacity problems caused by the Rhine draught

The drought of the past months in Europe caused the water levels of the Rhine River to diminish to unprecedented levels and now, in the final week of September, they are barely back to their normal. 

Disrupting the cargo shipping industry, this is also leaving a negative impact on overall freight transportation by decreasing the volume of inland water transportation by about 25% during the months of low water levels.

A shift in demand

While Europe has been struggling with drought and low water levels caused by climate change for many years now, the severity of this year added another level of challenge, causing cargo ships to sail loaded at about 30% of capacity. To make up for the shortage in riverine transport services, companies are considering alternative transportation modes, shipping more goods by rail or road. 

For every 100 cargo ships crossing the Rhine, 15,000 tons of goods are shifted to be transported by road. Considering that on average the number of cargo vessels traveling the Rhine in a single day is 1600, millions of tons of cargo per month are left to be transported by road. 

Any extent of modal shift is adding pressure on land transportation companies in managing capacity in times of increasing demand, while continuing to protect their margins.

Does this increase in demand equal an increase in gross margins?

Let’s consider the example of a road transport company XYZ Logistics. Currently, XYZ Logistics prices the route at €800 (calculated with cost + margin) and the regular volume is 500 shipments a month. A shift in demand would cause a sudden increase in their volume to 700 shipments a month.

The question is: how will XYZ manage its capacity so that margins stay secure. Table 1 shows the company’s performance with cost-plus pricing. Note the negative change in both unit contribution and gross margins. Realizing that the margins had dropped, the management finally increases the price, at the same time trying to limit rising costs to save the margins, something that will later result in capacity constraint. 

Table 1: Pricing, revenues and margins in case of increasing demand with cost-plus pricing.

Impact on the future: how can companies manage capacity and increase margins in the times of increased demand?

There is a probability that in summer 2023 the Rhine levels may decline. In such a scenario, how will XYZ Logistics manage capacity to meet the temporary increase in demand?

Let us look into what could happen if the company could anticipate the increasing demand (using both internal and external data) and, thus, adopt a demand-driven component in its pricing (Intelligent Pricing). 

In this case, XYZ’s pricing engine captures the increasing demand early on and begins to increase the price accordingly (Table 2). The volume still increases due to a stronger demand, but not as much as in the cost-plus case. Costs are allowed to increase faster, making it easier to outbid the competition for capacity. The resulting gross margin for the period is considerably higher, while the capacity is more manageable. 

Table 2: Pricing, revenues and margins in case of increasing demand with Intelligent Pricing.

Intelligent pricing for capacity management

Intelligent Pricing is a powerful internal capacity management tool that helps companies to manage capacity and secure margins not with volumes, which is difficult and disruptive, but with prices. 

For more on how Intelligent Pricing can help companies handle the demand-driven capacity problems, read “Capacity management: How to find capacity when demand is out of control?”.

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