CREATIVITY INNOVATION & ENTRE

Sand Company Inc. Contract Structure & Rate Increase Case

Union Pacific Railroad Case Competition

The southern region of Union Pacific Railroad's (UPRR) network has recently experienced a large

increase in shipments due to a boom in the oil market. Horizontal drilling (i.e., fracking) has grown over

the last several years, requiring large amounts of sand which UPRR has been transporting. This growth in

the southern region is a double-edged sword--it represents a huge growth opportunity for UPRR, but also

poses major service challenges for the railroad due to congestion. Significant capital investment is needed

in the southern region's infrastructure to handle the new volume while providing strong customer service.

UPRR has started to make the needed capital investments.

Sand Company, Inc. (SCI) is a customer of UPRR located in eastern Texas and is exclusively serviced by

UPRR track. SCI provides sand to the energy industry for horizontal drilling. In the past couple of years,

SCI has experienced significant growth that it expects to sustain into the future. Rail service has been a

point of concern for SCI, as they have experienced regular delays in their sand shipments. SCI happens to

be located on a water way which is seeing a growth in barge shipments.

SCI's four year rail service contract is coming up for renegotiation on Oct 1 and SCI has been identified

by UPRR as paying less than market rates for rail service. SCI is currently paying $3,250 per car.

Your task:

 Prepare a presentation for your director and the VP of Marketing explaining which contract structure (from the list below) makes the most sense for UPRR and what per car rate you will

propose to SCI. Your audience will be especially interested in why you choose a given contract

structure and rate.

 The VP of Marketing and director will also want to see the talking points for your plan to present to SCI when you meet with them for renewal.

Possible Contract Structures for SCI

1. Non-exclusive one year rate – SCI is free to ship using any transportation method available and will be given a fixed per car rate from Oct 1, 2020– Sep 30, 2021.

2. Exclusive one year rate -- SCI will be contracted to move all sand exclusively with Union Pacific and will be given a fixed per car rate from Oct 1, 2020 – Sep 30, 2021.

3. Exclusive three year rate -- SCI will be contracted to move all sand exclusively with Union Pacific and will be given a fixed per car rate from Oct 1, 2020 – Sep 30, 2023.

All data in this case was generated by the case creators and does not represent real UPRR data.

Sand Company Inc. Profile

Hydraulic fracturing or ‘fracking’ has been booming in the Longhorn Basin, a large sedimentary basin in

western Texas. Fracking requires large quantities of sand, and traditionally white sand from Wisconsin

has been used due to its high quality. While white sand is ideal for fracking, it is very expensive ($90/ton)

to transport to the Longhorn Basin. Sand is plentiful in Texas but it is entirely ‘brown sand’ which is both

less crush resistant and less round than the sand from Wisconsin. Due to the high transportation costs to

bring in white sand, Oil & Gas Corporation (O&G) decided to experiment with the local brown sand.

Sand Company Inc. (SCI) was formed in August 2015 as a small sand mine in Eastern Texas, after O&G

contacted a brown sand land owner about this chance to experiment with brown sand in fracking. SCI

purchased the necessary sand excavation equipment and sold their first shipment to O&G in October

2014. Prior to SCI’s formation, the sand on this land wasn’t being sold, as it was worth close to nothing.

SCI has been adding new customers since 2016 and charges the market rate for brown sand. Partially due

to the success of the O&G experiment, as of November 2018 nearly all fracking operations in the

Longhorn Basin are looking to source the less expensive Texas brown sand. This has led to more sand

sourcing requests than SCI is able to fulfill. Due to the high demand, as of February 1, 2019 SCI has

ramped up to maximum operations.

Since the major uptick in sand transportation throughout Texas, SCI has had issues with its Union Pacific

shipments arriving on time. More than half of SCI’s shipments have arrived at their destination over 48

hours late. SCI’s contract with UP expires on September 30, 2020 and SCI will be aiming to address these

service issues as part of contract renewal negotiations.

Based on the size of the mine, estimates are that SCI will have fixed expenses of $12,500/month and

variable expenses of $73/ton (excluding shipping), at all production levels.

Union Pacific’s Competitive Analysis

Transportation Alternatives for Sand Company Inc. (SCI)

Other Railroads

No railroads except for UPRR have railroad track access to SCI. As such, there is no competition from

other railroads for this customer.

Trucking

The market rate for trucking sand from SCI to the Longhorn Basin is $63/ton, due to DOT (Department of

Transportation) weight restrictions and a tight trucking market. The trucking industry has capacity to

transport all of the sand SCI produces to the Longhorn basin but would likely require that SCI work with

multiple trucking companies. Working with more than one trucking company can make it difficult to keep

track of pick-up and delivery times and can cause significant queueing issues.

Barges

With burgeoning sand transportation demand in Texas, new barges are being manufactured and will soon

enter the marketplace. Based on market intelligence, UPRR expects that SCI will have access to barge

transportation by March 1, 2020 UPRR also expects barges to charge $24/ton once available. The barge

industry will have capacity to transport all of the sand SCI produces to the Longhorn Basin along the

Grand Texas-Sand River. While barges can transport enormous quantities of sand, they are very slow and

take an indirect path to the Longhorn Basin, leading to very long transit times. They are also more

vulnerable than rail to weather conditions which cause a change in river levels.

Southern Region Operational Update – August 2019

Through August, the southern region’s performance continued to lag behind other regions due to

congestion on the network. The region’s average velocity for August was 15.6 mph, short of our velocity

goal of 16.2 mph, though up from July’s velocity of 15.0 mph.

UPRR has invested nearly $700 million in capital YTD on southern region track renewal and capacity

projects to help alleviate the heavy congestion on the network. These capital projects have helped

improve our velocity from the low of 13.3 mph experienced in March. We expect service levels to

continue to improve, as several key capital projects will be completed by the end of November.

Union Pacific is also employing a strategy of avoiding new service contracts with low-margin customers.

This ensures high margin customers’ goods are not delayed by congestion caused by low-margin traffic.

With the completion of key capital projects and addressing low-margin customers, our goal is to be at a

velocity of 17.5 mph by year end. This increase in velocity should increase our on-time shipment rate

from 48.3% in August to 55.0% by December.

Rail Terms Glossary:

Velocity – The average speed (mph) that trains move over a time period. Higher values are better.

CAD Dwell – The time (hours) between when a train passes a signal entering the terminal, and a subsequent signal

exiting the terminal. Lower values are better.

Re-Crew Rate – The % of trains that require a new crew due to the original crew approaching their maximum legal

hours of service before reaching their destinations. Re-crews are expensive and slow operations. Lower values are

better.

Consist Acc – How accurate the terminals are at getting the right railcars on the right train, in the right order. Higher

values are better.

Train Velocity

Region Aug Goal Aug Jul YTD

Southern 16.2 15.6 15.0 14.2

Northern 20.6 20.7 20.4 20.6

Western 21.3 20.7 19.6 21.2

August Performance

Arrival On CAD Re-Crew Consist

Region Time % Dwell Rate Acc

Southern 48.3 2.8 2.2 91.3

Northern 69.2 2.4 8.9 78.9

Western 80.9 3.2 5.5 88.9