June 2001

Strong railroads need strong supply chains

concept is
not just

Domestic freight on the railroads is a $35 billion market--mere crumbs compared to the total freight market of $540 billion, of which truckers have the highest share. One reason truckers have been winning is that they’re using customer information to manage capacity. Happily, there are signs that the railroad industry is beginning to catch on. The increased class 1 railroad revenue per carload for the first quarter of 2001 is our first clue.

Even with the soft economy, where coal and intermodal largely saved the day, merchandise carload revenues were not down as much as actual carloads. The reason is that the rails can now command a premium price for a premium service – one that’s consistent and reliable.

As examples of what’s possible, two new carload services come to mind. First is "Speedlink," a cooperative venture between the Portland & Western and Union Pacific. It’s a less-than-carload boxcar shuttle providing door-to-door service between the Portland OR and LA. Then we have Norfolk Southern’s JIT-Rail program for auto parts. Goods from more than 150 vendors funnel through four centers, are loaded in unload-sequence on special boxcars, and forwarded to assembly plants that maintain no inventory.

For supply chain managers, the economics are pretty basic: Better supply chain management helps manufacturers reduce inventories, increase inventory turns, and compress the intervals between shipments of goods to customers. But…since customers don't like pay for goods en route, irregular transit times drive up vendor receivables, eating into working capital. Not good for vendors, so they opt for reliability, even if the rates are higher.

True, there are times that operating variables in the field conspire to prevent the rails from matching the trucker’s consistency. The railroads are now at a point, however, where much of the randomness of events has been removed and the rest provided for. Scheduled freight shipments are once again becoming reality. So if shippers can predict how many loads are available on what dates then the carriers can have appropriate empties in place for loading at the appointed time.

Supply chain managers place as much value on information about the goods they manage as on the goods themselves. Data warehouses, the Internet, cell phones, and pagers sustain a ready stream of information. And it’s the quality of that information stream that gives one firm competitive advantage over another. Linking the customer inventory management system to the transportation system is essential.

Shippers have undergone massive process transformations to stay competitive. They pass on to carriers performance expectations that mirror their own drive for quality and consistency. Yet the basic transaction processing tools the railroads have used to meet these expectations were in too many instances old – and out of synch with customer IT systems. Historically low rates of return on invested capital have made it difficult to invest scarce capital resources on IT, especially in the face of roadway and equipment needs.

Other hurdles still remain. Rail analytical resources have been traditionally aimed at managing terminal and train performance, not end-to-end shipment characteristics – STB Dwell Time and Average Train speed, e.g. Furthermore, interfaces between railroads' legacy systems, either interline or process modules, not to mention data capture processes, have lead to data quality problems.

Leveraging customer information to improve reliability ought to be pretty direct. Even as freight railroads make significant strides in returning to scheduled operations, it hasn't been easy. They have been limited by the complexity and size of their operations and the massive amount of data needed. By the time they massage their traffic samples, run their network models, and tweak their classification tables and train schedules, the day’s operating plan can easily get out of step with current business conditions.

The tendency has been to revert to matching today’s resources to today’s traffic. That’s changing, too. Operating managers now have the tools to short-circuit random events by getting everything in place today to do tomorrow’s work. And that’s got to get easier as managers tap into the same large database management techniques that shippers use. They could pinpoint advance customer requirements, generate traffic forecasts, associate traffic flows and resource costs, generate alternative schedule options, and adjust schedules.

The good news is that rail rate increases are sticking as railroad reliability gets closer to truck reliability. By collecting data as close to the business activity itself, ideally as a byproduct of the work activity, railroads can improve data accuracy and reduce its gathering cost. Out on the road, Line item expenses such as labor and benefits, equipment rents, and diesel fuel can only go down as a result.


Railway Age Columns Home
Send comments to roy@rblanchard.com