August 2001

You Can't Fix What You Don't Measure

The view from here is that the customer measures performance in some other way than the railroad does

Curt Warfel arranges transportation for a major chemical manufacturer. He writes, "Too often, railroads determine on their own what the goals and measurements will be for a particular customer. The customer usually finds out after the fact, when the railroad comes in to tell him that his traffic has been running 98% on time. Wonderful news, but if I needed 10 day transit and the carrier is providing 15 as their goal, that 98% on time translates into 100% late as far as I am concerned."

Clearly, communication between Curt’s company and his railroad suppliers is "broke." The view from here is that the customer – and Curt is not the only one – measures performance is some way other than the way the railroad measures it.

The old saw about not fixing things not broken presupposes the ability to know when things are broken, and leads to another better adage, "If you can’t measure it you can’t fix it." Measuring something implies having something to measure against, and that’s the thread of this month’s column – identifying and using benchmarks, or something to measure against.

The rail industry’s share of the domestic inter-city freight market is now down to about 7% of total sales, or $35 bn of a total market well over $500 bn. Making matters worse, the AAR says constant-dollar rail freight revenue per ton-mile has been cut to half what it was ten years ago. The loss can be traced directly to product design. Others had products that more closely fit the transportation buyers’ needs.

What follows is a set of three measurements, each of which can be readily complied from the railroad’s books. Each benchmarks railroad product design against a customer value. In other words, the benchmarks (points of comparison) are railroad performance against customer expectations.

1. Ease of doing business. It’s fairly safe to say transportation buyers are well versed in web-based transactions, whether Amazon books, Gap khakis, or whole kitchens from Home Depot. The success of truckline websites says shippers are eager to buy their transportation services the same way, and vendors who conform to this environment are the soonest winners. The rail performance benchmark is the year-to-year change in revenues for the most volatile (and highest revenue) commodities – the ones most likely to change vendors on the shortest notice or most susceptible to diversion.

Two other measures are year-to-year change in the number of profitable customers and the volume of web-based transactions. The first shows a growing franchise, a great indicator of customer satisfaction. The second indicates not only customer satisfaction with product performance but also comfort with web-based transactions. These three – revenue changes, franchise size, and web-use – are leading indicators of how easy (or difficult) it is to do business with your company.

2. Consistency. The freight buyer’s need is a double one. Not only does the inventory level have to be sustained to match demand for his company’s product but also the freight mode selected has to be able to deliver product on a schedule to match the supply chain needs on time every time. Being "on time" simply means "when the customer expects it."

Consistency is measured by the percentage of "Loads arriving on time according to the trip plan" agreed to before the shipment ever leaves the origin. There needs to be a trip plan for every carload shipment based either on railroad experience or shipper input. Every trailer and container has to get a trip plan when it comes through the gate at the ramp. Trip plans and transit goals then go into the movement profile so the customer can follow adherence to goal via the railroad’s website.

3. Delivered Cost. Inventory on the floor and on the books is a drag on company performance. The less there is of it the better, and the best way to keep inventory down is to have raw materials come in at the same rate finished goods go out. Enter supply chain management and the Cash Flow Ratio (current assets less cash and equivalents all divided by current liabilities). Ideally the number should be less than one. Anything above one indicates too much inventory and an extra cost to the company.

Other factors adding to delivered cost are the three Ds: damage, demurrage, and dunnage. Repairing product damage, paying demurrage charges incurred as a result of inefficient transit times, and dealing with dunnage are all costs that don’t even exist in the highway environment. Thus delivered cost by customer is the sum of freight revenue paid plus the three Ds paid. Divide the result by truckload equivalents received by rail and benchmark that number against the truck rate.

"If it ain’t broke don’t fix it" works as long as you can tell "it’s not broke." That takes benchmarks. Because you can’t fix what you don’t measure.


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