Railway Age, November 1995

Creating Customer Value

Growing and successful companies -- regardless of industry -- have two things in common. They have a bias for action and they stay close to the customer. Operations, finance, and marketing are linked into a management system where every action creates or enhances customer value.

Maybe it's something in the water in Ohio: customer orientation seems to be as natural as breathing for the shortlines there. For example, Tom McOwen, President of the Indiana & Ohio will tell you about the "competitive advantage" that sets his company apart from the competition. A visit to the shortline's headquarters confirms the success of its customer oriented operation. The whole place reeks of success. Freshly painted and reliable locomotives, excellent track, newly remodeled offices on a residential Cincinnati street, a new three-track locomotive service building with room for nine units, and an enclosed building products transload facility that handles 200 cars a year of drywall alone are some of the tangible measures of success. Good rapport with his class I connections is a vital ingredient.

To say that the I&O has a bias for action is an understatement. Tom's focus on the competitive advantage leads his team to innovative services like a nine car auto parts shuttle that joins parts producer and parts user separated by just three miles. Or the trasnsload above. Or the emergency aggregates transload set up when a bridge was washed out between the off-line vendor and the I&O customer. (The bridge, by the way, was 80 feet long, had two 40 foot spans resting on a center pier, and was washed away without a trace. It was back in business in less than three weeks).

A couple hundred miles to the northeast, the Ohio Central Railroad System (OCRS) family of lines is busily adding to its marketing staff. The president, Bill Strawn, tells me the driving force is a desire to get closer to the customers. This, he adds, is going on even as the class Is appear to be shrinking their marketing and sales resources. The Ohio Central's six lines in 1994 handled more than 19,000 carloads a year on less than 300 miles of track and it still growing. Like so many other expanding feeder line properties, OCRS looks for substantial revenue increases on the very lines spun off by the majors for want of traffic.

In the last six years Ohio Central has brought sixteen new facilities on line. Some were brand new, some had lain fallow since before the class I sold the line. Commodities range from a mixture of building products to aggregates and chemicals. Total new business? Roughly 5,400 cars per year. Now that's close to the customer.

Of course, Strawn and McOwen each knows well they have in fact *two* customer bases: the shippers and receivers along his line and his class I connections. And this is critical, for you ignore the class I at your peril. Almost all the new business on these lines has to come and go somewhere on a class I, which means negotiating rates, car supply, scheduling, and service standards. Doing so successfully means being close to this customer as well: knowing how to package deal for maximum customer (class I) benefit. Sounds obvious, doesn't it? Sadly, though, many class I managers from all departments have told me they wished the shortlines in their realms were more action oriented.

What the I&O and OCRS have in common is a proven ability to create customer value. thanks to a bias for action and a commitment to stay close to the customer -- shipper and class I alike. Companies without a these qualities are easy to spot. If not action-oriented, they typically are awash in red ink, have high employee turnover, derail frequently, suffer along with a low mean time between locomotive failures, and have gotten themselves into freight rates that in some cases don't even cover car hire. A company that is not close to the customer --- freight buyer or class I -- sees traffic erosion, lack of rate flexibility, high demurrage bills to on-line industries, few new business opportunities, and general stagnation.

Which way runs your bias? Who are you close to? For a reality check, here are five simple questions you can ask.

  1. What's my operating ratio? If it's above seventy you've got problems. Look first at car hire, crew costs, and fuel and see what you get. Keep average car hire under 20% of revenue, minimize overtime even if it means adding T&E personnel, and keep fuel consumption under 10 gallons an hour.

  2. Am I putting enough into my revenue requirements to cover track maintenance? If you have a 100-mile railroad you're going to need about $400,000 a year to keep class II track up to snuff. Spread that across 10,000 cars and you'll need to include $40 a car. Do you?

  3. Am I getting my money's worth from my staff's work with class I contacts? Every manager on your property needs to know somebody at your connecting class I road(s) on a first name basis and who will take and return your calls.

  4. Do I know what every freight customer makes or does, their customers and competitors, and their relative financial health? Sick companies let cars sit driving up car hire, have irregular shipping patterns as they match inventory to cash flow, and are hard to work with because everybody's afraid of their jobs. Your financial future is at stake.

  5. Do I have a bias for action or do I study everything to death? No matter how much homework you do for a given project, there will always be that nubbin of missing info. Do you go with what you have or do you wait till every last scrap of data comes in? Personally, I prefer the Tom McOwen school of reasoning: "If I do X, what's the worst that could happen?" Answer the question and make your move.

    Dick Rushing of the Paducah & Louisville observed in a letter to me, "If we give all our attention to creating customer value the bottom line will be where it needs to be. The concept will not work, however, if we go to the bottom line and work backwards." Add that to a penchant for action, and the result is a shortline that's going places.

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    Created December 6, 1995. Send comments to lblanchard@aol.com