Wholesale & Distribution International - Spring 2017 - 49
In a previous issue of Wholesale and Distribution International, we described network optimization as a
series of tradeoffs between responsiveness and efficiency. A major challenge for supply chain professionals is balancing speed and cost. In this column, we'll
examine a railroad's efforts to strike that balance as
market conditions shifted.
Let's first look at the railroad's asset base
- what capabilities and constraints was
it working with?
Railroads have big, expensive assets.
To justify the capital outlay those assets
represent, management wants to work
them to full capacity. You may be picturing thousands of miles of steel rails snaking across the continent - but after fuel,
two of the railroad's most significant categories of operating expense are locomotives and labor.
Why locomotives? Though most of
them were built in the 1980s (or earlier),
they are surprisingly efficient; so until
recently, there was no compelling reason
to spend millions of dollars to replace
units. Instead, the railroad focused on the
maintenance, repair and overhaul (MRO)
of the existing fleet. This reduces capital
outlay, but drives up operating expense.
Let's look at how this informed strategy from late 2008 until today:
As the Great Recession loomed, management realized it would have to abandon "point-to-point" service in favor
of an airline-style "hub and spoke" model. Efficiency forced out responsiveness;
smaller yards were furloughed and big
"hump yards" picked up the slack.
The sales team had an ingenious idea
that built on this strategy: join forces
with the biggest shippers and build hubs
where they needed them. This promised
a classic win-win: less risk for the railroad, better value for the shipper.
The strategy proved very effective.
During the Great Recession, most industries languished or panicked - but
the railroad boomed. By 2011, abundant
coal passed through the network, exports
picked up and locomotive availability began to tighten.
As with any other resources, management had a choice: buy more or get more
out of what you have. Given the doubtful
return on investment for new equipment
and the doubt hanging over the general
economy, management chose the latter.
Word went out to the maintenance
facilities. "Shorten your cycle times and
turn assets around quickly so that we can
get them to a paying customer."
The customer also became the focus in a
different way. Railcars can be an appealing storage solution for some customers
- so the next step was to incentivize customers to turn the cars and locomotives
quicker. At first, this amounted to "rapid
unload" discounts and demurrage fees,
but as turnaround times decreased, the
railroad gradually developed the ability
to offer just-in-time (JIT) service.
This harnessing of operating efficiency in service of responsiveness opened a
new market of customers who previously depended on expensive over-the-road
truck haulage to keep inventory levels
low. Incentives for both customer and
provider helped keep things moving -
and that's exactly what happened. The
stock price soared.
And then, in 2015, the bottom dropped
out of the coal haulage market.
The rapid turnaround model was
based on high demand that tightened the
supply of rolling assets - but as freight
levels dropped, that was no longer true.
Why race to spin an asset back to the field
when you have plenty that are unused?
The railroad returned to the hub-andspoke model, now with more emphasis
on short-line railroads - but only to
the most profitable customers. Trains
became longer, as did the time between
departures. This saved on labor. Bigger
trains can break more easily, so they move
slower; maintenance cycle times became
less of a priority.
Responsiveness had given way to efficiency again. Unfortunately, this left
some of the newer customers dangling
- they were relying on JIT rail, and some
struggled to find affordable alternatives.
This brings us to today. How is management responding to the "new normal?"
Among other initiatives, management
has built a "brain trust" of experts who
create state-of-the-art network optimization algorithms. It's not just about software. The Internet of Things holds tremendous promise for railroading.
The next generation of locomotives
shows what this might mean for railroading. They'll likely sport sophisticated
onboard sensors for remote, real-time
monitoring of mechanical health. This
will allow shifting from preventive to predictive maintenance, promising reduced
costs and quicker returns to service.
Market conditions and technologies
come and go, but management will always
look for ways to navigate the tradeoff between responsiveness and efficiency. q
Tony Donofrio, head of Argo Consulting's
supply chain practice, has more than 30
years of supply chain experience. He has a
reputation for taking on tough challenges,
creating growth opportunities and outperforming the competition. Stephen Francis,
senior consultant, co-created the Argo Integrated Management System (AIMS). He develops and implements tools that drive deep
and rapid change for Argo's clients. Matthew
Saxton is a senior consultant with Argo's rail
and transportation practice. He has helped
several of the largest railroads in the US
innovate their way to large scale operational
improvement. For more information, visit
Spring 2017 www.wdimagazine.com