CSCMP's Supply Chain Quarterly
October 22, 2018

Driving "next gen" performance

To continue to improve productivity and attract new customers, railroads will have to get out of their comfort zone and adopt new technologies.

Change has always been constant and sometimes profound. But in the so-called "new normal" environment, the rate of change seems to be accelerating. Much of this can be attributed to the rapid advancement of technological capabilities. In this volatile environment, it can be tempting to focus on short-term trends. But it's important to remember that economies have a cyclical behavior, so it's hard to say for certain whether "the new normal" is indeed something new and unusual, or just another variation of what we've seen in past economic cycles.

Given that uncertainty, if I am the chief executive officer of a Class 1 railroad in North America, how should I envision my company and its ability to compete and win over the next two to three decades, rather than just the next two to three quarters? There will be many opportunities for railroads to grow profitably as the population continues to expand and highway infrastructure becomes progressively more constrained and expensive to build and maintain. The key question will be how to handle that growth.

What may matter most for the long term is transportation capacity—not just the raw capacity to jam lots of stuff into a given space, but also capacity that proffers network fluidity. This depends on having the right equipment available plus any related price and service considerations, along with having the supporting infrastructure to meet the needs of the buyer. Network fluidity gives railroads the ability to serve existing customers and attract new ones to secure long-term growth and prosperity.

Underlying the fundamental requirement of having sufficient salable capacity to serve customers is the need to continuously improve the productivity of assets: human, linear (track, structures, communications, and signals), and rolling (locomotives and cars). A railroad's balance sheet is dominated by linear and rolling assets; similarly, the majority of its operating expense consists of the cost of labor, along with the cost of operating and maintaining the linear and rolling assets.

Railroads historically have done a more-than-superior job of increasing productivity by deploying more efficient crews, higher-horsepower/higher-tech locomotives, and higher-capacity railcars. Their challenge now will be to continue to increase productivity as the marginal gains from these traditional approaches diminish. To make these gains and drive "next generation" performance, railroads will need to build and strategically deploy new and emerging technological capabilities that support their corporate goals for long-term growth.

Technology as a strategic advantage
The trend among the Class 1 railroads of reinvesting in physical infrastructure is encouraging from the standpoint of the ability to move goods. But the carriers seem to have less enthusiasm for investing in "e-infrastructure" (such as a common unwired platform for mobility applications) that can transform their business into one that customers will view as user-friendly.

Some carriers may think that because they are doing well, there's no hurry to make big technological changes. Moreover, because the major shippers have been successfully using rail for a long time, there's no compelling reason to "fix what ain't broke."

But future growth is at stake. To be successful, railroads need to think not just about their usual markets but also about potential new markets (shale oil and ethanol are recent examples) or ones that can be re-tapped. A fair amount of future growth probably will come from the traditional commodities—such as coal, grain, auto, metals, mining, and chemicals industries—as shorter-haul traffic that now moves by truck gradually shifts back to rail. There still are large-scale growth opportunities in intermodal, too. For years, intermodal was the growth engine, largely driven by international trade. The recession dented that growth, but things seem to be back on track, so to speak, for continued expansion. Domestic business, for instance, has come on strong recently, yet intermodal's share of intercity ton-miles is still small compared to what it could be.

If railroads want to capture more of this traffic, then they will have to work harder at being more inventive and user-friendly to get shippers' attention. The problem isn't that most supply chain managers have a negative opinion about rail (although some certainly do). It's that they don't have an opinion at all. In many cases, rail as an alternative to truck never even enters their minds. Earning mindshare is a vital precursor to getting market share. Gaining a foothold in this untapped market will require innovation and change—and that will likely require embracing new and advanced technologies.

Embracing technology is necessary not only for attracting new customers but also for attracting new talent. Look at the recent college graduates who are entering the workforce and will be running things in the next 10 to 15 years. They're cell phone-, iPod-, and iPad-enabled. They are virtuosos at texting, tweeting, and streaming. They are not going to work in an environment where they have to wait five or 10 minutes for an application to download on a 56K line, much less wait for hours or days to get data and reports from some archaic mainframe system whose output is suspect anyway.

Will rising talent want to work on rewriting mainframe applications to move trains, trace cars, and bill customers? Or will they want to go to work for Apple or Google or thousands of other au courant enterprises? Unless railroads update their strategic approach to technology, they will find themselves with a talent gap that will be hard to close.

Here's another reason for railroads to invest in e-infrastructure. These technology-savvy young folks will be the next generation of customers, too. They expect to live a good part of their lives on their personal digital assistants (PDAs) and iPads, and they are not going to stand for slow and outdated systems, interfaces, and customer relationship management systems.

Leave the comfort zone
The railroads have achieved a remarkable renaissance, pulling themselves out of the stagnation of the 1960s and 1970s and transforming themselves into a more efficient, cost-effective mode of transportation. And for the most part, they've done a pretty good job of not falling prey to the "We must be smart, look how well we're doing" attitude that always seems to precede trouble.

But it's time for them to get out of their comfort zone. Railroads have become adept at improving physical infrastructure and operating more efficiently. They are much less comfortable dealing with fast-moving technological change and the opportunities it affords. Historically, railroads have viewed technology as a tactical necessity, not as a strategic advantage. If they want to prosper in the future, that has to change.

The railroads' success will be determined by whether industry leadership can view the future differently and embrace what's coming (as well as what's already here), and then leap into the fray. This will make the rail industry an even more exciting and energizing place to be, both for the young talent coming along and for customers who are seeking new opportunities for moving freight more effectively.

Brooks Bentz is a partner with Accenture in its Supply Chain Management Operations Practice.

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