Balancing Responsiveness and Efficiency
By Tony Donofrio, Stephen Francis and Matt Saxton
In a previous column, we described network optimization as a series of tradeoffs between responsiveness and efficiency. As we explained then, one of the main challenges for the typical supply chain professional is to balance the tradeoffs between speed and cost. In this column, we’ll look at a particular railroad’s efforts to strike that balance as market conditions shifted under its feet.
Let’s begin by looking at the railroad’s asset base — what capabilities and constraints was it working with?
As in many industries, railroads have big, expensive assets. In order to justify the capital outlay that those assets represent, management generally wants to work them to full capacity.
At this point, 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 even earlier), they are surprisingly efficient; so until very recently, there was no compelling reason to spend several million dollars per unit to replace them. 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 financial system tottered and the Great Recession loomed, management quickly realized that they’d 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: why not join forces with the biggest shippers and build hubs where they needed them? These joint ventures promised a classic win-win: less risk for the railroad, better value for the shipper.
The strategy proved very effective. As the Great Recession took hold, most industries languished or panicked — but the railroad boomed. By 2011, the gravy train was really rolling: abundant coal was passing through the network, exports were picking up and locomotive availability began to tighten.
As with any other resource, management had a choice: buy more or get more out of what you’ve got. Given the doubtful return on investment for new equipment and the doubt hanging over the general economy, management decided on the latter.
The word went out to the maintenance facilities: shorten your cycle times, and turn the assets around as quickly as possible, so that we can get them to a paying customer.
The customer became the focus in a different way as well. Railcars can be a very appealing storage solution for some customers — so the next step was to incentivize them to turn the cars and locomotives quicker as well. 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 whole new market of customers who had previously depended on expensive over-the-road truck haulage to keep inventory levels low. Customer and provider both had an incentive to keep things moving — and that’s exactly what happened. Things had rarely looked better. 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 rapidly, that was no longer true. Why race to spin an asset back to the field when you have plenty sitting around unused?
The railroad responded by returning to the hub-and-spoke model, this time with more emphasis on short-line railroads — but only to the most profitable customers. On average, trains became longer, as did the time between departures. This saved on labor, the other big operating expense. Bigger trains can break more easily, so they move slower; maintenance cycle times became less of a priority.
Responsiveness had given up the field to efficiency again. Unfortunately, this left some of the newer customers dangling — they had come to rely on JIT rail, and some struggled to find affordable alternatives.
Which brings us to the present day. 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. Of course, it’s not just about software. More even than for most other industries, the Internet of Things holds tremendous promise for railroading.
The next generation of locomotives offers a glimpse of what this might mean for railroading. They will likely sport sophisticated onboard sensors that allow remote, real-time monitoring of mechanical health. This will allow a shift from preventive to predictive maintenance, promising both reduced costs and quicker returns to service after a visit to the MRO shop.
Market conditions and technologies will come and go, but one thing seems certain: whatever comes, management will be looking for ways to navigate — and perhaps transcend — the tradeoff between responsiveness and efficiency.
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.