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By Jeff Stagl, Managing Editor
Since 2005, Union Pacific has gone from worst to first in service performance among the U.S. Class Is, UP execs believe. Next up: raising the bar another notch — and, by extension, the expectation levels of UPers and customers alike
In the lobby of Union Pacific Railroad's Omaha, Neb., headquarters, a baseball stadium scoreboard-sized television shows scenic train photos and videos depicting a safety or promotional message. Part of it also displays the railroad's latest customer satisfaction rating and a current service-performance metric.
On July 27, the TV touted a truck-like rating of 90 and average train speed exceeding 26 mph.
It wasn't that long ago when UP had no metrics or customer ratings worth shouting about. Beginning with the service meltdowns associated with the Southern Pacific merger in the late 1990s and carrying over into the mid-2000s, the railroad was mired with — and highly criticized by rail shippers for — slow train speeds, clogged terminals, and wrongly switched or misplaced freight cars.
Shippers' frustrations grew to the point that in September 2004, while addressing the Association of American Railroads' fall peak forum in Kansas City, Mo., UP Executive Vice President of Marketing and Sales Jack Koraleski joked he was using a portable microphone and moving from side to side in the meeting room because it would be harder for shippers in attendance to hit a moving target. Now, shippers' service ratings are reaching record highs and many of the Class I's performance metrics are climbing to all-time-best levels.
The primary driver: From 2005 to 2009, senior executives devoted the most money UP ever spent in a five-period on capital investments — $14.3 billion — to adopt technologies designed to avoid network bottlenecks, congested yards and improperly switched cars, as well as to expand capacity and add equipment. They also designed a transportation plan for every train with built-in contingencies to account for unexpected demand upticks or severe weather, created a pool of surge resources and developed new services tailored for specific markets.
"We've learned the hard lessons. We need to be agile, resilient and have recoverability," says UP Chairman, President and Chief Executive Officer Jim Young. "Now, service is an expectation, not a question anymore."
The Class I's service performance has met a large chemical shipper's expectations of late. UP has been "better, faster and more efficient" than other railroads at adding resources the past few years, the shipper believes.
"They have good switching performance," says an official from the shipper, who wanted to remain anonymous.
However, along with other Class Is, UP could do a better job of storing more rail cars "outside our fence" and not "charging an arm and a leg for it," says the official.
Shippers continue to raise the service-performance bar, and they should, says Young. After regaining shippers' confidence and winning back some of the business lost in the early 2000s — as well as attracting new traffic — UP can't afford to let service slip, he says.
To ensure it doesn't, the railroad must continue to monitor and correct the "little things," such as billing issues, loss and damage claims, and car-switching frequency, says Young. Moreover, UP needs to focus on one very big thing: finding ways to go above and beyond shippers' service expectations.
"We must do extraordinary things," says Young. "In Mexico, we ran special trains for auto suppliers after the [July] hurricane. We need to take the lead in those situations."
Although some shippers and railroads might not characterize UP's actions in Mexico as all that exceptional, the shippers helped out by the Class I may beg to differ. After Hurricane Alex hit Mexico July 1, damaging rail infrastructure along the nation's Gulf Coast and Rio Grande Valley, UP worked with Kansas City Southern de México S.A. de C.V. (KCSM) and Ferrocarril Méxicano S.A. de C.V. to operate 16 special trains carrying auto frames or soda ash. The auto frames were stranded on KCSM and soda ash was needed by bottling plants, which also sought help to move beer to northern gateways, says Koraleski.
In addition, UP provided extra switches and remained in communication with the Mexican railroads, says Vice Chairman of Operations Dennis Duffy, who retired as of Sept. 1 and was succeeded by newly appointed EVP of Operations Lance Fritz.
"We probably would have taken too long to do this years ago because we weren't integrated into the customer then," says Duffy. "You can build customer loyalty at times of distress."
Becoming more in tune with customers' needs meant UP needed a more disciplined operating plan with inventory and bottleneck control, and re-route capabilities. Enter the Unified Plan. Rolled out in 2005, the plan, in part, is designed to increase velocity and reduce terminal dwell time by creating more direct origin-to-destination trains and eliminating intermediate switches.
For example, the plan recently helped determine that the railroad could add one car to coal trains — essentially providing the benefit of running 100 extra coal trains a year without actually running them, says Duffy.
"We don't just run a railroad," he says. "We try to run it better and make it more reliable."
Transportation managers analyze train plans daily to ensure trains are on time, and the right car is on the right train at the right time.
"We don't want passengers on the plane but no baggage because that's not a good flight," says Duffy.
While UPers from top to bottom have toiled since 2005 to ensure each train "flight" is on time and carrying the proper load, the long service recovery process hasn't exactly been "fun" to endure, he says.
"Running a reliable railroad and making it better is fun," says Duffy. "Success breeds success."
To continue scoring successes in the sales and marketing department — in the second quarter, revenue rose in all six commodity groups, and each group posted a traffic gain in the same quarter for the first time in six years — UP's ongoing push to raise the performance bar is crucial. So is a more aligned organization. The sales/marketing and operations departments now interact much more cooperatively and closely than in the past, says Koraleski.
"We're more hand in glove, and work together well when we need to rally," he says. "We're kind of a different railroad now."
For example, the departments recently teamed up to provide a more attractive rail transit time for coiled steel moving from the upper Midwest to Mexico. Moving the cargo via rail used to take 17 days, so shippers primarily trucked the freight, says Koraleski.
UP execs arranged to have the coiled steel trucked to consolidation centers and then transported via rail on premium trains. The moves began in the first quarter; now, rail transit time is about seven days, says Koraleski.
Sales/marketing execs are tailoring services for other commodities, as well.
Both a RailChem Connect service launched with CSX Transportation and Gulf Coast Flyer service introduced with Norfolk Southern Railway in fourth-quarter 2009 target expedited chemical shipments between the Southeast and Northeast; a recently launched GROTrain service is designed primarily for shippers and receivers in the Iowa, Minnesota, Nebraska and Wisconsin fertilizer markets; a Copper Connection service launched in second-quarter 2010 targets mixed freight moving from Arizona to Texas to Chicago; and a UMAX domestic interline container service launched with CSXT Intermodal in late March aims to offer a broader market reach in more than 600 service lanes nationwide.
"We have the technology now to design a transportation plan and much better infrastructure," says Koraleski, adding that opportunities still abound to add or tweak service offerings.
One major automotive-service tweak occurred late last month. On Aug. 25, UP unveiled a prototype 90-foot AutoFlexª multi-level rail car designed to provide more stability and security, less vibration and a better ride quality for vehicle shipments.
UP, which holds 15 U.S. patents for the newly designed car, operates the rail industry's largest fleet of multi-level cars at 18,000 units and is North America's largest automotive carrier, according to the Class I.
UP's efforts to up the service ante haven't gone unnoticed by shippers. The railroad's customer satisfaction index of 89 in the second quarter established a quarterly best mark and rose 2 points compared with the second-quarter 2009 rating.
It helped that UP's 2Q service delivery index rose to 92.1 vs. 88.9 in the first quarter and 92 in second-quarter 2009, and industry spot and pull — which measures local switching performance — clocked in at 93.2 percent compared with 90.4 percent in the first quarter and 88.5 percent in second-quarter 2009.
The customer satisfaction survey, which is conducted quarterly and based on a poll developed by Toyota Corp., includes 35 questions that touch on key service components, such as transit time, price, and a comparison of service quality between UP and other carriers.
Each question asks respondents to rate UP's performance on a 1-to-5 scale, with a 5 the best score. The survey typically garners more than 100 responses, says UP spokesman Tom Lange.
The 2Q survey showed UP received good marks for transit times, equipment supply and service consistency, says Koraleski. One negative comment, that the railroad was running its shuttle trains too fast, was really a compliment, he says.
"I thought I had died and gone to heaven," says Koraleski.
Sales and marketing representatives previously called every shipper that provided a 4 or 5 score, but now they phone every shipper regardless of score to understand the reasons behind a rating.
"We want to head off a problem before it's a problem," says Koraleski.
One issue cited by some shippers is that the railroad is too big and complicated to conduct business with. So, UP in December 2009 launched a three-member "onboarding" team that's "like a concierge service for customers who haven't used rail before," says Koraleski. The team aims to simplify business processes for new customers, such as the credit process.
Attracting small customers is key because they can "grow up" to be large customers, says Koraleski.
"We're seeing more customers doing 10 to 20 percent of their business on our railroad go to about 40 percent," he says.
That includes a number of intermodal customers, some of whom are having difficulty finding containers of late because of a market-wide shortage ("The only heartburn now is not enough containers," says Young).
Their search might be a tad easier by year's end because of a $100 million investment UP's board approved in May, a decision that increased the 2010 capital spending budget from $2.5 billion to $2.6 billion. The funds primarily will cover the cost of acquiring 7,000 containers and about 5,000 chassis in the third and fourth quarters.
The containers will support the railroad's intermodal business, says Vice President of Intermodal John Kaiser.
"We have turned business away because of equipment shortages," he says, adding that after the acquisition is complete, the railroad will own 57 percent of all the containers used for UP-supported intermodal programs nationwide.
Although a larger container fleet will be beneficial, intermodal business already is drawing benefits from a 30 percent increase in units on trains, and new and longer sidings, says Kaiser. As of late July, domestic intermodal business was up 28 percent and international traffic was up 17 percent year over year.
"We believe in the potential of domestic business," says Kaiser. "We have improved schedules and try to have as many sales channels as possible."
In the United States, there are 11 million to 12 million intermodal moves that move at least 750 miles and are within 100 miles of a dray. However, UP and BNSF Railway Co. combined have a 20 percent chunk of that business in the West, with each railroad's share about 10 percent, says Kaiser.
"Getting 1 percent of the traffic from truck to rail is huge," he says. "We only have a 10 percent share, so one more percentage point is 10 percent growth."
One way to capture the traffic is by offering shippers more intermodal lanes — the ultimate goal of the UMAX service with CSXT Intermodal. UMAX offers service in all lanes on the two railroads' networks as well as transcontinental service in many lanes, including between the Northeast and northern California or the Pacific Northwest, and between Florida and northern or southern California. The service also provides shippers access to more than 20,000 railroad-owned containers.
Since UMAX launched in early April, UP's business with CSXT Intermodal has increased more than 110 percent, says Kaiser.
To maintain intermodal business-generating momentum, Kaiser and his team continue to adjust UP's network of 32 terminals. For example, a facility that opened last month in Joliet, Ill., will enable the Class I to carry out a long-term Chicago-area terminal strategy, says Kaiser.
The 785-acre Joliet terminal — which is designed to accommodate 500,000 containers annually — predominantly will handle international traffic while the Global I and Global II terminals in Chicago mostly will handle domestic traffic. This month, UP also plans to close a Canal Street terminal in Chicago that mostly handles trailers.
Over time, some international traffic at a Chicago-area terminal in Rochelle, Ill., that is "too large for the market there and further away from distribution centers" will be transferred to the Joliet facility, says Kaiser.
The railroad also recently acquired land for a northern California terminal in Lathrop, a project in the permitting phase, as well as for an El Paso, Texas, terminal, says Kaiser.
UP needs to generate more traffic because current weekly capacity clocks in at about 200,000 carloads while weekly loads are averaging from 170,000 to 175,000 units. A healthier economy will help drive traffic, but reliable service is equally paramount, says Young.
UP's ongoing push to exceed shippers' demands will continue to change how the Class I is perceived as a service provider, senior execs believe.
"We want service to be so good that when a shipper thinks about one company that provides reliable service, we want to be that company," says Duffy.
UP is gaining a higher service-performance standing among the U.S. Class Is, Young & Co. believe.
"We have gone from last in service to, I think, No. 1 in the past five years," says Young. "We've proved we're capable of performing, and we should have that kind of reputation."
Senior execs at other Class Is certainly would make the case that their respective railroad deserves top-ranking consideration. But being No. 1 isn't what's important, says Art Hatfield, an analyst with Morgan Keegan & Co. who monitors UP's financial and operational performance.
"You can look at statistics in many ways," he says. "As long as you have improved train speed and stepped up in many areas, who cares if you're ranked No. 1, 2 or 3? UP's focus with service now should be: 'Don't go backwards as volumes continue to grow.'"
That's the ever-present challenge UP's senior execs will continue to face as they seek more ways to make the transition from an ordinary to extraordinary service provider.
All workers need to continue being proactive instead of reactive because, ultimately, the Class I is geared to sell a service and has $40 billion worth of assets to do so, says Young. Reliability has reached the point that a missed transit-time promise or improperly switched car can't be tolerated, he says.
"It only takes one negative thing to pull it all down," says Young.