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May 2010
By Jeff Stagl, Managing Editor
For the past few decades, Class Is have mined the logistics sector to increase service offerings. Each large railroad currently operates one or more subsidiaries that provide various logistics services, which range from transloading to shipment and fleet management to supply-chain modeling and design to container tracking.
Although every Class I takes a different approach to logistics — some serve as a third-party service provider (3PL) while others focus on transloading — they all have the same goal.
"At the end of the day, each railroad wants to produce more freight," says Mike McClellan, vice president-intermodal and automotive marketing for Norfolk Southern Corp., which operates three logistics-related subsidiaries. "Logistics services leverage what you do, and generate more revenue on the side for doing it."
To ratchet up revenue and carloads, Class Is are targeting shippers who typically don't use rail.
"We can show these customers that rail is a viable solution for them," says Beth Whited, president of Union Pacific Railroad subsidiary Union Pacific Distribution Services (UPDS).
Large roads also are leveraging logistics offerings to keep the traffic they already have.
"A customer might have new information needs, or if they want to get freight to western Canada, where do they need a distribution center? We can help with that," says Ian Murray, director of Canadian Pacific Logistics Solutions (CPLS).
Ultimately, it takes a variety of logistics services to meet shippers' changing demands, Class Is say.
"Customers are looking for a blend of services today," says Whited.
Providing a mix of logistics services that cover a "think, build and operate" strategy is key for NS, says McClellan.
In terms of "think" — think strategy development — NS subsidiary Modalgistics offers supply-chain consulting, asset management, and operations planning and management services.
According to AMR Research, 80 percent of all supply-chain costs are fixed based on a network design. So, customers rely on Modalgistics to help design a supply chain from the ground up to control transportation costs or leverage multiple modes.
Logistics strategy modeling and development is an "invaluable competence to have" to figure out how to ship freight at a lower cost, says McClellan.
"There's a lot of business out there. This helps us determine what kind of freight we're able to generate," he says, adding that NS' logistics services primarily target automotive, industrial product and intermodal traffic.
The "build" portion of the railroad's strategy — as in creating an information technology (IT) backbone — is covered by TransWorks, a subsidiary that develops business process automation tools and software. The company also offers end-to-end transportation management services for truckload, intermodal and rail shipments.
In addition, TransWorks provides IT services for the Class I's Triple Crown Services Co., Thoroughbred Direct Intermodal Services (TDIS) and NS Intermodal divisions, and outsources IT services to other railroads, such as Canadian Pacific.
"The IT services fuel NS," says McClellan.
The third prong, "operate," is handled by Triple Crown, which provides door-to-door truckload service featuring RoadRailer trailers; and TDIS, which offers door-to-door premium intermodal services. The subsidiaries provide capacity for freight brokerage and generate traffic for the railroad, says McClellan.
In addition, the companies provide a "front-row seat into what's going on in the pricing market," he says. "Business wasn't as good in 2009 and prices were depressed, but prices are firming up now."
Intermodal also is a key component of CPLS' logistics strategy, which calls for creating value for CP, and evaluating and improving supply chains, says CPLS' Murray. The subsidiary works with a number of retailers and manufacturers to manage their intermodal shipments, including truck movements in short-haul lanes.
Intermodal traffic is growing and the logistics "bucket" could be the Class I's biggest this year — the first time it would best project logistics and carload logistics, says Murray.
A recent change to a Chinese joint venture should help drive that growth. CP is taking over management of Lanzhou Pacific Ltd. (LPL), a joint venture launched in 2002 with five Chinese container transportation companies to develop the logistics market around Lanzhou, China.
Increasing the Class I's management presence in China will help LPL register traffic growth of 40 percent this year vs. 2009, says Murray.
"We want to leverage that business a bit farther," he says. "There's a lot of containerization of non-traditional goods in China, like certain liquids."
In terms of carload logistics, "we will play in the bulk space, where rail has an application," and manage industrial product shipments, says Murray. For example, CPLS can serve as a 3PL for a food-grade product manufacturer.
Project logistics are an integral component of the company's business, too — such as managing wind turbine component shipments. Component moves from Canada to the U.S. Midwest have become a niche business, says Murray. CPLS helps obtain rail cars and crane operators, and coordinate the moves.
"It's all about providing extra services onto a rail move, and to show rail as an option," says Murray.
There also are other small niche markets CPLS might be able to serve, such as containerized specialty grains, he says.
"We can evaluate if traditional rail service fills the need," he says.
UPDS is handling more wind turbine components, as well, because of the growing number of wind farms in the United States, says UPDS' Whited. The subsidiary offers software that enables a customer to track their shipment from a component factory overseas to a U.S. wind farm, she says.
For the past two years, UPDS also has offered "Border Solutions," a suite of services designed to help customers resolve cross-border customs issues, including waybills and car orders.
"Customers are going more global," says Whited. "Border Solutions is big for auto parts. We found our auto parts business increased 50 percent in the first quarter."
UPDS is "very focused" on managing NAFTA import/export cargo as part of the company's mission to provide a full suite of services that cut across transportation modes and multiple railroads, she says.
"We are multi-modal, but rail-centric," says Whited. "We want to be a place to do multi-modal, one-stop shopping. However, there's almost always a rail move in there."
Currently, customers are demanding cross-mode, cross-railroad service, and the ability to trace their shipment regardless of carrier, she says.
"They don't want to call the shipping line, railroad and trucker to find their shipment," says Whited. "We assign a logistics representative who follows their shipment."
If the shipment involves an automobile, UP's Insight Network Logistics (INL) and ShipCarsNow subsidiaries might be involved. INL and ShipCarsNow provide logistics services for new and used vehicles, respectively.
Several years ago, UP formed ShipCarsNow because there are thousands of potential used-car customers, says Roland Fortner, general manager and chief operating officer of INL, which operates ShipCarsNow.
INL redeveloped ShipCarsNow last year as an e-business platform to enable customers to go online and arrange a movement of one or multiple used vehicles.
North American auto production is projected to total 35.4 million vehicles between 2008 and 2010 vs. 51 million vehicles the prior three years. So, there's a shortage of used cars on the market as consumers purchase — and, in turn, trade in — fewer vehicles, says Fortner.
"There's lots of activity on the Internet. Dealerships are trying to bring in cars from all over the country to fill their inventory," he says. "We have an opportunity to tap into that."
ShipCarsNow conducts digital marketing, including ads on Google, to enhance its visibility. The company might co-load new and used vehicles, which traditionally move separately, to further boost business.
"If we mix in both types, that would help new car shippers who are awaiting density to a certain location," says Fortner.
To help intermodal shippers move freight to a desired destination, UP subsidiary Streamline offers door-to-door service to motor carriers, truck brokers, intermodal marketing companies and 3PLs.
The company is focused on integrating its technology with UP's transportation and asset management systems, and developing business processes that "create value and efficiencies," said Streamline President Tom Brown in an email.
"We are simplifying domestic intermodal service and creating ease of access for existing and new intermediary customers," he said. "We believe this helps us convert customers to ship via rail intermodal instead of truck."
Meanwhile, Kansas City Southern is attempting to garner more business by providing more transloading services. KCS' Transload Center (TLC) network currently features 104 transload and warehouse centers, with 54 in the United States served by Kansas City Southern Railway Co. and 50 in Mexico served by Kansas City Southern de México S.A. de C.V.
Since KCS launched the network in 2001 with 20 facilities, annual carloads — mostly industrial products such as plastics, chemicals, paper, petroleum and steel — have increased from 5,000 to 93,000.
The TLC network is one of KCS' fastest-growing business segments, particularly in Mexico, where many small- and medium-size companies don't have rail sidings at their facilities, KCS officials said in an email.
The Class I plans to double its transload and warehouse capacity in five years to meet demand for truck-to-rail and rail-to-truck transfers.
In Mexico, transloaders and warehousers are encouraged to build and expand packaging operations to handle plastics and other commodities that formerly were packaged at the U.S./Mexico border and trucked into Mexico's interior, KCS officials said.
U.S. manufacturers can save money by moving rail cars directly into Mexican transload and warehouse facilities.
In the United States, the railroad already has expanded transload and warehouse track capacity in the Shreveport, La., and Corpus Christi, Texas, areas to handle booming business for frac sand, which is used in natural gas production and consumed in newly discovered Haynesville, La., and Eagleford, Texas, gas fields, KCS officials said.
"Much of the sand used in these fields originates in the Midwest," they said. "Demand for track space has outstripped supply in many areas."
For TRANSFLO, demand has been high for transloading ethanol — the CSX Corp. subsidiary's fastest-growing commodity, says TRANSLO President Gary Soliah.
Ethanol business increased only slightly in 2009 — partially because much of it moved in unit trains — after registering a 50 percent increase in 2008 and 100 percent gain in 2007.
Twenty-five of TRANSFLO's 58 terminals in the eastern United States are approved to transfer ethanol because the facilities meet various federal, state and local regulations.
TRANSFLO's main goal is to attract business from non-rail-served companies, says Soliah.
"It's an opportunity to show the economics of rail," he says.
Shippers also are taking note that TRANFLO can provide the speed to market they're demanding, adds Director of Marketing and Logistics Kelly Shefelbine.
TRANSFLO has the capabilities to transfer just about any commodity, says Soliah, adding that the company owns and manages a large amount of equipment.
Shippers are demanding that type of flexibility from logistics providers. They also want competitive rates and easier-to-do-business-with processes.
But if each logistics subsidiary wants to attract and hold onto business for its respective Class I, reliable service is paramount, too.
"It's important to deliver what you say you will deliver and when you say you'll deliver it," says Soliah.
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