RailPrime: Thank you so much for being part of RailTrends 2020 (held virtually Nov. 19-20) — and for delivering such a dynamic, engaging presentation. You shared three “levers” railroads could use to recapture growth: rail-centric, flexible, and truck-centric commodities. Which of the three, in your view, is the one they could leverage quickest (and why?)
Bailey: Of the three levers, adopting a customer-centric mindset is a change that requires minimal investment and ultimately would improve the railroad value proposition. As a culture shift for the railroads, it would require intentional work to change the way people in the organization are evaluated, rewarded and empowered.
The first step on the journey to a truly customer-centric railroad experience is coming up with a common understanding of what that means, how success will be measured and why it must be a strategic priority. A place to start is using the “Golden Rule” as a guidepost for how customers might react to a given policy or action — railroads must see the issue from the customer’s point of view. And this is a full team sport — executives must get out of their silos and be relentless in looking at all of the processes that impact customers across the entire railroad, with an eye to making everything customer facing as simple and customer-friendly as possible.
In addition, railroads must spend more time learning and understanding the customer's world and its challenges, and this can illuminate opportunities for railroads to do things differently. Ultimately if railroads deliver more value, they will grow their business AND be able to price accordingly.
RailPrime: Which of the three levers would be the hardest for them to pull to recapture growth? Why?
Bailey: It’s no secret that sustainably improving railroad service levels is a tough problem. The entire executive team has to lean in and make it a priority, as well as understanding that each aspect of the railroad has an influence on service performance: This is not a problem that the operating department can go solve on its own.
It’s clear from customers that being reliable is the more important issue to resolve, rather than being fast. A critical function is to determine at a root level what causes a lack of reliability and what to do about it. You need a wide lens, as every part of the railroad has the ability to impact reliability. Mechanical controls locomotive and car reliability, transportation controls the operating processes and daily decisions for the network, marketing can influence how the business shows up to the network and how shippers behave at origin and destination. Finance sets the framework for how decisions are evaluated on a daily basis, HR signals priorities based on how people are empowered and rewarded through performance reviews, and IT delivers tools to help make problems visible and help managers prioritize. Tradeoffs among these functions must be fully evaluated: Are we saving overtime on this crew but leaving a cut of cars that should have been advanced to stay on schedule? Railroads who become passionate and rigorous about tackling this problem holistically will have the greatest degree of success.
RailPrime: In a recent survey, 100% of the shippers you reached out to found truck “superior to rail on all attributes of customer experience.” How do railroads respond when you share this information? What might they do first to start chipping away at that astonishing percentage?
Bailey: Railroad executives spend a great deal of time with their customers, so these findings were not surprising to most of them. The most consistent response has been an acknowledgment that while this is hard to hear, it is important to continue to embrace it and own it, and to find ways to close the gaps. There is a growing motivation in the C-suites of railroads to unlock the value created with PSR, and they understand that going forward growth is the lever that offers the greatest long-term opportunity — and to capture that growth, railroads will need to take share back from truck.
RailPrime: We hear a lot about “the new supply chain” — how do you characterize it, and again, what can railroads start doing to better serve it?
Bailey: The new supply chain represents changes in tangible and intangible aspects of how shippers design and execute their logistics networks every day. We used to have all-purpose distribution centers in four big ports. We now have specialized networks within networks, and layers of inventory placement to get closer to customers. Structurally, shippers are changing the way facilities (old and new) are configured and rail is taking a back seat in those designs. In many cases, we were told by shippers that rail was not a consideration in facility placement or design. These are tangible shifts in the way networks are constructed that have an impact on rail as an option.
Intangible shifts are the way customers evaluate modes and carriers in their decision criteria. At one time it was just the “tariff” rate — then it was the tariff rate plus transit time and how transit time translated into dollars of inventory carrying costs. Today, shippers are increasingly looking at total landed costs when considering modes and individual carriers. They are considering more factors in their calculations, such as transit reliability, information timeliness and accuracy, problem resolution, claims, and the cost of trucking around failures. The impact of this is that the total cost of rail is higher than what the tariff rate indicates by itself. This makes rail less competitive against truck — and shippers told us that while they generally want to use more rail, the economics (when considered as total landed costs) were not working even when it would normally make sense to run rail in a lane.
RailPrime: What would be an example of a technology rail could adopt that would help with all of the above?
Bailey: The RailPulse project provides a tremendous platform of data that will enable the railroads to much more aggressively use predictive analytics and machine learning to help provide more accurate ETAs to customers, identify and then reduce related service failures, and improve freight integrity performance (ultimately avoiding claims/loss/damage). It’s an example of the value that can be created by the rail industry working together to accelerate change and to provide the shipping community with a network solution. Making the rail network overall more competitive with truck is a much bigger growth lever than railroads continuing to develop independent solutions that cause shippers to interact with multiple systems, processes, and rules for any interline traffic.
Adriene Bailey is a partner in Oliver Wyman’s Transportation and Logistics practice, with a particular focus on rail, intermodal, and third-party logistics. She began her career at Oliver Wyman and subsequently held senior executive positions at various transportation and logistics firms, including two Class Is, before rejoining Oliver Wyman in 2019. She is currently a member of the board of directors for the Transportation Institute at the University of Denver where she previously served as its chair; is a past member and past chairman of the board of directors for the Intermodal Association of North America; sits on the Federal Reserve Bank of Atlanta Advisory Council; and serves on the board of directors of Stuart Dean, a private company dedicated to preserving the value of commercial and historically important buildings. Bailey holds a BS in engineering from Princeton University and an MBA from the Wharton School of Business.
