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April 2011



Rail News: Rail Industry

Next-generation productivity — by Brooks Bentz, Accenture



by Brooks Bentz, Partner, Accenture

Passage of the Staggers Act in 1980 drove an inspiring story of success and renewal for U.S. railways, with robust growth in productivity and a concurrent decrease in prices. Beyond the commercial freedom and flexibility deregulation brought, railroad performance was buoyed by productivity gains stemming from smaller crews, better locomotive technology, expanded use of welded rail, higher-capacity cars, and double-stack and unit trains.

Still, railroading's success over the last decade was driven less by productivity improvements and more by leveraging price in the face of rising fuel costs for competing modes. In fact, productivity improvements have flatlined — falling from an average annual increase of 5.4 percent between 1981 and 1999 to about 0.1 percent between 2000 and 2009. Expect future gains to be incremental rather than transformational.

We believe "next-gen" productivity gains will be driven largely by a leap forward that is technology enabled. Tomorrow's improvements in productivity will have to come from better, more-integrated technology vs. more traditional sources like mechanical advancements and better manpower management.

The Collaboration Call

We are now at a tipping point — a rare opportunity for aggressively pursuing and capturing substantive gains through collaboration in the development of game-changing technology applications.

This window of opportunity will not remain open indefinitely. Each Class I will reach a stage in charting its own path where it will be too difficult and expensive to change course, and collaborative leverage will be lost.

Railroads have always been masters at working together when it made empirical sense. They developed standards-in-common for things like track gauge, knuckle couplers, air brakes, interchange rules, mechanical standards and, most recently, PTC interoperability. But, as one industry senior executive put it, "We're 80 percent the same and 20 percent different, but we seem to focus on the 20 percent. Now may be the time to change this."

Patchwork systems still remain common in railroading. Although many Class I railroads have implemented ERP solutions in some limited form, those improvements are almost exclusively aimed at back-office functions such as finance and H.R. Driving technology-enabled change requires new approaches to business case development. Industry ROI calculations have focused on legacy I.T. cost avoidance and administrative improvements — areas in which cost reductions (e.g., software licenses, retirement of obsolete or redundant systems, head-count reductions) could be easily quantified. These economies are real, but not where the largest amounts of treasure are buried. Deploying ERP within the rail-focused "Holy Trinity" (Transportation, Mechanical and Engineering), as well as Lead-to-Cash and Supply Chain functions, will provide multiple tiers of benefits: from low-hanging fruit (e.g., improving asset utilization and optimizing supply chain performance) to organization-wide growth and profitability associated with enterprise transformation.

Increasing velocity has become the new goal. For some, this simply means running trains faster. However, real gains in velocity couple speed with more effective use of fixed and rolling assets. Making this happen will expand capacity without the need to deploy huge chunks of additional capital. Velocity improvement is also about giving smart, dedicated people better tools and analytical capabilities to make better decisions faster.

A Two-Fold Task

Equally important is driving revenue growth. Consider, for example, that ERP and TMS technologies don't accommodate rail solutions particularly well. Despite the fact that rail has become manifestly more competitive in both price and service since deregulation, market opportunities often go unrealized because many shippers don't even have rail on their radar screens. In many instances, their systems just aren't configured to readily accommodate rail solutions. In effect, making the industry easier to do business with could seriously improve long-term prospects. Interfacing railroad ERP systems with customers' ERP applications is an important way to do this, and to significantly improve end-to-end supply chain visibility and performance.

The railroad industry's task is twofold: (1) amp up productivity to become more operationally efficient and expand capacity, while (2) becoming more user-friendly to the customer to grow revenue from both new and existing sources.

The keys to making this happen are also twofold: (1) collaborate more extensively and (2) use enabling technology as a strategic weapon, rather than a tactical set of patches and upgrades to old systems.

The decisions made today — if the past is a valid guideline — will impact the way railroads operate for the next several decades.

Brooks Bentz is a partner in Accenture's Management Consulting Practice and can be reached at brooks.a.bentz@accenture.com.



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