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May 2011

Rail News: Rail Industry

CN's team of precision railroaders must strive to be supply chain enablers, CEO Claude Mongeau says

— by Pat Foran, Editor

Seventeen months ago, Claude Mongeau took CN's reins from the retiring E. Hunter Harrison. Since then, the Class I's 49-year-old president and chief executive officer has kept the railroad on track in terms of operational efficiency and service performance, as CN's first-quarter financials suggest. Mongeau also has added the next collective step for CN's 22,000 employees to take, as well as a few new words for them to weave into their workplace vernaculars.

Instilled by Mongeau, a focus on supply chain collaboration has netted a series of terminal service level agreements, an end-to-end coal plan and a scheduled grain plan during the past year. The pacts already are producing tangible results, and not just on the balance sheet.

"We are engaging with our customer in a new way — I call it 'daily engagement' — and I'm telling you, it's a wonderful thing," Mongeau said during a mid-April interview at CN's Montreal headquarters.

Maxims like "Change is good, but quick change is better," which permeated the Class I's culture during the mid- to late 1990s, still apply. And "precision railroading" still rules at CN. But like his CEO predecessors, Mongeau expects CNers to stretch. He's asking the precision railroaders of CN to step it up a notch and become, as he calls them, "supply chain enablers."

"The supply chain focus is a natural evolution from where CN has been," Mongeau says.

Merging Interests

It's also something of a natural progression for Mongeau, a strategic thinker who knows how to piece together corporate puzzles. He grew up in Montreal, earning a degree in psychology from the University of Quebec and an M.B.A. from McGill University, which also are Montreal institutions. He later traveled to Paris to earn a degree from Institut Supérieur des affaires, which offered an M.B.A. International Exchange Program. In 1988, Mongeau landed his first gig: as a consultant in the Paris office of Boston-based Bain & Co., a global business consulting firm.

"I got an early education in corporate strategy," he says. "Sometimes, you're just carrying the bags, but you're in the room."

Mongeau took full advantage of his room time. He did a lot of listening and a lot of learning, particularly in the merger realm. In 1989, Mongeau returned to Montreal to Groupe Secor Inc., a Montreal-based management consulting firm. There, he served as a senior consultant, then manager and partner for a firm that provided strategic advice to such corporate heavyweights as Bombardier and Bell Canada. In 1993, he became manager of business development for Imasco Inc., a diversified holding company with subsidiaries operating in the manufacturing, retail, and financial services sectors.

Mongeau joined CN in mid-1994, when the Class I — then still a Crown corporation — and Canadian Pacific were exploring the possibility of merging their respective eastern operations.

"I had a lot of expertise with mergers, and they needed somebody to help with the execution," Mongeau says. "It was an exciting opportunity."

But CN-CP dropped the merger talks just weeks after Mongeau signed on. Instead, CN strategists embarked on a plan to privatize the railroad.

"That ended up being a more exciting project," he says.

And an educational one, as well. Mongeau worked closely with then Chief Financial Officer Michael Sabia, as well as CEO Paul Tellier, a hard-driving change champion.

"It was a unique opportunity in life, to be part of CN at that time," says Mongeau, who served as vice president of strategic and financial planning and AVP corporate development before being named executive VP and CFO in 2000. "Paul had a vision, and it was to become not just a North American railroad but the best North American railroad. At the time, we were neither."

Anything But Clinical

CN, of course, would go North American in a big way. From 1998 through 2009, the Class I acquired Illinois Central Corp. (1998), Wisconsin Central Ltd. (2001), Great Lakes Transportation L.L.C. (2004), B.C. Rail Ltd. (2004) and the Elgin, Joliet and Eastern Railway Co. (2009). Mongeau helped shape and complete each acquisition, as CN Chairman David McLean noted in an April 2009 press release announcing Mongeau as the successor to Harrison, who'd succeeded Tellier as CEO in late 2002 and retired on Dec. 31, 2009.

"[Mongeau] is one of the architects of CN's industry-leading financial performance and the key strategist behind the highly successful rail acquisitions that have grown CN's reach throughout North America and made it a key industry player," McLean said.

Ensuring that CN remains a key player is a given for Mongeau, who took the Class I's reins on Jan. 1, 2010. His loftier aim is keeping the railroad on the "best" quest. It starts with making sure CN remains razor sharp on the operational execution front.

"We know how to railroad," Mongeau says, citing the "precision railroading" model Harrison championed. "We also know what it means to be accountable."

Mongeau included. In speeches he's given during the past year, he frequently told business leaders, customer groups and investors that he's "standing on the shoulders of two great leaders." Tellier was the global-thinking, politically savvy change agent who transformed a lumbering, government-run railway into arguably the most efficient North American Class I. Harrison changed more than a few minds about how railroads work and why, and he did it in his own inimitable style — something approximating "relentless" squared.

"I've got a legacy of operational excellence and service innovation to protect," Mongeau says.

He also plans to build on that legacy — his way.

An engaging, down-to-earth conversationalist, Mongeau doesn't default to consultantspeak; his analogies and metaphors are clear and concrete, and he delivers them in an anything-but-clinical fashion. He's also every bit as focused as the CEOs who preceded him, observers say. That focus is evident when Mongeau talks about taking a team approach, a subject he addresses with zeal. And when he's talking "team," he isn't just referring to CN's 22,000 employees. To Mongeau, every member of the supply chain is on the team.

"That is why we have to become supply chain enablers," he says.

That makes connecting with customers more important than ever.

"The very first thing I did as CEO was restructure marketing at the top, bringing sales and marketing together," Mongeau says. "And we aligned sales and marketing again much closer to operations, which brings all of them closer to the customer."

That way, CN decision makers and customers are better equipped to solve problems together. Mongeau characterizes the corresponding railroader-customer interaction as "scrums," citing the rugby term for game restarts after the ball has gone out of play or an infraction has been committed.

In a scrum, teams must function as a unit — team members must be on the same page, they must know their respective roles and they must share the same goal — in order to move the ball forward. It's a perfect analogy for the supply chain, Mongeau believes.

"As we become more customer centric, we can scrum and fix supply chain issues with customers," he says.

And that scrumming will help bring CN, CN customers — all supply chain stakeholders, really — to the next level.

"For years, we were in silos, and there was quite a bit of finger-pointing," Mongeau says, using the intermodal dynamic as an example. "You're losing the ultimate customer in the equation. It's not the shipping line, the terminal, the railroad — it's the ultimate owner of cargo that's in that box. He's the one buying service end to end. We have to develop an end-to-end view of the supply chain."

Developing that view is the way forward for CN, Mongeau says.

"It's our future," he adds.

Less Finger-Pointing

In some supply chain segments, that future is already here. Last summer, CN and TSI Terminal Systems Inc. signed a service level agreement that established specific performance targets and measurement tools for containers flowing through the Vancouver gateway. Key performance indicators include on-time train departures and arrivals, train capacity utilization and average terminal dwell time of containers.

The pact followed a supply chain collaboration agreement CN-TSI signed in June 2010 that put both parties on the hook to drive greater efficiencies, improve customer service, create capacity and, ultimately, boost business.

Now, decision makers at CN and TSI — the largest container terminal operator in Canada — share a host of transportation and shipment data daily.

"If data isn't visible to all the links in the chain, it's easy to finger-point. But we've been able to improve our dwell time significantly," Mongeau says. "Slot utilization, car supply — we're more efficient. Our ability to plan together is much greater. You can see issues building up a day, two days or a week in advance, and you can address them before they become real problems."

TSI officials are just as jazzed about the collaboration arrangement, Mongeau says. A TSI spokesperson couldn't be reached for comment. But last summer, Michael Moore, president of CEO of TSI parent GCT Global Container Terminals Inc., characterized the CN-TSI collaboration thusly: "Our relationship with CN continues to improve significantly, and we are pleased to collaborate on delivering high-level service to our mutual customers."

Another collaborative effort Mongeau believes is paying off is emerging in coal country.

"When we reorganized marketing, I wanted to make coal a separate group inside the 'bulk' area," Mongeau says. "Why? There are 10 to 12 mines in western Canada and three terminals. It's more than a market. It's a supply chain."

That meant taking a comprehensive approach to managing the flow of coal from mines to west coast terminals.

"It starts at the mine — you have know how much mine tonnage is available, you have to know when the ships come in," Mongeau says. "Until you see the whole piece, how can you improve the supply chain piece?"

Now, CN and terminal managers don't have to squint to see the big picture; all have access to a series of metrics designed to make the supply chain more transparent. A weekly report shows how much coal is on hand at export terminals and mines, the arrival date of vessels at the ports, the amount of coal being shipped from mines, and the number of trains en route to and from the mines.

"They see what we see," Mongeau says, booting up the PC in his office and pulling up a "live" visual of the day's transportation activity at Ridley Terminals Inc. (RTI), a Crown corporation in northeastern British Columbia. "Now, we can identify bottlenecks. Again, we can move from finger-pointing to pinpointing."

And once you can pinpoint and get more predictive, you can leverage efficiencies, create capacity when and where needed, and generate additional business. The collaborative approach to managing coal flows — along with rebounding Asian steel markets and business from new mines — is helping CN improve service for coal customers and grow their volumes to Asian markets.

"With RTI, it's been remarkable," Mongeau says. "What's happening is we are helping them make their case with the Canadian government to expand."

That's what supply chain collaboration can do.

"It's about all of us getting to the next level," Mongeau says.

Every Grain of Innovation

Getting there was the point of the scheduled grain plan CN unveiled last year. The plan calls for CN to deliver specified hopper cars to specified elevators on designated days each week to provide more predictable service. Last year, the railroad achieved a fulfillment rate of more than 85 percent for spotting covered hoppers on specified days.

As result, grain companies can better schedule staffing at country elevators and waterfront export terminals. In the end, "it's all about selling the right grain at the right time to the right buyer and ultimately creating more wealth for Canadian farmers," as Mongeau puts it.

But it's also about finding a way to transform a traditionally adversarial carrier-customer relationship to one based on collaboration and a clear, end-to-end supply chain perspective.

"Embracing change and innovating together is the key to making the grain industry more competitive in global markets," Mongeau says.

That embrace is also paying dividends at CN. One example: The Class I's first-quarter intermodal revenue jumped 12 percent to $392 million compared with Q1 2010's total. Supply chain collaboration agreements contributed to the revenue jump, EVP and Chief Marketing Officer Jean-Jacques Ruest said during CN's first-quarter earnings conference on April 26.

Expect the supply chain collaboration pacts to keep on coming. In February, CN reached two level-of-service agreements with the Montreal Port Authority (MPA), Montreal Gateway Terminals Partnership and Termont Montreal to improve efficiencies along the port's gateway. The pacts complement a framework agreement CN and the MPA reached in September 2010 to develop supply-chain best practices, boost productivity and increase the port's share of global container traffic.

The February pacts call for establishing key performance indicators to improve gateway fluidity, including metrics for container dwell times at terminals, rail-car availability, CN's on-time performance and ocean vessel performance. The metrics will drive continuous improvement in performance and, ultimately, help expand the Port of Montreal's business, Mongeau says.

On May 3, CN revealed that a recently implemented scheduled potash service already had increased supply chain efficiencies and provided quicker access to markets for western Canadian producers. The service "is the next chapter" in CN's supply chain collaboration agenda, Ruest said in a prepared statement.

It's an agenda Mongeau says he's "honored and privileged" to push.

"We have the DNA of execution, we have a great business model, we have the franchise," he says. "I like the position we're in."

If CN fulfills the supply chain enabler role Mongeau's conceived for the railroad, CN customers will like it, too.


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