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February 2014

Rail News: Rail Industry Trends

Railroads seek more collaboration, technological innovation among vendors to help the purchasing department control costs

By Jeff Stagl, Managing Editor

Not all that long ago, freight railroad purchasing managers and vendors took a hard stance on negotiating a price for a particular material or service. Their relationship often was contentious.

Now, purchasing department managers are trying to foster a more collaborative and less combative relationship with suppliers and service providers.

Acting as partners rather than adversaries can help railroads better achieve their purchasing goals: reasonable prices; better-quality materials and services; improved customer service; timely deliveries to avoid excessive inventories; and low total cost of ownership, purchasing executives say.

"The more combative approach from the past doesn't work anymore," said Tom Holmes, CSX Corp.'s assistant vice president of engineering-purchasing and materials. "Price negotiations are still a reality. [But through collaboration], we get better processes and more innovative services."

Purchasing department execs at Norfolk Southern Corp., Genesee & Wyoming Inc. (GWI) and Florida East Coast Railway L.L.C. agree that collaboration is crucial, given the billions of dollars freight railroads spend on materials and services annually. For example, NS each year spends about $3 billion on materials and $1 billion on services.

"Suppliers are a critical component to running the railroad, so it has to be a collaborative relationship," said NS AVP of Sourcing Ben Chapman.

Although a good price is the traditional No. 1 goal, NS aims to obtain the best total cost of ownership and take a more holistic approach, he said.

"Think about an iceberg — the price is the part you see above water. What you don't see below is quality, reliability, etc.," said Chapman. "We look at the lifecycle cost and how to do something better, so collaboration is key."

In turn, suppliers and service providers have requested that freight railroads provide them more time to adjust to current or upcoming business changes so they can do a better job as a vendor. For example, a crew transportation service provider might not hire more people as planned if NS tells the company it would be needing less of that service soon, said Chapman.

Jockeying For Position

Suppliers and service providers who better understand a railroad's business requirements will be best positioned to effectively and efficiently meet them, said Kristine Storm, AVP of purchasing for GWI — which owns 108 regionals and short lines in North America — in an email.

"Our top demands of our vendors are safety, quality, effective communication and [a willingness to] continue to challenge the status quo," she said.

A crosstie supplier strived to keep CSX's needs in mind while helping the Class I reduce logistics costs when delivering ties to a job site. The supplier previously provided three to six rail cars at a time, each carrying 400 to 500 ties. But about a year ago, the railroad worked with the supplier to begin delivering ties in unit trains, each carrying 20,000 to 25,000 ties, said CSX's Holmes.

"It's another way look to take costs out," he said. "It's more difficult for suppliers to load unit trains, but we worked that out."

CSX also was among a number of railroads that about five years ago collaborated with tie treaters to find a way to provide more cost-effective borate-treated ties. The addition of borate — an environmentally friendly compound that can extend a tie's longevity — previously drove up a tie's price point.

"We worked with tie treaters to develop a new process to treat the ties, and took cost out," said Holmes.

Although the purchasing department's functions and goals haven't changed much over the past several years, the processes employed to attain objectives have significantly changed, primarily because of technology, said GWI's Storm.

"Technology has had a significant impact on how purchasing acquires goods and services, which was historically a manually intensive process, both on the procurement end and on the payment end," she said.

At CSX, the focus now is on prompting more technological innovation by vendors, said Holmes. If suppliers want to work with CSX, they need to come up with better technologies, materials or services, such as longer-lasting products or something that improves the railroad's productivity, velocity or safety, he said.

"We want new ideas. Most suppliers respond favorably to that. There are some who are surprised, but then they're enthusiastic about it," said Holmes. "Things are happening now, there are technologies developing."

Last year, CSX also started to change its business process with suppliers from a contract-to-contract basis for a single item to a contract covering a specific commodity area. For example, instead of buying one item involving signals, department managers now analyze the entire signal area for purchasing opportunities, which helps cut costs, said Holmes.

"It becomes a full-blown discussion. The advantage is you can look at total cost of ownership from a broader perspective," he said.

A Hybrid Model

GWI made a process change in the purchasing department, too. After the company acquired RailAmerica Inc. in 2012, GWI adopted a "hybrid" approach that made the department responsible for sourcing and contracting high-value commodity groups — namely capital expenditures and original equipment — and other internal departments responsible for other commodities and purchase orders, said Storm. Prior to the RailAmerica acquisition, GWI took a decentralized approach to purchasing.

The advantages of the hybrid approach: purchasing can focus on leveraging the spend of the combined companies, ensuring that products and services are acquired at a reasonable cost of total ownership without ramping up staffing levels to cover the administrative functions of a standard purchasing department, said Storm.

"Our team has met all expectations and goals set forth during the first year of 'centralized purchasing,' and looks forward to improving the process and deliverables in subsequent years," she said.

Florida East Coast Railway (FEC) made changes in its purchasing/materials department, as well. The biggest one was an organizational change made last year so the department wouldn't continue to be managed by one person, said Fran Chinnici, FEC's senior vice president of mechanical, engineering and purchasing.

Jim Fronckoski was installed as FEC's director of purchasing and materials to lead the department. A 31-year CSX veteran, he last served as the Class I's procurement manager-mechanical. FEC also promoted Rob Markum to senior manager of purchasing and materials-mechanical, and named Jason McMaster manager of purchasing-engineering.

"Having one person handle purchasing wasn't effective. You can't do that job on your own," said Chinnici. "We had to consolidate. Now, we have four people in purchasing and three people in material supplies."

Looking At The Long Term

FEC, which operates a 351-mile line between Jacksonville and Miami, also didn't have a long-term purchasing plan or strategy.

So, the department adopted a cross-functional team approach like the one that was in place at CSX, said Fronckoski. Mechanical and engineering chief engineers, and other managers at the regional now get involved in purchasing plans.

"Since the changes, we have identified $2 million in cost savings, more so because we look at long-term contracts," said Fronckoski, adding that those contracts can run for five years.

Moreover, FEC is striving to foster long-term relationships with suppliers that weren't well-established or nurtured before, said Chinnici.

Looking ahead, Chinnici believes a supplier relationship will play a key role in the purchase of rail and ties for both FEC and All Aboard Florida, a privately owned and operated passenger-rail service proposed by FEC parent Fortress Investment Group L.L.C. between south and central Florida. FEC aims to create a venture with a tie producer and Cemex to set up a concrete-tie manufacturing facility in Florida, he said.

"If we buy ties in Florida, we can avoid the freight charges," said Chinnici.

Other Places, Other Means

In the meantime, FEC is trying to leverage its competitiveness in the marketplace by seeking two or three suppliers for each material. For example, the railroad now purchases some materials in China, which it hadn't done previously, said Chinnici.

NS also is purchasing some materials abroad. The Class I buys rail from suppliers in the Czech Republic and Japan that offer good quality and a reasonable price, said NS' Chapman.

Since consolidation continues in the supply industry, it's more difficult to do business with more than a handful of vendors for many materials and services, he said.

But as has been the case in the purchasing realm of late, something good can be drawn from a less-than-ideal situation. Reduced competition among suppliers due to consolidations has led to the development of more strategic relationships with vendors, said GWI's Storm.

"We will continue to improve and monitor our supply base to ensure we are receiving the highest quality that, in turn, supports our business objective to move freight in a safe, environmentally friendly way," said Storm.


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