How IT is Helping the Railroad Industry Improve Efficiency and Service

Railroads are poised for a comeback, thanks to rising fuel prices. IT provides the linchpin for a shipping model that integrates ships, trucks and trains.

There's something nostalgic about railroads. The steel tracks that rim the American landscape. The familiar ding-ding-ding as the crossing arm descends and the freight train passes. The lyrics to "I've Been Working on the Railroad," learned from childhood. The $200 properties on a Monopoly board.

To the layperson, little has changed over the years. Those rust-colored tracks lie fixed in their familiar locations. Drivers sit at a railroad crossing, either cursing their luck or counting cars for fun, the way they always have. Kids still learn the old folk song. And the B&O is a downright bargain for today's Monopoly players.

Even executives in the railroad industry recognize that, in some fundamental ways, freight railroads are untouched by time. "It's still steel wheel on steel rail," says Deb Butler, CIO and executive vice president of planning for Norfolk Southern, a company that's 177 years old.

But a funny thing has happened. As the price of diesel fuel soared and highway congestion increased, new interest sprang up in the old form of transportation. "Shippers had been dubious about rail because it has historically been about moving very large finished goods or commodities in bulk," says David Rutchik, partner with sourcing and supply chain consultancy Pace Harmon.

As big retailers, manufacturers and even trucking companies themselves started scrutinizing their skyrocketing shipping costs, however, railroads began to look more attractive. "It's all about the economic pressure," says Rutchik. Sustainability, too. That old iron horse, chugging along at 49 miles an hour, has suddenly become a "green" option, given its ability to move a ton of freight 423 miles on one gallon of gas.

While it's still only carload materials like coal that make a full cross-country trip by locomotive, more and smaller goods are spending the bulk of their journeys on a freight train. In 2004, intermodal business—the transport of truck trailers or ship containers on a railroad's flat cars—surpassed coal as the largest source of revenue for Class 1 railroads (as categorized by revenue) in the United States, according to the Association of American Railroads (AAR). "It has been our engine of growth," says Tom White, director of editorial services for AAR, thanks to big customers like UPS, truckload carriers like Schneider National and J.B. Hunt, and—to a lesser degree—the less-than-truckload transportation providers, all eager to use their trucks and drivers for short trips and let the railroads handle the rest.

The increased demand has been good news for railroads in the short term. But long-term, experts say, demand for rail service could outstrip supply to such an extent that rail capacity becomes severely strained and rail shippers profoundly dissatisfied. The key to future growth and customer satisfaction—in addition to laying billions of dollars' worth of new track—will be new IT systems and technology-enabled business processes, which ensure that the railroads operate more efficiently and predictably.

Rail carriers, anxious to take advantage of growing interest in their intermodal offerings, are investing in systems to become more flexible, improve on-time performance and increase their virtual capacity. Automated gate systems reduce backups at intermodal hubs, while complex trip-planning systems analyze variables, such as crew and locomotive availability and the weather, in order to reduce bottlenecks on the tracks. The railroads are also updating their tracking systems to provide trailer-level location data and more frequent updates to satisfy a new breed of end customer. Wal-Mart or Kimberly-Clark, for example, wouldn't be satisfied just to know that the train left Seattle on Sunday and is supposed to get to Kansas City on Wednesday.

"The key to growth, service levels and getting the most capacity out of the railroad is using information and technology," says Butler. The question waiting around the bend is whether that will be enough.

Using Less Diesel

Fuel-optimization systems help engineers operate trains more efficiently

Although railroads are the most fuel-efficient form of surface transportation, they're hurt by rising diesel prices. Fuel costs at Burlington Northern Santa Fe (BNSF) have risen from $1 billion in 2003 to $1 billion per quarter in 2008. And that means bigger fuel surcharges for customers. (Railroad and trucking companies have been sued by their customers for allegedly colluding to fix fuel surcharges, a charge companies in the transportation industry deny.)

Investing in more fuel-efficient locomotives helps curb diesel costs, but that goes only so far. So rail carriers, just like their diesel-devouring brethren in the trucking industry, employ fuel-optimization systems to control costs.

In 2006, Norfolk Southern began installing its Locomotive Engineer Assist Display and Event Recorder (Leader) on its entire fleet. Developed in partnership with New York Air Brake, the system calculates the optimum speed at which to operate the train, depending on the topography and curvature of the track, the train's length and weight and other conditions. "It's rare in our territory that you're operating a train over a straight path," says Deb Butler, Norfolk Southern's executive vice president for planning and CIO.

The system has been integrated into Norfolk Southern's Optimized Train Control system, developed in-house, which utilizes data communications, positioning systems and onboard computers tied to a train's braking systems to enforce speed and operating limits automatically.

Last year, BNSF rolled out its Fuel MVP Program to encourage engineers to use fuel-efficient train-handling practices. The company had a scorecard to track each engineer's performance, but IT automated the process using the railroad's network of 37 wireless base stations. The base stations gather information from passing trains' onboard computers and then transfer it to BNSF's enterprise data warehouse. After normalizing the data for mitigating factors (Was the train going uphill? Were the cars empty?) BNSF calculates each run's fuel efficiency and displays the information online.

Each month, the company ranks engineers based on fuel conservation and rewards leading engineers. Thanks to fuel-efficiency programs like Fuel MVP and the acquisition of more efficient locomotives, BNSF's fuel efficiency increased 8.3 percent between 1996 and 2006. In 2007, the company's fuel efficiency further improved by nearly 3 percent.


Railroad's New Growth Engine

The use of wooden railways to move goods and people, by some accounts, goes back to ancient times. But it wasn't until the late 1700s that metal was used for the wheels and track. Steam replaced horses for powering locomotives a few decades later. And in 1815, Colonel John Stevens was granted the first railroad charter in North America.

The railroads dominated long-haul freight transport nearly until Dwight D. Eisenhower established the Interstate Highway System in 1956. Shippers found that finished goods could get more places faster and more flexibly on the open road. Railroads chugged along, nevertheless, carrying coal, lumber and other commodities. That movement of bulk goods remains an important component of railroad revenue. "[Those customers] need only limited visibility into their shipments and transit times and are able to deal with the inherent dynamics of the infrastructure, which is that the railroad doesn't always take the shortest distance between two points," says Marc Tanowitz, principal with Pace Harmon.

But in the past couple of decades, the railroad industry has experienced two big shifts. One has been consolidation. In 1980, there were 40 Class 1 railroads (defined today as those with operating revenue exceeding $346.8 million in 2006) operating in the United States. Today there are just seven: Burlington Northern & Santa Fe Railway (BNSF), Canadian National Railway, Canadian Pacific Railway, CSX Transportation, Kansas City Southern Railway, Norfolk Southern Railway and Union Pacific Railroad.

The other change has been the explosive growth of its intermodal business. Intermodal volume has grown 400 percent since 1980, according to AAR, from 3 million units (trailers or containers) to 12 million. Today, chances are much of the stuff of your everyday life—your cell phone, your cereal, your car—rode the rails at some point on its way to your door.

BNSF (the product of more than 390 railroad lines that merged over 150 years) still hauls enough coal to generate 10 percent of all electricity in the United States and moves more grain than any other North American railroad. But it's also one of the world's top movers of intermodal traffic. Half of BNSF's volume and 33 percent of its revenue comes from moving truck trailers and ship containers. That's probably because BNSF owns the shortest route between Southern California ports and Chicago distribution centers. (More railways come together in Chicago than in any other city; according to some estimates, more than 75 percent of U.S. rail freight from U.S. ports is processed there for distribution throughout the country.) BNSF CIO Jo-ann Olsovsky says her company has forged partnerships with trucking companies for 25 years.

There's a natural synergy between full-truckload carriers and rail because the trailer is headed to and from a single location. One intermodal train can move as much freight as 280 trucks. (For more on how the railroads are using IT for fuel optimization, read "Using Less Diesel," above.) That's why intermodal shipments accounted for one-third of truckload carrier Schneider National's $3.7 billion in revenue last year. Steve Van Kirk, vice president of intermodal commercial management with Schneider, says the business it gives its two biggest rail partners, BNSF and CSX, will grow "due to driver shortages, rising fuel costs and growing sensitivity to the impact of different choices on the environment."

The intermodal option gives truckload carriers opportunities to cut costs and provide additional solutions for customers, Van Kirk says. "We're in it for the long haul, and we see it increasing in some places it was never used before," he says, noting that Schneider plans to increase its rail buy in the shorter-haul Eastern triangle connecting Chicago to Florida and the East Coast ports. "As fuel costs have gone up, rail is a more viable alternative for 800-mile or less trips."

Even less-than-truckload (LTL) carriers with their trailers of mixed goods headed for different destinations have been eager to take advantage of rail service. "We don't want to have to jack up prices because diesel is at $4.60 a gallon," explains Michael Rapken, CIO for YRC Worldwide. "And with a tight economy and our best customers leaning on us for more concessions, it makes our ability to generate a margin on that business tougher and tougher. We use rail as much as possible," he says, though YRC considers cost and capacity in its calculations. (For more about YRC, see "BPM Without Busting the Budget.")

Doing so is possible thanks to improved rail service reliability in certain corridors. "Certain high-density (rail) lanes have results close or equal to long haul trucking," Van Kirk says. A trucker doing 500-miles-a-day solos takes four days to get from Chicago to Los Angeles. An intermodal train can usually make the trip in four or five days. Whether to ship by road or rail comes down to how Schneider's network matches up with the available rail networks and what the end customer's expectations are. "If you're talking about something going from Chicago to L.A., it works," Van Kirk says.

The railroads want to expand intermodal capacity in high-demand areas. Intermodal has been the fastest-growing segment of Norfolk Southern's business during the last five years, accounting for 20 percent of its $9.4 billion in revenues last year. "We have initiatives under way to create corridors that are natural magnets for trailer and container traffic," says Butler.

Creating Virtual Capacity

The industry has finally run out of excess capacity, enabling rail lines to raise their prices 30 percent or more, according to Morgan Stanley research analysts William J. Greene and Adam Longson. But the railroads must make significant investments in capacity and service to take advantage of the situation long-term. (Potentially, railroads could take business away from trucking companies.)

The U.S. Department of Transportation has forecast that freight railroad demand will increase 88 percent by 2035. If capacity is not added, as much as a third of the country's 140,000 miles of track will be so congested as to cause widespread service breakdowns. The DoT report concluded that $148 billion must be invested in railroad infrastructure expansion.

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