How IT is Helping the Railroad Industry Improve Efficiency and Service

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.

-S.O.

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.

Here’s where IT comes in. Although the Class 1 railroads, including BNSF, CSX and Norfolk Southern, are actively investing in physical infrastructure—laying new track, building new terminals and expanding flatcar capacity—the average railroad spends nearly 80 percent of its capital expenditure budget just maintaining the track it already has. A rail company spends 17 percent of revenue on capital investment, compared with 3 percent for the average manufacturer. The AAR’s White says proposed investment leaves a gap of $1.4 billion a year beyond what the rail carriers will be able to raise on Wall Street, according to a study for AAR by Cambridge Systematics.

One solution is proposed legislation. The Freight Rail Infrastructure Capacity Expansion Act of 2007 would allow up to a 25 percent tax credit for rail investments. But AAR’s White says the bill isn’t moving quickly. Railroad investment in equipment, like new signaling and communication systems to decrease the spacing between trains or more powerful locomotives that can run heavier, longer trains, will help, too. But IT can help the railroads more efficiently route trains and process freight at intermodal terminals, enabling them to increase capacity virtually without spending as much to lay track.

“The entire industry is putting more focus on IT systems as a way to streamline operations,” says Morgan Stanley’s Longson. When a train is moving down the track, there’s little work for anyone but the conductor. But when it pulls into the station, there’s a flurry of activity that can be more efficiently managed with IT.

Building for What’s Around the Bend

One of the rules of railroading has always been, “You are where you go.” A railway’s value proposition has always been tied up in where it has chosen to lay track. But today around BNSF’s Fort Worth headquarters, you’ll more likely hear the phrase “building for where we need to be.”

The company is expanding its intermodal hubs and laying additional track. It is also spending about a third of its IT budget on new investments. Some of that investment goes into software for improving what BNSF calls overall “velocity.” A movement planner from Siemens, for example, schedules trains throughout the BNSF network, benefiting carload and intermodal customers. Likewise, Norfolk Southern’s Thoroughbred Yard Enterprise System (TYES) tracks the movement of railcars and locomotives.

Norfolk Southern employees use the Operating Plan Developer (OPD) to model railcars into blocks, blocks into trains, trains into schedules. Additional models predict locomotive and crew requirements for the train schedules.

But the railroads have begun to make specific IT investments for their intermodal business.

Consider BNSF’s Hobart Yard in Los Angeles, which processes 1.2 million lifts (the movement of a “box”—one container or trailer—to or from a railroad car) a year, or Logistics Park, Corwith and Cicero facilities in the Chicago area executing more than 2 million lifts annually. Managing these transfers requires technology to schedule movements efficiently and keep shippers and receivers informed of the boxes’ whereabouts. Hundreds of trailers and containers must be transferred on and off trains.

Both BNSF and Norfolk Southern are implementing automated gate systems at their intermodal terminals to help the trailers descending on those facilities make their trains. Norfolk Southern is also using the gate systems to improve safety, reduce gate processing time and reduce the time drivers spend inside the terminal. “That helps our trucks coming onto the railroad property drive through without delays, which improves our productivity,” Schneider’s Van Kirk says.

The systems use optical character recognition, digital cameras and voice-over-IP-enabled communication kiosks. They scan the trailers for identifying information and send them to the right location for transfer, transforming a system that previously required people with ruggedized computers to spend 20 minutes processing each idling semi into one where truckers can drive through in three minutes.

In an industry where a day without a workplace injury is rare, the gate systems also reduce the chance of someone being run over by an 18-wheeler, says Kathleen Meisinger, BNSF’s director of technology services and application development. Jerri Parks, director of intermodal and automotive systems for Norfolk Southern, says her company plans to use the system to process trucks remotely in and out of terminals in the near future.

Containers on an ocean vessel are often stacked 10 high, and managing them is relatively simple: first on, last off. But because of the complexity of transfers at the intermodal station, railcars often carry just one container, even though a locomotive can move double-stacked containers. BNSF has invested in giant cranes—284 feet wide, spanning seven loading tracks and three truck lanes—to load double-stacked cars. They worked with Kone, a Finnish marine software vendor, to develop workflow optimization software that uses GPS coordinates of containers and incoming trains to automatically guide the crane operator. Norfolk Southern’s Strategic Intermodal Management System (SIMS) creates a load plan for moving trailers and containers onto a train at the intermodal station, so that they can be efficiently unloaded at their destinations. SIMS also supports train planning, inventory management, equipment storage and EDI communication with customers and other railroads.

CSX—whose lineage can be traced back to the very first U.S. railroad, the Baltimore & Ohio—has built a wireless tool that allows truckers to verify billing with the terminal before arrival. The smartphone-enabled application lets drivers know whether they will be able to offload the trailer without any issues, says Frank Lonegro, president of CSX Technology, the business unit responsible for IT. The driver can reconcile problems by phone en route, saving time and money.

Those systems that improve productivity will only become more important as East Coast carriers like CSX and Norfolk Southern go after the short-haul market, where trucks continue to dominate. Norfolk Southern is moving more freight in the 500-mile and 250-mile lanes, like the route from the Port of Savannah, Ga., to Atlanta. “We want to continue to grow this business,” says Jim Bolander, assistant vice president, intermodal pricing and development for Norfolk Southern.

Better Data for Customers

New IT systems aren’t limited to increasing operational efficiency, they’re also critical to improving customer service. It’s something few railroads had been known for in the past. Tools like the automated gate system at the intermodal hubs help. “When you’re moving millions of containers a year, saving 17 minutes on the in- and out-gate translates into improved service and improved recoverability [after delays],” says Olsovsky.

But more visibility into container movement and progress is necessary to meet the real-time data needs of intermodal customers. And the increased number of touchpoints involved in intermodal freight movement—versus single trips by one mode of transport—means that more data is being generated.

For truckload carriers, “it’s no longer pick it up, drive it, deliver it—one driver, one assignment,” explains Schneider National’s Van Kirk. “There’s the arrival dray, the rail component and the destination dray, and each movement has three separate activities.”

The big railroads currently use electronic data interchange (EDI) to share information directly between their systems and those of their intermodal partners. “When one of our drivers picks up a load, we have a satellite system in the truck that sends a macro to say they picked up the load and to generate a waybill that lets the railroad know they have a load coming,” explains Van Kirk. “They go through an automated checkpoint (at the intermodal station), and the railroad provides EDI status updates for different events.” Most rail providers also provide the same data and the ability to generate reports via their websites, which trucking or retail customers can then use to update their end customers.

Norfolk Southern and other railroads have installed automatic equipment identification (AEI) tags and readers on their tracks at close intervals to monitor the movement of railcars. The AEI readers relay each railcar’s location. That data can be viewed online or sent to the shipper’s own system. “It’s one thing to know your trailer departed Atlanta and the next stop is Birmingham,” says CIO Butler. “It’s another thing altogether to know where between those two points it actually is.”

Real-time tracking information from Class 1 railroads has improved over the last few years, says Dave Howland, vice president of intermodal rail management for Schneider National. There is “better reporting of trains delayed between reporting points due to derailment, washout, et cetera, on a real-time basis,” Howland explains. “Before, they wouldn’t update those things until the train reached the next reporting station, a day or two after the fact.”

If the railroads want to grow their LTL business, they must invest more in streamlining business processes and communications, says Tanowitz. They also need to keep better track of their own assets. Tanowitz says 1 percent to 2 percent of railcars show up as “in unknown locations” on railroad systems. Railroads won’t be making huge investments in IT systems like the barcode scanners that UPS uses. But, he says, they could invest more in GPS tracking of railcars and integrate that with their existing networks to keep closer track of trailers and containers than they do with the AEI tags and readers.

To help trucking companies manage their trailers, CSX has developed an IT-enabled empty-equipment-relocation program. It allows carriers that have unloaded a trailer at an intermodal station in an area where they’re unlikely to pick up another load to, for a fee, put the empty container on a train to a destination where there’s greater opportunity to load up again. “It allows carriers to have better driver utilization in their hot markets,” says CSX’s Lonegro.

But not every customer is thrilled with the rail offering as it exists today. In the early days of intermodal, the railroads wooed customers with free rides for empty trailers to someplace they could load up again. Not today. “The problem is, they haven’t added a lot of rail capacity in the last hundred years, and the service isn’t as good as it used to be,” says YRC Worldwide’s Rapken. “They don’t reposition our empties anymore. Investing for the Long Haul

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.

They’ve raised their prices.” While YRC understands the market dynamics guiding the railroads decisions and says it isn’t moving away from rail, the company is moving more of its long-haul less-than-truckload trailers on 18 wheels rather than steel wheels.

The railroads will tell you they’ve simply decided to focus on their core competency of moving trains and are concentrating on volume. “Over the years, railroads have tended to focus more on providing transportation service and less on equipment management,” says BNSF spokesman Patrick Hiatte.

The Limits of Rail

Then, of course, there is the need for speed. In the railroad industry, there’s a business metric everyone keeps their eyes on: delays. Everyone is trying to limit it—20 percent of Norfolk Southern’s incentive compensation is based in part on a composite service metric that includes goals for train performance, connection performance and compliance with operations plans. But keeping the trains running on time is hard to do.

When there’s a storm, an airplane can fly around it. If there’s a wreck on Interstate 90, a semi can take a detour. If there’s a mechanical failure or a mud slide or some other mishap on a track, the train stops. IT helps mitigate slowdowns. The Midwest floods this summer “made for a tough couple of weeks,” says Schneider National’s Van Kirk. Union Pacific rerouted its trains on BNSF tracks, but such cooperation between railroads is used only in emergencies. Most of the time, railroads can’t reroute trains on the fly.

The rail providers themselves are the first to point out these shortcomings. The risk factors listed in their annual reports will mention that more flexible truck lines will continue to affect their ability to compete for deliveries of nonbulk, time-sensitive freight. Rail remains a no-go for those managing just-in-time inventories and operations.

“A growing segment of the logistics marketplace is small-volume, high-value finished goods,” says Tanowitz. Shippers of those goods want “package-level details on their shipments,” and railroads today can’t provide that. Those most likely to invest in systems to provide more granular data—and compete or integrate with more LTL carriers—are the East Coast railroads like CSX or Norfolk Southern that are going after more short-haul business. The railroads also need to provide more precise forecasts for train departures and arrivals, Tanowitz adds.

CSX Technology’s Lonegro says that if retailers provide SKU-level details to their intermodal customer and the intermodal customer includes that information in its shipping instructions, the railroad could modify its systems to allow everyone to have full visibility. But others, like BNSF and Norfolk Southern, say it’s just not worthwhile to offer that level of detail today. Says BNSF’s Hiatte: “Our trucking-company or ocean-carrier customers know what’s in a trailer or container, and our tracing systems provide the location of the trailer or container.”

The IT projects in the Norfolk Southern pipeline are focused on increasing overall productivity and decreasing costs. These include a new dispatch and traffic-control system to improve scheduling, transit times and service, as well as the next generation of a tool to optimize railcar-trip planning and provide dynamic routing (to be rolled out during the next year). The railroads would need to integrate even more with each other to improve the overall flow of the rail network, analysts say. Although the Class 1s have negotiated rights on each other’s tracks, traveling on track they don’t own can be more costly. And for the most part, the railroads choose the lowest-cost—not shortest-distance—route, often to the detriment of their customers, says Tanowitz.

Some wonder whether the railroads want to improve their services to compete more directly with trucking companies. “Investment in a truly integrated intermodal supply chain has been a lot of talk but not a whole lot of investment,” Rutchik says. “The question is whether this is an incremental change based on an exceptional spike in fuel prices or this is an area they’re going to really invest in and become a more viable third-party logistics provider.”

The numbers tell the story, counters Butler of Norfolk Southern. “If customers didn’t see value in intermodal as it exists today, they wouldn’t be using it,” she says. “We have the capacity and it’s lower cost. Rail does not move as fast, in general, as highway traffic, and we have a lot of work to do. But our expectation is for continued intermodal growth.”

Although improved service and increased capacity may enable the railroads to take business away from the $150 billion trucking industry, there’s one thing everyone agrees on: Rail will never fully replace long-haul trucking. “You would have to increase (rail) capacity by far more than economically could be justified,” says AAR’s White. “But long-haul transportation may increasingly move more by rail, and it will continue to be the key to our growth.”

Stephanie Overby is a freelance writer based in Boston.