Originally published in Forbes
Unlike tech, for manufacturing and other sectors that have steadily improved productivity over the years, and despite infrastructure investments, rail freight output metrics have barely improved over time.
Demand for rail freight will continue to rise due to increased road congestion, making rail a key enabler for driving a competitive advantage within the supply chain. Yet several major barriers and imbalances exist in the rail transportation network that continue to challenge shippers, carriers and investors alike. The challenges are made greater by the dysfunctional relationship that exists between those three stakeholders who are at best misaligned and at worst working against each other’s best interests.
Communications has broken down between stakeholders. Unlike tech, for manufacturing and other sectors that have steadily improved productivity over the years, and despite infrastructure investments, rail freight output metrics have barely improved over time.
There is a small window of opportunity for the rail industry and for the shippers who utilize it. At the present time, trucking rates are increasing due to driver shortages and regulatory changes, opening the door to a modal shift in favor of rail. But this will happen only if all parties involved enhance their collaboration, leverage digital technology and utilize data-driven analytics to make decisions. Railroads are capable of delivering at the right cost and competing successfully against truck freight, but it is necessary to forge tighter relationships based on open communication and collaboration, data visibility and long-term value creation.
Factors complicating freight decisions include an unpredictable economy and trade war, chronic driver shortage, reduced capacity, increased environmental restrictions, changes in buyer behavior and an increasingly complex supply chain. Even the so-called “Amazon effect,” which has triggered a major imbalance between carrier and shipper and has made dramatic changes to the nature of retail, has also changed how products are shipped, as consumers have come to expect fast and cheap delivery of everything from consumer goods to everyday groceries. As this effect takes hold and the supply chain grows in complexity, traffic patterns shift and buyer behavior adapts to new realities, shippers and investors alike will have to face questions about how to move forward.
These factors have hit shipper costs and margins, negatively impacted delivery times as well as inventory carrying costs. In rail specifically, this is complicated by a reduced number of cars and crew and not enough flexibility built into the system to handle an increase in demand.
A clear path for the rail industry will include greater collaboration and a more advanced digital supply chain model characterized by end-to-end supply chain integration and value creation, as well as an end-to-end view of the entire supply chain. As quarterly reports are monitored closely from the investor community, long-term solutions are sometimes put off in favor of short-term band-aid solutions. Growth necessitates a long-term view.
A Solution That Works For Carriers, Shippers And Investors
In this rapidly changing freight ecosystem, new ways must be sought out to create value for all stakeholders, including carriers, shippers and investors. Understanding the value drivers is key to this process. Supply chain management practices indicate that total supply chain performance improves for all firms in the chain when relationships are well established and managed with open, quick, reliable communication to enable sharing of strategic and operational plans, data and performance.
Outdated rail business models must be addressed immediately with an eye toward a new and more efficient transportation system capable of meeting the needs of the current and future environment. Finding a solution that meets the often conflicting needs of carriers, shippers and investors is not an impossibility, but it requires three things to succeed: digital transformation, improved collaboration between all stakeholders and a deeper view of the entire end-to-end supply chain.
Within that framework, all stakeholders must acknowledge that the supply chain is now a digital supply chain, and an often unforgiving railway environment can be significantly improved by computer-based systems, such as satellite positioning systems, to help reduce collisions and the internet of things to combine sensors to improve maintenance practices and improve rolling stock availability.
Three tasks are essential to the future of rail:
1. Greater collaboration, driven at the executive level, is key to creating win-win partnerships that address the biggest challenges of both shipper and carrier. This higher level of collaboration will prove valuable in driving growth, cost savings and improved margins.
2. Further improvements in cost, cash, growth and share price will be achieved when all parties look closer at their buy-make-move-fulfill supply chain. Doing so will further eliminate bottlenecks and improve throughput, while also optimizing shipment size.
3. Total Value Optimization (TVO) should be implemented throughout the carrier’s entire organization. Partnerships and improvement programs must be put into practice across the carrier’s entire organization. TVO will enable the necessary collaboration throughout the entire supply chain, from the client’s client, shipper, carrier and supply base.
To meet the Amazon effect head-on, carriers need to invest in new technologies and business models and incorporate a new level of agility to respond to rapidly changing shipper and client demands and a more collaborative approach between all stakeholders. Doing so will create economic profit and value creation in a win-win scenario for all stakeholders.
Read all four of Steve Bowen's Forbes articles here.