Sunday, November 28, 2010

CN’s productivity pipeline

Written by  Luther S. Miller, Senior Consulting Editor
Writing a new chapter in an extraordinary success story.

Paul Tellier took Canadian National public with stunning success, Hunter Harrison’s Precision Railroading model took CN to performance levels that led many investment analysts to crown CN as the world's finest freight railroad, and now Claude Mongeau, in command since Jan. 1, is taking steps to ensure that CN stays that way.

As Mongeau said in a mid-October interview, he “stands on the shoulders of giants.” But he hasn’t been standing still.

Any doubts were settled when Mongeau on Oct. 26 delivered the news to financial analysts and reporters that CN in third-quarter 2010 achieved an operating ratio of 62.7%, two percentage points better than a year ago and exceeding the 68.2% reported a few days earlier by another great railroad, Union Pacific. Solidly successful productivity initiatives, along with strong top-line growth and unrelenting cost control, keep lowering the percentage of CN revenues consumed by expenses and increasing its appeal to investors.

Mongeau this year introduced a new strategy that has been quick to pay off. As CN explains it: “A series of clear metrics make the supply chain more transparent to CN managers – for example, a weekly report shows how much coal is on hand at export terminals and mines, the arrival dates of vessels at these ports, the amount of coal being shipped from mines, and the number of trains to and en route from the mines.”

The supply chain approach came at a time of rebounding Asian steel markets and production from new mines, and in this year’s first eight months helped CN increase coal carloads to two terminals in the Vancouver area and one at Prince Rupert by 91%.

“CN’s impressive performance is more than an economic recovery story,” Mongeau stressed as CN released its third- quarter results. “We are starting to see dividends from our new supply chain initiatives, which are designed to help our customers grow their business and position CN to handle a greater amount of that traffic. Since the beginning of the year, we’ve innovated on a number of fronts ranging from scheduled grain service in Western Canada, to collaboration agreements with CN’s major ports and level-of-service pacts with terminal operators, to a new end-to-end supply chain focus on Western Canada export coal.”

Mongeau doesn't miss an opportunity to tout the importance of the supply chain. He told the Pacific Gateway Forum 2010 at the Vancouver Board of Trade on Oct. 19: “To date, CN has invested roughly C$600 million in projects that specifically relate to the Asia-Pacific Gateway Corridor—everything from terminals and equipment, to sidings and signals.” But he said that investment is not enough. “We need innovation and collaboration throughout the supply chain. That is the journey CN is on.” CN introduced its “Pipeline of Strategic Productivity Initiatives” (see illustration above right) earlier this year with the comment: “Precision Railroading centers on what customers are most concerned about—the timely and safe delivery of cars or containers, not the train that carries them. By focusing on continuously improving all the processes that contribute to delivering the customer’s goods, CN became the most efficient and productive railroad in North America.”

These are some of the initiatives now in the pipeline:

Extended sidings, train length

One of the challenges CN faced in implementing its Precision Railroading model and running 10,000-plus-foot trains was that its sidings were typically only 6,000 feet long. In the past 10 years, in addition to putting in new sidings, CN has invested C$400 million to extend a significant number of sidings. In many cases, existing materials were redeployed, using two 6,000-foot sidings to create one of 12,000 feet. Benefits: fewer train and crew starts; fewer locomotives; faster, more reliable service.

Operating trains equipped with Distributed Power is integral to this objective. DP provides faster, smoother train starts, improved braking and lower pulling forces at the head-end of a train. As of midyear, CN had Locotrol on 320 of its roughly 1,200 road locomotives, and new deliveries and retrofits should push that number to 411 by year’s end. CN runs 75% of its loaded bulk commodity trains (mainly coal and grain) with distributed power, plus half of its intermodal trains and 20% of its manifest trains.

Car velocity

While continuing its focus on asset utilization metrics such as car velocity, CN is now doing this in greater cooperation with of customers. A number of “scrums” have been held involving customers, Car Management staff, and local Operation staff, to identify and eradicate sources of dwell, while improving flexibility for customers in their car order process and getting short lead time orders filled. “It’s all about balance—minimizing fleet, maximizing velocity, maximizing loading opportunities, and providing flexibility in the marketplace to maximize order fulfillment rates,” says CN.

EJ&E bypass, Kirk Yard integration

CN says its acquisition of the Elgin, Joliet & Eastern provides the “missing link” to connect five existing CN lines entering Chicago, filling a void in its network that has caused delays and higher costs. CN expects integration of the CN and EJ&E networks will be completed within three years of the acquisition. A strategic goal of the EJ&E integration is the reconstruction of the former’s Kirk Yard in Gary, Ind. The plan is to consolidate work done now at multiple yards in the Chicago area at Kirk. CN expects the transition to occur toward the end of 2011 or in early 2012. Kirk is envisioned as a “low cost per car-handled facility with greater switching efficiencies, promoting higher car velocity, network fluidity, and improved locomotive productivity.”

Harrison Yard in Memphis

CN recently completed a US$100-million reconfiguration and modernization of its Memphis classification yard, now Harrison Yard. Today’s yard can handle nearly double the traffic the old facility could in a 24-hour period. Harrison Yard is CN’s second largest in the U. S. with a capacity of more than 3,100 freight cars at the 45-track facility. The revised operation can handle 35 or more freight trains a day. Memphis is the largest U.S. location outside of Chicago where CN interchanges traffic with four of the major U.S. Class 1 railroads.

Edmonton (Walker Yard) Hump Closure

This is part of CN’s overall network switching strategy, which is based on minimum handlings, upstream blocking, and a centralization of production switching needs on its network of highly productive hump yards—Symington (Winnipeg), MacMillan (Toronto), Harrison (Memphis), and Kirk (Gary, Ind.), for which redevelopment plans are under way. This strategy allows CN to minimize the cost per car handled, and close or downsize smaller yards for use as regional switching, industrial support, and intermodal facilities. In Walker Yard, the service plan was changed to have the many inbound way-freights do online blocking, and reduce the number of outbound blocks required here by having Symington classify more, and by streamlining the empty car distribution tactics. Savings included signals and computer system maintenance and upgrade costs of the hump itself.

SmartYard

CN has developed SmartYard, to provide operations decision makers with better information. Smartcard takes information from different existing CN computer systems, combines the data, and then provides the best sequence for processing the cars. “It continuously adjusts to constantly changing conditions of the yard inventory and CN's network using preset parameters and rates to predict when processes associated with classification and train make-up will start and end,” says CN. When the start or end time of a process conflicts with or does not support the yard’s overall plan, alerts are displayed. SmartYard was first rolled out at MacMillan Yard, and later implemented at yards in Edmonton, Vancouver, Winnipeg, Montreal, and Memphis.

Precision Engineering

A key component of Precision Engineering, based in SAP, is the Track Inspection System (TIS), which combines data from ultrasonic and track geometry rail inspection vehicles along with information collected from visual inspections. This provides engineering supervisors and track inspectors with a detailed overview of all track defects, along with the ability to prioritize and assign work to field forces. The second phase of the project delivers mobile time and material reporting capabilities. PCs are installed in work vehicles to provide employees with wireless access to report and extract information such as plant condition, track availability, along with train and engineering crew locations. .

Fuel efficiency

CN claims to leads the industry in fuel consumption per 1,000 GTMs. CN was getting 1-2% fuel efficiency gains in 2003, 2004 and 2006, mostly from running longer, heavier trains. Motivated by soaring fuel prices, CN improved the pace of improvement. In 2009 the railroad achieved a 4% improvement, with an 8% gain in the second half of the year. CN has set a goal of a 3% annual gain in fuel efficiency in the next three years. New fuel-efficient locomotives, which consume 15% to 20% less fuel than the units they replace, are a key part of CN’s strategy. CN is also conserving fuel with:

• Distributed power, which maximizes the gains targeted from its extended siding program. DP-equipped locomotives’ higher-power and higher-adhesion capabilities mean fewer locomotives are needed to pull the same train weight. With improved matching of motive power to train weight, DP locomotives save fuel and cut emissions.

• Installation of Wi-Tronix systems on CN locomotives. W-Tronix's Wi-Tracker system is being used to maximize both locomotive asset utilization and fuel savings. Wi-Tracker provides tools such as statistics on utilization, engine shut down and duty cycle, fuel monitoring, locomotive fault and exception-based alerting, and geo-mapping.

• Automatic Stop/Start devices that conserve fuel and reduce emissions by automatically shutting down locomotives not in use.

• Equipping CN’s latest GE locomotives with GE Transportation’s Trip Optimizer.

All of this requires a strong and consistent flow of capital improvement dollars. CN told Railway Age last month: “Current guidance for 2010 is C$1.6 billion. Approximately C$1 billion is targeted towards track infrastructure. Equipment spending, targeted to reach approximately C$300 million in 2010, is intended to improve the quality of the fleet to meet customer requirements and includes the acquisition of 69 new high-horsepower locomotives.

CN also expects to spend roughly C$300 million on facilities to grow the business, including transload and distribution centers; on information technology to improve service and operating efficiency and on other projects to increase productivity.” CN is also buying 2,000 new freight cars this year.

In five years that have included the deepest recession in nearly 80 years, CN has invested as much as C$1.688 billion on improvements (2007) and never less than C$1.477 billion (2009). Cutting corners on long term capital improvements is not part of Precision Railroading.