John Hamilton (pictured below), former Electro-Motive Diesel president and CEO, kicked off the meeting with a presentation on the cyclicality of the freight car and locomotive market:
“The health of the railway supply industry is guided by cyclicality, despite talk of the rail renaissance. Small demand changes for railroads translate into enormous demand cycles for suppliers. The industry has just gone through the largest drop in demand cycle in 20 years. The supply community struggles with normal demand fluctuations. Railroad capital expenditures translate into huge cyclicality. As capex varies, locomotives bought and delivered vary even more, even when international deliveries are considered. The same is true with freight cars. It's very difficult to have a healthy supply company when demand varies so much.
“You can’t make money on these steep slopes, up or down. Personnel efficiency suffers—you're either hiring and training, then laying offand paying severance. Factory efficiency suffers. Sub-optimal capital and cash planning occurs, not to mention bankruptcies. Suppliers may decide to add capacity, with the risk that it sits idle in the next downturn, or simply raise prices. All this boom/bust adds cost to the supply chain, increasing railroad costs or reducing supplier investment. This is a real problem for real companies.
“Cyclical buying is likely to repeat in the near term. What can suppliers do to address this, both internally and with customers?”
Hamilton gave these recommendations, some of which were implemented at EMD:
• Reduce manufacturing cycle times.
• Standardize designs.
• Drive for multi-year deals with minimum annual commitments.
• Buy/sell production slots or capacity)-customers have later flexibility in what is built with that capacity.
• Share long term requirements forecasts with your sub-suppliers.
• Share commodity price risk through indexes and hedging.
• Seriously cnsider down payments or progress payments.
• Trade shorter payments terms for lower price.
“These practices may be an anathema to railroad purchasing agents,” Hamilton concluded.
—William C. Vantuno, Editor