Web Worries

The prospect of doing business on the Internet excites some railroads, and leaves suppliers wary.

By Christopher Ytuarte, Associate Editor

	The homepage at www.RailMarketplace.com announces all of its particpating constituents and allows those who formally register to browse various links for purchasing, pricing, and researching rail supplies.

Over the past two decades, railroaders, like most people, have come to rely upon and appreciate such devices as fax machines and cell phones to more efficiently run their businesses. Now, creeping over the horizon comes e-commerce, essentially reinventing the way railroads and suppliers co-exist, adding another technological twist to their already combustible relationship.

"Relationships are changing, and this will accelerate that process," says Jon Schumaker, president of Pandrol U.S.A.

"Technology changes, especially in the railroad industry, are slow to come. There's no one I know of who will dispute that," agrees David L. Powell, president of UniRailNet, one of the online stores found on Railresource.com.

For transit, a major cultural shift

E-commerce is making inroads into the transit sector of the rail industry. The claimed benefits for transit agencies-and the wariness of those who supply them-are similar to the freight sector's. Specifically for transit, it's widely believed that e-commerce will enhance regulatory compliance by creating a "documentation trail" for major procurements like railcars, and reduce the cost and time of preparing purchase orders. One observer points out that "80% of transit agency transaction costs are devoted to 20% of purchases-highly inefficient."

"E-commerce is a way for cumbersome behemoths to streamline procurement," says iRail.com Senior Vice President Mike Monteferrante. He's referring to large agencies like MTA New York City Transit, SEPTA, and MARTA, all of which have initiated e-commerce initiatives.

NYCT Assistant Chief Logistics Officer-Materials Division Lynn Espy, who is also project manager for the New York Metropolitan Transportation Authority's multi-agency e-commerce effort, says over 90% of the mammoth agency's purchases are below $10,000. E-commerce, she says, has already simplified some of these purchasing activities, "allowing our field people to order materials-uniforms, business cards-off existing contracts from supplier websites."

But that's only the beginning. The first big steps will be to add functionality to the MTA website to allow the agency to get bid solicitation summaries, sell surplus materials, and assemble vendor information profiles on line. Currently, the MTA website is non-interactive: "Vendors get information on contracts and then contact our bid desk," says Espy. As the website is developed, this will change to a fully-interactive site where vendors will be able to log in and submit "E-bids."

Will railcars eventually be procured on line? Yes, but not for a while. That's where some observers say e-commerce is headed. Atlanta's MARTA, which is developing an e-commerce program similar to New York's, says it "will not rush to put a major construction contract or railcar procurement on line. We will ramp up to this, and we'll have paper-based as well as electronic procurement to give our vendors an opportunity to migrate up to the Web."

APTA (to the dismay of "neutral marketplaces" like iRail.com) is jumping into e-commerce with E-Marketplace, a pilot program managed by Booz-Allen. BART, Cleveland RTA, MARTA, NJ Transit, NICTD, PATransit, WMATA, Adtranz, and bus supplier Neoplan have signed on for "Wave 1," designed for small purchases. Start-up is anticipated for late summer. "Wave 2" will add surplus materials auctions, pooled purchasing, and "B2C" (business to customer) pieces.

In any case, e-commerce entails a major cultural shift, for transit agencies and their suppliers alike.

-William C. Vantuono

But e-commerce is enveloping the entire rail industry, transit included (sidebar on right). Railroads, to the dismay of many suppliers, are being drawn to procurement websites for various reasons, including lower costs, time savings, and the overall simplicity of transactions.

"Typically you will find that it's cheaper than what you are currently buying for," says Powell. "In almost all cases we found that to be true."

Railresource.com, a prime example of rail-associated e-business, is a website that caters specifically to regionals and short lines, and offers significant cost savings. "Everyone tries to save money, but the regionals and the short lines feel the pinch much quicker, I think," says Powell. "The most common transactions are for locomotive replacement parts. Some sites will offer an entire freight car for sale, scrapping, or lease, and they've also offered locomotives for the same thing, but it's rare. It's a hands-off, passive kind of service where you wait a small period of time-we're talking hours-before a quotation comes back to you. You don't have to accept it if you don't want, but in many cases, the regionals and the short lines are finding there are many good alternatives out there."

Even with all the positive aspects of e-commerce being touted on dozens of rail industry websites and by word of mouth, relations between the railroads and suppliers may be strained by the induction of this new technology. "I think there is going to be a difficult stage in the beginning," says Powell.

That beginning occurred in January when five North American Class I's teamed up with GE Global eXchange Services and iRail.com to create RailMarketplace.com, an "open and neutral" playing field designed to "significantly reduce sourcing/manufacturing costs, transfer costs, and purchasing cycle times, while simultaneously expanding the trading community on a national or global scale." BNSF, Canadian Pacific, Canadian National, Norfolk Southern, and Union Pacific all climbed aboard. CSXT officially joined the "gang" several weeks later, though that's not the image RailMarketplace.com members would like to invoke. iRail.com, which does significant business in the transit sector, pulled out last month on the basis that RailMarketplace.com was strictly focused on the freight sector-too limiting to iRail's objectives.

"Suppliers are concerned about railroads ganging up," says Sameh Fahmy, vice president-supply management for CN. "My answer to that is that we are not allowed to gang up, by definition of the law, and we have no intention of doing so. Using a common market does not mean that you gang up."

But Jon Schumaker notes the number of Class I's has already shrunk and may shrink further. "This shrinkage has already increased the buying power of the remaining railroads," says Schumaker. "If you miss the bid for a contract from the consortium, which involves three of the remaining Class I railroads, you may have to pack up shop and go away."

As suppliers brace for the impact of e-commerce, "I think there is some apprehension from both sides (suppliers and railroads)," says Powell. "From the supplier side, it would squeeze their margins even further if it is going to compete with them."

Has it?

"No, I don't really think it has," says Powell. "What I think it has done is reach a lot of markets that suppliers had absolutely no way of reaching before. In both the international and the domestic market, things are brought to them without any effort on their part. That certainly has got to be a positive thing for them, when you don't have to invest your sales and marketing dollars to gain new business."

"E-commerce has had a major effect on our business with wheelset services provided to UP, KCS, and TTX, and they've been the movers and the shakers," says ABC-NACO Rail Services Division President Rick Turner. "They've pushed us toward this rather than us pushing them."

Most in jeopardy of crumbling over the Internet's e-commerce universe is the delicate relationship between railroads and suppliers, some of whom have been working together for decades. ABC-NACO, for example, says it chooses not to bid in online auctions because it feels that type of e-commerce "really will deteriorate the market and margins," says Turner.

"One of the challenges for railroads, I think, in doing e-procurement and e-business, is how do you maximize the number of suppliers that you can draw from to get your best pricing while also taking into account any long standing relationships or contractual relationships you may have with those suppliers," says Patrick Baxter, global vice president-transportation industries at Mincom. "It is important to ensure that you're not just going to the lowest bidder, who may be selling junk and who may also be in violation of a contract you may have with another supplier." Mincom, which says it assists transportation companies in using technology "to become more efficient," views e-business as "a tool, not a strategy."

Others think the introduction of e-commerce will improve relations between suppliers and railroads by bolstering each side's individual situations. Yet some railroads, as well as suppliers, are hesitant to participate in outside websites if they've already spent significant dollars on their own.

"The future of e-commerce is really supply chain management," says Turner. "If you can link up supply chains vertically on the web, where you're really looking at your website, but everyone else from the railroads to wheel manufacturers on down is linked and seeing what is happening in real time, it would make it easier to manage your company."

On the other hand, "a lot of relationships can be hindered by using the Internet," says Powell. "There are relationships where you have an agent that represents your company, and those relationships are hard to give up. There's also the relationship between the buyer and the supplier where 'I've always bought my wheels from you, I've always bought my fuel from you,' and those too are difficult to give up. But I don't think any company that is truly doing a good job of purchasing can turn aside an offer for a competitive product that is 60% or 50% of the price of what they've been buying it for."

Some suppliers are worried about their margins being squeezed by low-priced Internet offerings, and though they admit that cost savings are a key attraction to e-commerce, it is not the end of the line.

"The bottom line here for suppliers and railroads is that price is not everything," says Baxter. "There is a lot to be said for service and what support a supplier can give to a railroad. If the railroads blindly go after the lowest price, they're going to end up in a situation where they're not getting the kind of support that they need or expect out of those suppliers. Eventually, either the price will go up or the support will go down."

"If you're selling a commodity," says Schumaker, "it seems like you can pretty much do it all on a computer and the factory can be somewhere in the Himalayas, as nobody seems to worry about the location anymore."

As enthusiastic as railroads are about this new technology, they can appreciate the stress it creates for their suppliers.

"There is definitely concern and apprehension and anxiety that has been expressed by some of the suppliers, and I can understand where they are coming from," says Fahmy. "They are concerned that this may become a tool to squeeze money out of their pockets."

"Suppliers need to push the aspect of support, but I don't think they can fight this thing," says Baxter. "It's a technology that will roll them over if they don't adopt it."

Though some industry members may not be able to appreciate it just yet, the expansion of the North American rail industry internationally is an upside of the e-commerce boom, and most railroaders see only a bright light at the end of the tunnel.

"Five years down the road I can easily imagine the railroads in North America, whether it's in the U.S. or Canada, buying rail from a Czech Republic supplier, buying wheels from the Ukraine, and containers or other components from China," says Fahmy. "Today, we don't deal with these suppliers because there is a big distance between us, we don't know them, they don't know us, and we are worlds apart. There are customs issues and currency issues and different laws for shipping. These barriers are going to disappear, and dealing with these people will become as easy as dealing with people in North America."

Schumaker readily admits that this wave of e-commerce technology may usher out "old guard" executives as younger managers adapt to it more easily and will eventually take the reigns.

As to how railroaders and suppliers will adapt to this new style of business procurement, those on the high side feel it is an inevitable and natural step toward a better, more efficient industry.

"E-commerce is going to become just another way of doing business," says Baxter. "The E is going to go away, and it's just going to be another means of commerce."

"I think it will be sort of like we've seen with the cell phone and the fax machine," adds Powell. "E-commerce is an invaluable tool that has to earn its trust in the industry and has to be cultivated in terms of the users agreeing that this is the way to go. What we need to do is get some time behind us, have some people use it, and then word of mouth, as with most good products, will convince people to try it. I think you're going to look back on this and think, like we do with the fax machine now, 'how did we ever survive without it?'"