PSR, The Next Generation. Part 1: The Case for Mainstream Adoption

Written by Sonia D. Bot and John F. Orr
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CN photo

Precision Scheduled Railroading (PSR), as we know it today, is rapidly reaching an inflection point. Escalating trade disruptions, rail strikes, blockades, weather events and the COVID-19 pandemic have highlighted the urgency to make supply chains more resilient. Weaknesses in the international supply chains have been exposed, and the escalating domestic transportation turmoil demonstrates the need for end-to-end approaches, standards, solutions, and greater service level accountability and safety.

The current version of PSR, which we refer to as “1.0,” has produced measurable financial, operational and service improvements for railroads. Yet, some internal growing pains continue, accompanied by shock waves absorbed by shippers, non-PSR railroads, industry partners, advocates and policymakers.

This Railway Age series introduces PSR 2.0, which will take PSR to the next level, within individual railroads and across railroad and transportation “ecosystems.” It demands an entrepreneurial culture focused on business rigor, forging productive partnerships, safeguarding origin-to-destination traffic flow and increasing knowledge. It is geared toward increasing relevancy in a world that is rife with existential economic threats, increased competition and urgency to embrace the tail end of the digital age while preparing the foundation of the new era of breakthrough innovation.

To date, PSR has been applied to some Class I’s and has yet to be applied widely to Class II, Class III, short line, tenant and passenger railroads in North America. This gap in PSR deployment represents about 40% of North American route miles. There is both excitement and apprehension in anticipation of scaling PSR into these new areas.

In Part I, we briefly describe PSR 1.0, pointing out its successes and limitations. We make the case for PSR 2.0 as the next step, the foundation for extending PSR across the full ecosystem of rail and other transportation stakeholders.

THE URGENCY: NEXT-GEN PSR

PSR 1.0 is currently the widely accepted benchmark of financially sound railroads and is starting to materially change the investment landscape. North American infrastructure funds are getting involved in the railroading renaissance. In July 2019, Morningstar reported that PSR is “the surest path to the best operating ratio (OR), a key industry measure of profitability.”

Meanwhile, escalating trade disruptions, rail strikes, blockades, weather events and the COVID-19 pandemic have highlighted the urgency to make supply chains more resilient. Transportation supply chains are under increasing pressure to meet demand while keeping inventory levels low. The weaknesses in the international supply chains have been exposed, and the escalating domestic transportation turmoil demonstrates the need for end-to-end approaches, standards, solutions, and greater service level accountability and safety.

It’s time for the next generation of PSR, which provides the means for implementing and scaling PSR for mainstream adoption—not just within individual railroads, but across railroads and across the entire transportation ecosystem, with a supply chain that is growing more integrated, nimble and transparent. At its core, it is about providing customer service reliably, predictably, effectively and safely; thereby manifesting other benefits for all parties, such as profitability and future-proofing in the face of rapid change.

THE FOUNDATION: PSR “1.0”

PSR 1.0 is an origin-to-destination method of managing a railroad. It challenges traditional asset utilization and service quality practices, and is geared toward optimizing existing assets. It is based upon operating fixed train schedules that optimize train load and yield and improve service accountability down to the carload level.

E. Hunter Harrison. CSX photo.

The late, now-legendary E. Hunter Harrison defined five key principles, “Pillars of PSR,” to guide railroad management:

Provide Service: Do What You Say You Are Going To Do.

Control Costs: Eliminate Unnecessary Costs.

Optimize Assets: Use Assets More Efficiently and Productively.

Operate Safely: Safety is the Top Priority.

Develop People: Cultivate the Best Team of Railroaders.

PSR 1.0 has driven improvements in line and yard capacity, productivity, asset fluidity and costs. With the impressive improvements in Operating Ratios, PSR is currently widely accepted in investment and finance circles as the benchmark of financially sound railroads.

PSR 1.0 has its limits. Costs can only be cut so far before needing to transform the cost base. PSR 1.0 is focused on individual railroads and their internal operations, optimizing assets for reducing costs while trying to support new business ventures that may not be mature. For others in the transportation ecosystem, this created an issue of downstream impacts, with partners such as Class II and III railroads having to step up as “shock absorbers.” Customers experienced broad ranges of service quality, from painful marked degradations to unprecedented improvements.

EVOLUTION TO PSR 2.0

PSR 1.0 is rapidly nearing an inflection point. It is time for PSR to evolve and scale across the rail network and its ecosystem partners, driving greater business value and efficiency gains.

To achieve this, we propose that:

“PSR 2.0 is a constantly evolving purpose- and data-driven origin-to-destination management view of a transportation ecosystem in which railroads commit to reliable service, cost control and asset optimization. PSR 2.0 is anchored by an operating methodology and structure based on leveraging optimal revenue generation and growth strategies.”

The five Pillars of PSR 1.0 are foundational, timeless and meaningful to everyone, regardless of role. They provide a decision-making framework for implementing PSR 2.0. In addition, here are five guiding principles to take PSR to the next level:

Guiding Principles for PSR 2.0

Reward Entrepreneurial Culture: Everyone is Innovative, Resourceful and Creating Value.

Exercise Business Rigor and Relevancy: Precisely Matching Services (Supply) with Markets (Demand) and Business Objectives/Obligations.

Forge Productive Partnerships: Strengthening Performance and Viability.

Safeguard End-to-End Flow: Accounting for Downstream Impacts Across Systems.

Foster a Learning Organization: Continual Mastery and Improvement.

These Guiding Principles serve as enhancers, raising value; accelerators, where progress occurs faster and more effectively; and sustainers, maintaining gains.

PSR 2.0 transcends PSR 1.0 by embracing entrepreneurship and partnerships across railroad and related transportation ecosystems. It expands PSR 1.0 to include revenue generation and growth strategies. Productive partnerships that go beyond individual railroads, extending across the rail industry and embracing others in the transportation ecosystem, are key.

PSR 2.0 requires an entrepreneurial culture, creating a system of shared values, beliefs and norms. It includes embracing ingenuity, valuing creative people and cross-pollinating functional disciplines and industry sectors. It depends upon believing that innovation and seizing market opportunities are critical to survival and prosperity, and to dealing with environmental uncertainty, competitors and threats. Organizational/ecosystem members must be able to respond accordingly.

As a cross-check to maintain system-wide balance, PSR 2.0 introduces and necessitates a culture that also safeguards end-to-end flow and impacts within a railroad and across the partner ecosystem. In this new mode of operation, it is no longer acceptable to overlook downstream impacts. Instead, stakeholders must account for downstream impacts across the system, taking action to mitigate adverse impacts. Our mantra:

Do no harm. Do good—for us, our ecosystem partners, our customers, and
the community.

VISION FOR A PSR 2.0 EVOLUTION

A unified PSR platform is central to PSR 2.0 and its governing processes, policies and technologies. This platform is a mechanism to protect the rail industry’s relevance and future. Well-defined hand-offs among parties and legal entities are vital. All parties earn a seat at the table. They must see the cause-and-effect impacts across the end-to-end system, as opposed to existing in siloes. All ecosystem members participate in maintaining flow. The platform allows for better responsiveness and market relevance. Furthermore, a unified PSR platform with aligned partnerships is an alternative to an exclusive “acquire-and-comply” growth strategy. For mergers and acquisitions, it can facilitate integration.

The interacting players are railroads (Class I, Class II, Class III, passenger, either host or tenant), industry partners (air, seaports, trucking, pipeline, etc.), and public and enterprise advocacy/policy partners (regulators, legislators, unions, industry groups, etc.). The timeline is modeled on an adoption lifecycle (innovators/first implementation, early adopters, early majority, late majority, laggards). First-implementers and early Class I railroad adopters create the momentum for others.

A unified PSR platform grows and matures as more adopters engage. PSR 1.0 was implemented on individual railroads and has been internally focused. The next step, an ecosystem enabler stage, establishes critical mass among the railroads. Integration, phased in by corridors, includes attention to points of hand-off and end-to-end flow. The goal is an integrated ecosystem with a standardized PSR platform.

The unified PSR platform will grow and mature over time. Initial implementations will have PSR 1.0 players adopting basic PSR 2.0. Another transition would include new adopters starting with PSR 2.0 implementation. Over time, as capability matures, the unified platform would be fully established on PSR 2.0. Any laggards—for example, those stopping at PSR 1.0—would receive only partial benefits from a PSR 2.0 platform.

Productive and tight feedback loops among ecosystem parties are crucial. Feedback loops among only railroads are no longer enough. Industry partners and public and enterprise advocacy/policy partners are also part of the fold. The focus is on being entrepreneurial, collaborative, and productive, for execution and governance. Bureaucracy creep is thwarted.

THE POWER OF PSR 2.0

Our first example deals with Train Service Agreements (TSAs), commercial agreements involving Class I, Class II and Class III railroads that define service frequency, interchange locations and dispute resolution mechanisms. When a TSA is constructed, it does not always consider the whole view of the parties and regions involved. Typically, Class II and Class III railroads carry less weight than a Class I. The TSA tends to be used to discuss services failures, thereby invoking dispute resolution mechanisms. The PSR 2.0 unified platform adds rigor and commitment to front-end planning and balanced execution, rather than to a focus on back-end conflict resolution. It advances commitment to dialog among those constructing the TSA, demands repeatable service level commitments and accountabilities based on facts and data, and upholds agreed-to ways to measure and monitor performance so that one can respond to temporary demand and expectation changes. All parties share improved performance and asset efficiency benefits. In short, PSR 2.0 establishes a voice at the table for all.

Our second example deals with Class II and III railroads having to react and readjust to Class I PSR 1.0 impacts. To date, Class I PSR 1.0 adoption has been inward facing: shutting down yards, rationalizing assets, rightsizing service and taking other measures. Downstream Class II and III railroads are forced to deal with the impacts. They unfortunately bear the burden of being “shock absorbers” of these changes and oftentimes respond reactively. Such imposed and unilateral mitigations result in disproportional costs and re-work for delivering agreed-to first-mile/last-mile service. With PSR 2.0, the changes would be proactively planned and executed with a first-mile/last-mile cause-and-effect view to ensure smooth flow throughout the system.

Our third example deals with the relationship between public advocacy/policy partners (STB, CTA, FRA, TC, NTSB, TSB, legislators) and the railroads. Despite structural tensions, regulators’ objectives need to be respected, while the transportation industry can remain responsive to market demands, competition and complexity. PSR 1.0 has been implemented with little consultation with regulators and policymakers, whose mandate is to protect the transportation system of their nation, often leaving them to guess on what is going on. They were hearing many concerns, possibly biased, as changes were being made. They had little, if any, basis to properly evaluate and respond to them, let alone having to catch up after the fact. With PSR 2.0, public advocacy/partners are engaged upfront in any change process, properly informed and prepared as the changes begin to roll out. It also allows them to be proactive in providing early guidance on regulatory and industry impacts.

Our fourth example deals with supporting repeatable end-to-end execution across geographies and industry partnerships, such as product coming off the shop floor in Asia, transported to a seaport, shipped across the Pacific Ocean to a North American seaport, transported by rail intermodal to an inland distribution center and delivered to retail locations by truck. Currently, supply chain visibility is generally segmented and does not transcend entities well. Consequently, there are gaps in the downstream work scope, impairing the ability to make precise decisions. All of this results in lost productivity and opportunities to adapt and respond to operational realities and fluctuations. With PSR 2.0, various roles within the span of influence and control among entities in the end-to-end supply chain are articulated, agreed, measured, monitored and enforced.

PSR 2.0 SWEET SPOT

The immediate sweet spot for PSR 2.0’s launch and evolution would lie with the entry of a Class II PSR implementation, while working together with current Class I PSR-based railroads that are ready to mature to this next level of capability. An optimal cost/benefit balance will begin manifesting across the end-to-end ecosystem. This domino effect will draw in numerous railroads, shipper, and public and enterprise advocacy/policy partners.

We believe that waiting for the rising tide of the economy is shortsighted as it could be a drawn-out wait. And supply chains themselves could shorten as North America contemplates onshoring and building national capacity in critical areas. PSR 2.0 provides a unique opportunity to transform the rail industry and the entire transportation ecosystem. It has the power to achieve sustainable operational effectiveness, organizational effectiveness and profitable growth.

Stay tuned: In Part II we will present key considerations for implementing and scaling PSR by delivering tangible business and customer value faster than current implementation approaches, while lowering cost and effort in doing so.

Listen to the Rail Group On Air Podcast: Interview with Sonia D. Bot and John F. Orr on PSR, The Next Generation, Part 1

Sonia D. Bot

This article is based on the novella-sized white paper, “Delivering PSR 2.0 for Entrepreneurial Railroading and its Ecosystems: The Evolution of Precision Scheduled Railroading” (Bot & Orr, 2020). Drawing from academic theory and deep practical experience, Bot and Orr comprehensively and practically unpack the myths and realities of PSR, define the vision and delivery approaches for PSR 2.0, and bring it all to life with various case studies. For more information, contact Sonia D. Bot at [email protected] and John F. Orr at [email protected]

John F. Orr

Sonia D. Bot, chief executive of The BOT Consulting Group Inc., has worked at the forefront of technology, media, and telecommunications companies worldwide, and was instrumental in PTC implementation on CN’s U.S. lines. John F. Orr, a top-level operations executive for railroading and transportation ecosystems, is a fourth-generation railroader who rose through the ranks and became CN’s Chief Transportation Officer. With E. Hunter Harrison and his successors, Orr delivered PSR operations, and continues the mission today throughout North America, Europe and Asia.

Categories: Analytics, Class I, Freight, Freight Forecasting, Regulatory, Safety, Short Lines & Regionals, Switching & Terminal Tags: , , , ,