Nick Little is Director of Railway Education at Michigan State University Broad College of Business Center for Research and Education. Following is a letter he sent to Editor-in-Chief William C. Vantuono in response to the latter’s May 3 editorial, “Leaving Behind Precambrian Attitudes.”
I liked your article, especially calling out the two Class I leaders with an understanding of where railroads can fit into the extended supply chain in the modern world. The COVID-19 crisis has shown us that supply chains for even emergency supplies are broken. Those supply chains failed to cope with the unexpected. Why?
They are driven by cost reduction as their over-riding strategy. Safety stock (inventory) has been eliminated to save money. Supply has been outsourced and moved overseas to reduce cost of goods sold. Manufacturing plants have been streamlined by adopting lean management to the extent that goods can only be manufactured for a single type of customer.
The worst example of the last point is the food industry. Plants have streamlined packaging machinery for either the consumer or institutional marketplace. This has resulted in serious repercussions at the start of the supply chain—the farmers. Livestock farmers are euthanizing their stock, eggs are being destroyed, pork meat is being wasted in quantities far greater than the already tragic way we used to waste over 40% of all food produced.
But what about the freight railroads? We are one of the few industries that, by virtue of our vertically integrated structure, has traditionally deployed a good degree of risk management and mitigation. We built into our system a level of redundancy (both physical assets and human resources) that enabled recovery from most predictable events. Whether it was a broken air pipe, failed locomotive, derailment, or a washed-out bridge, we had a recovery plan that we put into action.
Compare that with some critical supply chains we have all been made aware of in the last few months. Healthcare equipment, such as ventilators, had to build new manufacturing capabilities from scratch in industries without regulatory oversight experience to ensure product quality. Health workers’ PPE became almost a cottage industry overnight and, in some cases, even a struggle between neighboring nations. There are many more examples. Meanwhile freight transportation, whatever the mode used, is keeping the world supplied.
Rail freight is playing its part, but our ecosystem is showing signs of stress. We hope the sudden volume drop in traffic late March through much of April is showing signs of sustained recovery. In the early days of stress on the global supply chain system, road transport experienced massive business-to-business (B2B) demand for shorter haul (up to 500 miles) deliveries from distribution centers to customers. That evaporated almost quicker than it had developed. International freight took to the air for urgent pandemic-related PPE and other supplies. Air freight rates rocketed, aided and abetted by the loss of some 50% total capacity due to cancelled passenger flights. Air freight rates are still higher than normal for this time of year.
Meanwhile, our freight trains keep rolling. Traditional “cash cow” traffic such as coal has suffered due to reduced demand for power and continued low natural gas prices. Other higher margin traffic has been hit by the sudden drop in industrial production. The auto industry dropped off the map. International intermodal traffic suffered the double-whammy of the Chinese New Year and their coronavirus shut-down. When that was over and Chinese manufacturing resumed, western demand started to evaporate as the virus migrated to our shores.
Looking at the consumer market (B2C: business-to-consumer) which drives GDP, stay-at-home dictates have boosted e-commerce and curbside retailing. The latter is a precursor to reopening business in many places. It will draw supplies through individual supply chains again. It will not be a lightning-fast recovery. We will see some sectors recover faster than others. We also need to restart the consumer services economy.
How does that impact rail freight? A lot of the services performed rely on rail to move materials that go into products used to provide a consumer service, i.e., further back in their supply chains. Supply chains that have ground to a halt. Supply chains that may look and behave very differently when they start up again.
As both quoted Class I CEO’s implied, customers and their customer’s customer, eventually lead to consumers—the only place real money is ever put into a supply chain. Ignoring those opportunities for rail freight service will allow our competitors to grab market share. Whether it is apparent greater flexibility, responsiveness or whatever, if we as an industry don’t try to retain or win this business, we will continue to suffer decreasing market share.
Two things are true about the scale and scope of this pandemic. It was unexpected and unplanned. Railroads are better equipped than many businesses to still be able to perform their core mission and service under such conditions, but we need to be resourceful and responsive to new opportunities. Every event of this type is an opportunity for someone. Amazon is often looked on by the public and the media as a place to go in such situations. We have seen that even their capabilities have been stretched to, or beyond, their limits.
As freight railroads, we need to rethink our game plan. PSR, OR, PTC all have their parts to play in this future. Data will be a major enabler for service improvement and improved reliability. The structure of the world’s business ecosystem is undergoing fast, thorough, deep and irreversible change. We must respond. It’s not acceptable to use an excuse that we tried it in the past and it didn’t work. We must not stick our collective heads in the sand and expect to return whence we came.
Things are very different now. Be imaginative, innovative and inventive. Look to create the future. Do not allow the future to limit you.