Using the Internet to Create Competitive Advantage by b9kM31

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									E-Commerce and its Potential for
      Shortline Profits
      Canadian Pacific Shortline Conference
                Calgary, Alberta
                October 17,2000
     Roy Blanchard, The Blanchard Company


                                              1
                  The Facts of Life...

• Railroads continue to lose market share to trucks in all but
  the lowest value, highest volume bulk commodities.
• Revenue gains and revenue carloads remain at or below
  GNP growth rates as shareholder returns grow only as a
  result of reduced costs.
• The focus continues to be on running trains rather than
  providing a competitive value-adding transportation
  product.
• The Internet has the power to make a difference.


                                                                 2
Networked markets are beginning to self-organize
faster than the companies that have traditionally served
them. Thanks to the web, markets are becoming
better-informed, smarter, and more demanding
of qualities missing from most business organizations.

                                       www.cluetrain.com




                                                      3
             Some Internet Implications

• The Internet is rapidly obliterating the differences between
  manufacturers and suppliers, distributors and producers, delivery
  channels and content.
• Web-based trading networks eliminate bureaucracy and red tape,
  streamline procurement and supply chain management, and cut the
  cost of paper and manual processing.
• Application service providers (ASPs) running via the internet integrate
  Enterprise Resource Planning (Oracle), Procurement (Ariba), Supply
  Chain Management (i2), Customer Relationship Management
  (Siebel)*.
• E-Commerce transactions will account for 90% of all B2B purchases
  by 2003.
• Companies seek continuity among applications, e.g. MS-everything.
                         * Full discosure: positions in all             4
    Transportation Buyers Want Painless
         Transportation Solutions.
• Shippers don’t really care how the goods move as long as
  the transportation is easy to buy, easy to manage, and
  reasonably priced.
• One-click shopping -- pricing the move, ordering the car
  for loading, launching the trip, watching its progress,
  arranging for delivery, and paying for it in one seamless
  motion.
• To make all this work there will have to be major structural
  changes in railroad marketing practices, management style,
  train operations, and car management.

                                                             5
    The Shortline E-commerce Challenge



• Shortlines are limited in their ability to conduct one-click
  shopping on own websites
• Marketplaces and auctions are of limited value as
  shortlines can’t control whole route
• Most shortline business is carload, not intermodal
• But...




                                                                 6
Merchandise carload railroading does have
 a future, in spite of what some people say
• Merchandise carload traffic (not coal, auto, or IM)
  accounts for more than half of all class 1 revenues
• Shortlines, predominantly carload carriers, grow
  traffic at twice the annual rate of class 1s
• Shortlines increase carloads about 30% following
  branchline takeovers from class 1 owners
• Responsive customer service is the main driver.


                                                    7
    Shortlines have a major role to play


• In marketing and sales: Superior operating
  performance combined with web-based customer
  service
• In car management: A new paradigm designed to
  take $billions out of class 1 and shipper car costs




                                                        8
     What does a railroad do?
                   • Runs Trains

             • Operates a Right of Way

                • Provides Railcars

• Maintains its Locomotives, Cars and Right-of-Way

         • Schedules Service for Shippers

         • Prices that Service for Shippers

• Invests in new Locomotives, Cars and Right-of-Way

   • Pulls all those things together in one package
                                                      9
      What is the Core Business Model?
         What is the “Franchise”?

•   Trains            •   Marketing/Sales
•   Power             •   Freight Cars
•   Right of Way      •   Back Office
•   Yards             •   MoE
•   MoW




                                            10
         The Model is running out of gas
•   Volume Growth anemic @ 1-2% per year
•   Revenue Growth only about 2%
•   Fortunately, Expenses grew at only 1.2%
•   But, now Fuel and Labor Costs are rising sharply
•   CapEx Growing at 7%..faster than GNP
•   Debt Growing…Debt:Equity up to 55% from 38%
•   Asset Utilization Unacceptable
•   Truck Competition Intense
• Marketing Hindered by 20:80 Perspective

                                                       11
 Non-core functions already moving to the
                 Internet


• Marketing/Sales: Class 1 “Order-to-cash”
  websites; FreightWise.com, shortline
  “brochureware,” where it can go
• Freight Cars: TranShopNet.com, RailMatch.com
• Back Office: Arzoon.com



                                                 12
                  Tariff or
  Price?          Contract          One-Stop Shipping

Laptop or    Transit Time?            RR Website
  Spot

  Local               Order, Ship
 Estimates
              Net-redi              Trace

  Order to Cash Cycle
  Information Flows                         Place

                                                    Pay   13
14
15
16
      Benefits of Full-Service Links
                                                                    THIRD PARTY
       SHIPPERS                      CARRIERS                        PROVIDERS
 Access to quality carrier    Improved Yield              Access to quality carrier
  capacity, multi-modal         Management through           capacity, multi-modal solutions,
  solutions, neutral            dynamic pricing /            neutral solutions
  solutions                     auctioning capabilities
 Reduced search and           Broader market coverage  Reduced search and comparison
  comparison costs / time       and reach at overall lower costs / time
                                cost
 Simple, easy to use          Decreased financial risk    Broader market coverage and
  interface across all                                       reach at overall lower cost
  processes /
  transportation modes
 Multi-modal ancillary        Accessorial management      Decreased financial risk
  services

 Seamless Light to Tight      Seamless Light to Tight
  systems integration           systems integration




                                                                                          17
18
19
 Where Shortlines can Take This
• Strive for Wider links to class 1 websites
• Substitute shortline carloads for trucks in
  the FreightWise model
• Create invisible customer links to class 1
  “order-to cash” customer service sites
• Lap-top pricing and full-service links


                                                20
 Non-core functions already moving to the
                 Internet
• Marketing/Sales: Class 1 “Order-to-cash”
  websites; FreightWise.com, shortline
  “brochureware,” where it can go
• Freight Cars: TranShopNet.com (GE Capital),
  RailMatch.com (neutral)*
• Back Office: Arzoon.com




                *Full disclosure: equity position   21
               Railroad Investment

               Other Equipment
      Freight Cars    5%
          9%



Locomotives
    11%




                                     Road
                                     75%

                                            22
52%

50%
                                   Railroad Share of Total Railcar Fleet
48%

46%

44%

42%

40%
      Railroads Getting Out of the Railcar Business…Sooner or
38%   Later

36%
      1989   1990    1991   1992     1993   1994    1995    1996    1997   1998

                                                                           23
The Solution:
Take the freight cars out of
the railroad business model




                               24
   Changing the Business Model for Cars
• Create cooperative pools and for profit car management
  companies – focus & expertise
• Separate car ownership from management and control –
  sell load capacity not individual carloads
• Price transportation and car supply separately
• Use ecommerce to:
   – Allocate surpluses/shortages in a neutral market
   – Improve utilization with new car mgmt. tools
   – Finance new capacity for short- and longterm


                                                           25
26
27
                    The Current Order



       RR                        RR                         RR



Shippers Purchase Bundled Transportation Services from Railroads including
Haulage of Lading, Loaded and Empty Car and (Often) Car Supply




                                                                 Shipper
    Shipper
                                   Shipper
                                                                             28
                 The Current Order-2

• Shipper leases 2,000 cars, averages 10 turns per car per
  year (700,000 car-days), 100% empty return, annual cost
  @ $6000 per car per year = $12 mm. Lease cost $17.14
  per car per day for 3 year term
   – IF service degrades allowing only 7 turns per year, shipper must
     lease an addtl. 857 cars to cover his 20,000 loads; ($5.1mm)
   – IF trip time improves permitting 12 turns a year, shipper is stuck
     with 333 cars for the term of the lease ($2mm)
• The current order is good for leasing companies and at best
  just OK for RRs and shippers



                                                                          29
                         The Current Order
          CPR
                                 1000 miles loaded
                                                     CPR

                          1000 miles mty




     CN
                                 1000 miles mty


                                                      CN

                     1000 miles loaded



Total Car Miles = 4000
Total Car Days = 40 @ 100 miles per day
                                                      30
 Cost Components of a Freight Rate
Shipper Pays Railroad         Shipper Pays Manager
for Bundled Services
                                   Car Rental

      Car Rental
                               Shipper Pays Railroad


    Trans. Lading                  Trans. Lading


                        Shipper Pays Manager Pays Railroad
    Trans. Car MTY

                                  Trans. Car MTY

    Trans. Car Ld.
                                  Trans. Car Ld.



 Current Order                 New Paradigm
                                                       31
                          New Paradigm
          CPR

                                                     Shortline A
                              1000 miles loaded


100 miles mty

                                                  100 miles mty

     CN



                          1000 miles loaded



     Total Car Miles = 2200                       Shortline B
     Total Car Days = 22 @ 100 miles per day
                                                           32
                     The New Paradigm

        RR                  RR                   RR



                            Capacity
                              Mgr.


Shippers and Mgr. Use Car
                                         Manager Uses Car Source to Add
Source to Openly Allocate
                                         New Cars or Dispose Surplus Cars
Capacity During
                            Car Source
Shortages/Surpluses




     Shipper                                       Shipper
                            Shipper
                                                                   33
               The New Paradigm-2
• To cover his 20,000 loads per year, shipper purchases
  700,000 car-days at spot market price of $18 per car-day,
  total cost $12.6 mm vs. $12 mm today (35 days a turn)
• IF service temporarily degrades to 50 days a turn, shipper
  purchases an additional 300,000 car-days;
  300,000*$18=$5.4mm extra cost vs. $5.1 mm over 3 years
• IF service improves to 12 turns a year, shipper can
  immediately sell his excess capacity on Railmatch ($6mm)
• Car-day prices change according to market forces so a long
  position could be sold at a gain. Short sales an option
• Improved utilization from the car pool will provide
  substantial additional savings

                                                          34
     Benefits to Railroads and Shippers

• Reduce Future CapEx     • Expand Car Supply
  Requirements            • Meter Investment
• Source of Funds           into/out of Private
• Free Up Line Capacity     Fleet
• Improve Yields          • Improve Rate
• Focus on Core             Transparency
  Competence              • Reduce Overall Costs


                                                   35
How big could the numbers be for the RRs?

• Avoidable CapEx in Railcars : $30 B.
• Potential Asset Sales : $ 12.5 B.
• System Gains @ 10% utiliz. improvement
  – 17.5 m. fewer cars days @ $16 : $280 m.
  – Many fewer train starts per year
     • Fewer locomotives and less MoE expense
     • Reduced line and yard congestion




                                                36
      Where Shortlines can Take This

• Connecting class 1 prices assume empty backhauls
  - load ‘em up and get the head-haul rates down.
• Supply the cars yourself and pay your own car
  hire out of higher allowances
• Find back hauls on connecting or near-by RRs if
  you have none.
• Become a market-maker in car days


                                                37
How This Fits In the New Economy
  Communications
     – Cheap, Fast, Everywhere
  Central Marketplaces
     – Neutral, Liquid
  New Tools
     – Tracking and Tracing, Back Office
  New Players
  Internet Changes Everything….
     – Faster, Smaller, Smarter
  No Change is not an Option
                                           38
               Conclusions
• The merchandise carload business may
  change but it isn’t going away
• Shortlines will be more important to the
  carload business going forward
• Shortline success is directly tied to the ease
  of doing business with you
• And remember...

                                                   39
Service quality is measured by
    the customer, not you
   The Internet is your key to being
     perceived as a quality service
  provider in the eyes of the customer

                                         40
Go Do It!




            41

								
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