As things have been upended on many fronts over the course of 2020, due to the ongoing COVID-19 pandemic, many trends within the freight railroad sector that were already evident have been accelerated by the pandemic.
That was a key takeaway at the virtual RailTrends conference earlier this month, which was hosted by Progressive Railroading Magazine and independent railroad analyst Tony Hatch, from Alan Shaw, Executive Vice President and Chief Marketing Officer for Class I railroad carrier Norfolk Southern.
“We experienced deep disruptions specific to supply chains globally and, in our country, are witnessing the emergence what we think is a profound reorientation in supply chains, in which companies hold product and how they potentially move the product, that has significant ramifications, particularly in terms of how you look at inventories,” said Shaw. “That means it is largely impactful for those of us in logistics and transportation.”
At a macro-level, Shaw said this probably means the freight railroad sector is going to have to likely change how it understands and interprets several economic indicators like the inventory-to-sales ratio and how the industry positions itself moving forward.
“As a result of the pandemic, we believe customers are going to be a lot more risk-averse with their inventory levels,” explained Shaw. “They are going to hold more inventory, and I believe they are going to position it closely to the end consumer. Frankly, I think that is a good thing for rail, because rail, which offers greater capacity, will be able to better compete with truck. In this environment, in which risk aversion to inventory stock outs is greater, I don’t think speed is as critical as reliability and consistency and capacity. It benefits Norfolk Southern specifically, because we have an intermodal franchise that is unrivaled in the East and is next to the end consumer. And consumer spending drives about 70% of economic activity.”
As for how the impact of the pandemic-driven e-commerce surge, which were driven by the challenges the pandemic brought, Shaw said that while this was intact prior to the onset of the pandemic, Class I railroads and their interline partners can benefit from this situation.
Pre-pandemic, he noted that e-commerce was already outpacing in-store retail sales, with estimates calling for 18% growth in 2020, a figure that has subsequently nearly doubled, to 32%, totaling nearly $800 billion in overall online sales. Taking that theme a step further, he noted that Amazon announced it will expand the square footage of its fulfillment operations by 50% in 2020 alone, on top of a 15% increase in 2019.
Shaw said that in a recent conversation with real estate development companies in New Jersey, he was told industrial properties in that area are being bought and taken down and replaced by warehouses, due to the need to position inventory next to the final consumer in an e-commerce world. And he added that customers are concerned about service, as it relates to consistency and accuracy, things he said should play to the strengths of the freight railroad sector, particularly as it becomes more effective with the implementation of PSR (Precision Scheduled Railroading).
“A lot of what we sell depends on product quality…that means producing a product that the market wants to purchase,” said Shaw. “It is also a relationship business with a ‘no surprises’ approach to PSR implementation. At NS, it means communicating with our customers in advance and ensuring the changes we are making don’t impede their ability to compete in their own market.”
And as these markets continue to evolve, the products everyone is going to handle are going to be more consumer-oriented, which generally have tighter tolerances for service, he explained. What’s more, he added that also means they are probably more truck-competitive, too, which he said is fine, as it opens up much more broader opportunities.
“There is an $800 billion trucking and logistics market out there, and an $80 billion rail market,” he said. “As we improve our service product and provide a more truck-like product into this growing consumer economy, it creates broader opportunities for the rail ecosystem. Truck capacity is very tight right now and has proven to be largely inelastic with demand, with truck employment now about 6% below where it was last year. Part of that is pandemic-related like the slowdown at truck driver training schools, and some of them are secular…with advanced drug and alcohol screening, which includes random testing in a clearinghouse that prevents truckers from hiding the results of their violations from moving from one company to another.”
With customers needing service and schedules that meet their needs and create value, coupled with wanting a reliable product that understands their increasingly sophisticated supply chains, they want to know, from their carriers, when there is an issue.
“That speaks to the customer service standpoint, our customers manage some very complex supply chains,” said Shaw. “They rarely get fired for spending more on truck than rail, but they can get in a lot of trouble internally if their supply chain costs impact production or lead to a stock out.”
Cost-effective solutions can be viewed as an area of strength for railroads, as they already have a good structural cost advantage relative to trucking, according to Shaw.
“With PSR, we are all working to become much more efficient and cost-competitive than other forms of transportation,” he said.
And designing more of the business around the customer to deliver a consistent, reliable service product, layered on top with this product quality, to create a best-in-logistics customer experience is sorely needed, explained Shaw.
“They want technology that keeps it simpler and easier to do business with Norfolk Southern and transparency across the entire supply chain,” he said. “There is a need to deliver service and logistics solutions, in order to become relevant for our customers.”
He provided an example of the current chasm that currently exists, in that a consumer can go onto a web site to track an e-commerce order, in regards to its location and delivery status, whereas rail struggles to give its customers the same ability to track that status of shipments for things like high-value finished vehicles or a hopper car full of plastics.
“We have to evolve there,” he said. “Everyone is investing in it, but we need to think of ourselves as no longer being in a B2B world. We have customers with B2C expectations, for speed, costs, transparency, technology, and sustainability, and we need to innovate. PSR has given us a really good service product and more consistency, and on top of that we need to add great visibility for our customers. That means making it really easy to do business with us.”
This has led NS to invest in a mobile product that is going to provide local servicing ETAs and involve letting a customer know what number its stop is for the local crew, and the tight window in which that local crew is going to show up.
“It is important for rails to remember they work in an ecosystem,” he said. “At NS, 50% of our system involves working with another railroad, which means we need to work with our peers to stitch together information for our customers. We have to innovate interline solutions that make it easier for mutual customers to do business with us. When customers move something across the company with truck, it is one phone call and they can track it the whole way. If they have to shift from different systems between NS and a Western interline partner or a short-line, we are making it harder for them to do business with us.”
In a consumption-driven economy and with the rapid growth of e-commerce and the trend of moving inventory closer to the customers is intermodal-intensive and service-sensitive and will be focused on the natural flow of goods, from the West to the East, noted Shaw.
“That is what we do best at NS,” he said. “We are in a highly-desirable, densely-populated service area that touches a majority of the consumption and manufacturing in the U.S. economy. While we serve both, we are increasingly tied to the consumption portion of that ledger. Much of the growth we see in consumption-driven markets folds really easily into existing merchandise and intermodal trains, which creates operating leverage and minimizes service disruptions. We are going to continue to be focused on innovative products and solutions for our customers—this includes new service products and digital technologies—and focus on making it easier to do business with us. I think that with where the economy and logistics are headed, we are positioned very well, and the rail network is going to have a very good opportunity going forward to handle the growth and the changes in the market.”
About the Author
Jeff Berman, Group News Editor
Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman