Tensions rise as CSX defends new model before frustrated shippers
CSX’s service problems highlight structural issues within the rail industry.
“If I don’t accomplish anything else today, I want to apologize to our valued shippers. Whatever problems we had, we had internally. We’ve made some mistakes. This is not a failure of precision scheduled railroading.”
Those were the words of CSX CEO E Hunter Harrison, apologizing to a room full of shippers, trade associations and regulators present for a Surface Transportation Board (STB) listening session held Wednesday.
The conversation was meant to focus on the service delays caused by CSX's transition to precision scheduled railroading — Harrison's trademark operating model. Yet, as the day went by, more and more guests took to the floor to address what they saw as the larger problem in the industry: a disregard for customer service due to a lack of competition.
CSX's issues were viewed as a symptom of this structural imbalance. How else could a company serving two-thirds of the country's population make such drastic changes overnight? Where else but the railroad industry could customer service disruptions persist, yet have minimal negative impact on a business?
Harrison apologized to shippers and regulators on Wednesday, but that may not have been enough. After all, CSX customers have been suffering through hundreds of thousands of dollars in alternative transportation costs — or outright losses — due to the railroad’s deteriorated service.
“In the past several months, (Mr. Harrison) and his investors have provided the strongest reason to date” for reforming the railroad industry, said Herman Haksteen of the Rail Customer Coalition, which represents 75% of CSX customers. “It shows how one powerful industry using monopoly power created by outdated regulatory protection can lead to the destruction of commerce in this country.”
Here's the story of how that happened:
Harrison’s precision scheduled railroading
E. Hunter Harrison is a railroading legend. In his 50-year career, he has served as chief executive officer of three different railroads, implementing the precision scheduled railroading (PSR) business model at each company, to wide success.
“That operating plan kept Illinois Central from the third major bankruptcy in the mid-70s,” Harrison recounted at the listening session. “It literally turned around Canadian National, and now it's the gold standard, and it had a huge impact on Canadian Pacific. So it's a tried and true system."
Harrison describes PSR as a different way of thinking about efficiency in railroading. While most models measure efficiency in terms of volume, PSR puts the emphasis on asset utilization, seeking to build predictability into customer service. Rather than designing train routes according to capacity, a PSR-enabled railroad gives “each individual car a plan — door to door in hours.”
The little bit of reputation I had certainly got tarnished over this three month period
E. Hunter Harrison
The result, Harrison explains, is increased customer service through predictability. In addition, by focusing on cars rather than trains, PSR allows railroads to cut train length, locomotives and even hump yards to ensure each asset is being utilized as best as possible.
In other words, PSR is like a just-in-time model for railroads: lowering costs by using only the assets needed to perform a service, thereby reducing operating ratios and increasing case flow. Investors love it. So much so, that they hired Harrison away from Canadian Pacific in January, with the mission of implementing PSR in the U.S.
But something went wrong. Just like lean manufacturing, PSR increases a company’s risk as small, unmitigated disruptions have a greater potential to derail the entire supply chain. And in the case of CSX, the small disruptions piled up.
At first, everything went according to plan, Harrison recounts. “When it really kicked in: April to May, we were producing some record numbers.” But then, the problems began to arise: there was some internal resistance, “push back,” some “bad luck” and a few mistakes. “We got a little ahead of ourselves with the plan.”
“We did close one (hump yard), and made a mistake. That’s one thing about this model that I hadn't been able to program in — is no mistakes,” he said.
How shippers suffered from CSX’s transition to PSR
Those mistakes have been costly, and not just for CSX.
In fact, the STB’s public listening session was designed as an opportunity for shippers to dialogue with CSX about the various side effects of its transition to PSR, and the subsequent deterioration of service.
Harrison remained steadfast in his defense of PSR during the session, arguing everyone benefits from the new model, while promising “the worst is over, and the best is right around the corner.” Shippers, however, were skeptical.
“In a nutshell, PSR means having to do less with less,” said Brad Hildebrand, Vice President of Cargill.
CSX has laid off more than 3,000 employees, changed 1,300 train plans, and eliminated 300 crew starts and 850 locomotives, according to a recent presentation. Perhaps the company’s assets are being utilized better to benefit the bottom line, but local crews are overworked and unable to provide the service shippers expect from a common carrier.
The deterioration of service, however, extends beyond efficiency at local yards. During the session, shippers also complained of missed switches, longer dwell and transit times — one shipper said a car took 31 days to arrive, from the average 12 to 15 days before Harrison’s tenure — and delayed, lost or ping-ponging cars (where a car travels to one or two out-of-the-way yards before arriving at its destination). Above all, shippers complained of poor customer service.
“Where in business today would a company put their customers through this type of pain in order to operate a new model,” asked Hildebrand.
A structural problem?
Not all shippers are unhappy with CSX’s service.
Prior to the listening session, CSX pointed Supply Chain Dive to 10 letters filed with the STB from shippers — at least some of which were solicited by CSX — acknowledging the problems but still “encouraged” by recent improvements in the railroad’s performance and metrics. The letters and reported metrics back CSX’s claims dwell times and transit times have been decreasing, and improved service lies ahead.
Yet after 24 testimonies at the listening session from shippers, trade associations and some rail representatives, it became clear the problem with CSX’s service issues have more to do with the lack of a competitive solution than individual complaints.
Many of the more passionate speakers in attendance were, or represented, “captive shippers”— or companies that have no choice but to ship goods with a specific rail company, due to issues of product type, distance or access.
“Our Pringles plant is also entirely dependent on CSX for inbound and outbound east of the Mississippi River,” said Sharon Moss-Higham, senior vice president of operations and distribution for Kellogg’s Snacks division. “Kellogg does not have the option to use a different rail carrier to mitigate the impact of any rail service disruptions.”
“While CSX may have improved service for some customers, it appears they are doing so at the expense of captive customers like Kellogg,” she added. “Our costs have risen by nearly 20% over the past few months. This cost increase does not include bulk trucking of the most important ingredient for Pringles: potato flakes.”
Moss-Higham was not the only speaker to bring up the high costs associated with PSR for captive shippers. Speakers from The Chemours Company, Dow Chemical Company the American Chemistry Council and the Alliance of Automobile Manufacturers reiterated the issue.
In fact, even non-captive shippers are facing non-sustainable solutions. After all, trucks are significantly more expensive than rail transportation, particularly for long distances and in a tight transportation market.
“How do we go out and find the trucks to (service us)? You can’t just pick up the phone and say 'I need 20 trucks at my facility,'” said Mary Pileggi, chairman of the board of directors for The National Industrial Transportation League.
The speakers noted that the inability to find a solution was harming not just individual companies, but the U.S. economy at large. After all, the industrial clients served by rail have customers too, which use their inputs to provide consumers energy and food, among other products.
The resounding issue is that this is not the first time this has happened, nor will it be the last.
“In 2013-2014, rail customers suffered extensive failures in the upper Midwest,” Eddie Johnston, federal government affairs manager of The Chemours Company reminded the board, noting those delays forced losses on farmers who were unable to respond to the season’s harvest. CSX’s troubles, he said, are strikingly similar. “Once again, rail customers are paying the price.”
“In competitive markets, shippers could vote with their business,” said Jeffrey Moreno, director of government affairs for The Fertilizer Institute. So, what are shippers to do in a non-competitive market?
For now, many companies appear resigned to shoulder the costs and expend greater human capital to ensure CSX is meeting its obligations. CSX, meanwhile, is actively working to resolve its issues. However, the outcry at the listening session indicated shippers were hopeful this crisis would yield a more permanent solution, pushed on the industry by the STB.
After all, as Mr. Harrison himself said, “You can’t be successful in business and not have a good product.”
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