Riding the Rails
As the old song, “I’ve been working on the railroad all the live long day — ” implies, the railroad business can be tough. Across the globe, we depend on rail transport, especially for our commodities — from energy to food, from apples to automobiles. The business can be cyclical, which we are currently witnessing with the drop in cargo related to energy1 due to shifting consumption, lower prices, and the reduction of shale and fracking activities in the US.
Yet, at the same time, global companies are benefiting2 from the investment made in railroad infrastructures such as the Silk Road that runs between manufacturing in inland China and the EU countries.3 Not only does this route shorten the time for container shipments between China and the EU4 by weeks,5 it avoids the ocean voyage through the dangerous Gulf of Aden and aids the ‘greenification’ of the railroads. More modest investments in the US funded by private/public partnerships6 continue to make rail safer and work towards improving time-to-market. According to the American Association of Railroads, “In 2015, the nation’s major freight railroads plan to spend an estimated $29 billion.”7 According to the US Department of Transportation, in the US, railroads account for more than 40% of our freight moves.
Railroads are bound for further glory, but they also need and continue to upgrade their software. Over the decades, railroads have built large IT departments, but most of the technology investments focused on managing the physical assets — controlling them and making them safe. Less has been done in the TM solution. In spite of their quasi dominance of the route — or maybe because of that — railroads8 suffer from significant issues in serving customers, tracking freight, making on-time commitments, and the ‘simple act’ of quoting and closing business. Believe it or not, even the largest railroads still have tons of paper-based processes and a myriad of homegrown and purchased systems that need to be integrated. These are roadblocks to faster communication and to gaining further efficiencies.
The major railroads spend hundreds of millions of dollars on IT.9 And major shippers of commodities — grains, coal, paper, etc. — also have made huge IT investments to enhance their transportation. These are big businesses, with only a few major players per region of the world. Building a solution for them requires scale, big money behind the TM product, and ongoing investment to meet more and more of the requirements for these types of businesses.
SAP’s TM for the Railroad
Most significant and challenging is providing a rich enterprise solution for carriers. Though there are a limited number of targets (seven large Class 1 railroads in the US), solving the complexities on the carrier-side makes it easier to support shippers. Shippers want availability and pricing; however, figuring out pricing requires that an enterprise know what things cost! In addition, the rail business has many more processes to support, from strategic business analysis to customer services to asset maintenance. SAP has been diligently working the railroad carrier side for several years,10 providing a service offering for strategic needs as well as day-to-day activities such as quoting, invoices, track and trace, all the way down to granular capacity management within railcars. SAP TM has significant advanced capabilities for railroads and their customers, changing SAP’s relationship with the railroads from the accounting department to the road.
If you think about the cyclical nature of transportation, especially railroads, certain strategic needs come to mind. Railroads have a fixed and mobile infrastructure: rail lines, stations, railcars/locomotives, and a great deal of equipment to manage and operations to monitor. A locomotive, priced around $2.5M, is not an investment you make lightly. Yet, like any other transportation operation, demonstrable numbers on fuel optimization, the ability to pull more freight per engine (plus government regulations governing emissions) have motivated railroad carriers to make significant capital investments.11
However, that is all based on the forecast — how much business will there be in the coming years. Unlike other businesses, rail companies are not very flexible — they can’t turn on a dime. A CPG planner’s decision, for example, “Let’s order a few more lots of red sweaters for this season,” would be the envy of a capital planner for a rail firm. Thus, the forecast — creating various scenarios based on economics, pricing, profitably and so on, is ultra important. It drives capital spending, personnel, and other strategic investments (acquisitions) that are critical to these organizations. SAP supports this unique and most important capability for rail carriers.
This results in SAP going deeper. This is not just a TMS — a quote through cash solution, if you will, but goes into railroad management — an ERP for rail.
Pricing and Rating on the Railroad
In capital intensive yet cyclical businesses, pricing is difficult to do; it is critical to ensuring profitability and competitiveness. A total cost model of the enterprise (what it costs to operate the business, plus the variables of a particular product or service) is all part of the capability. This is one area in which it is obvious that an any-street TM won’t work. This is also where SAP can shine, since they have decades of financial analytic expertise. Plus over the years they have acquired, integrated, and enhanced their mobile and web analytic tools such as SAP Fiori, which has powerful but user-friendly analytics and a modern UI.
There are few TMs on the market — even for trucking — that look at strategic business and operational fleet management to create an enterprise solution for an asset-intensive business.12 This type of analysis allows an organization to not only provide fair rates to customers by service and commodity, but also allows the operator to decide what kind of business they want to take.13
Commercial cargo railroad businesses, globally, have been on an upturn in the last decade, and this is in no small part due to careful analysis of the total business model and optimization of equipment, routes, etc.
All that analysis has to work at the granular level — one load at a time — with each and every load being an efficient load. SAP TM for rail has the data model for most types of railcars including bulk, flat beds, boxcars, and so on, so that loads as well as intermodal connections can be planned and executed with the right equipment.
They also partner to obtain Umler14 data to feed into the TM system. This data is critical, since equipment often changes lines during its journey. This can vary, since from door-to-door to maintaining location, ownership information, exchange of fees and so on, and can be expeditiously managed.
Rail transportation service providers (freight forwarders, 3PL, and brokers) often look at a shipment as a continuum. Interconnectedness (door-to-door) often means from a ship’s port to rail, from rail line to rail line, and from rail to truck transloading (intermodal), making scheduling highly complex. Of course, SAP has ground, courier, appointment scheduling and so on, so that a mega-enterprise can use this approach in their business.15 SAP works with freight forwarders, but that is a story for another time.
Running the Railroad Day to Day: Lead to Cash
Day to day, freight sales often happen one railcar at a time. Of course, one shipment could mean dozens of railcars of grain, coal, autos, or airplane parts. As with any carrier, it’s necessary to quote all the data about the shipment, the type of equipment required, destination and so on. SAP has a rate maker for carriers based on all the shipment data and service requirements.
Shippers may evaluate alternative modes — truck vs. rail, but most often, there are not too many competitive alternatives. This is unlike the trucking business, in which a shipper can have a whole network of carriers from which to choose. Freight forwarders/shippers have rate optimization solutions (as does SAP) with which to evaluate choices.
The data model and data source is complex for any TM solution. In SAP’s solution, the rich data required to create the waybill can be transmitted by fax or paper, but is done most often by EDI. The waybill data then sets up the rest of the process — execution, track and trace, and finally, invoicing. The core TM processes can leverage and integrate to commercial third-party applications or to SAP’s solution for functions such as yard management, import/export, and so forth. SAP also has many more railroad-specific operational features that help manage assets. It will be interesting to see how far they develop their solutions, since railroads already have many asset management, tracking, and safety solutions.
SAP’s Big Transportation and Logistics Strategy
There is a lot more to discuss about SAP’s TM products, but overall, SAP has a two-front approach — by user: shipper, freight forwarder, carriers; and industry: truck, rail, and so on. SAP TM sits in SAP’s execution portfolio and Supply Chain Execution Platform, which includes other logistics applications.
A few years back, SAP’s board decided to put full weight behind this strategy. Thus, this version, 9.3, is a rich, fully functional TM for ground — rail and truck. And SAP still has plans to enrich v9++ over the next few years. SAP also has created partnerships with others such as Descartes,16 who have strong carrier networks, which will help TM providers such as SAP, who have certain strengths, to provide end-to-end ‘any-mode shipment’ planning and execution.
For rail, SAP has a dedicated user group that is helping to guide the development of the solution. Intimate work with customers is the key to these highly complex multi-functional solutions. SAP has a unique approach that will surely fit many railroads, and with their global reach, we believe that within this decade they can ultimately establish themselves as part of the modernization of the global rail system.
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US Department of Transportation Federal Railroad Administration
More on the Silk Road
SAP TM 9.1 information, which includes updates for their TM, overall, and for rail functionality
SAP Community Network, SAP TM
1“For example, coal business — a longtime moneymaker — has eroded over the past three-plus years. CSX has lost nearly $1 billion in revenue — coal usage and a global oversupply is pinching export demand. April marked the first time that natural gas trumped coal as the top electric power-generation fuel in the United States in a given month, with about 31 percent of power generated from natural gas and 30 percent from coal, according to an SNL Energy report issued last month — ” Progressive Railroad, August 2015 issue. — Return to article text above
2 Modern-Day Silk Road Optimizes HP’s Supply Chain — Return to article text above
3 Estimates are more than $160B for rail, infrastructure connecting ports to rail, and highway infrastructure. This will provide a ‘seamless’ trip from the Middle East or EU ports through Asia to eastern China and into Southeast Asia as well. — Return to article text above
4 Read several articles about this in Journal of Commerce— Return to article text above
5 In spite of the widened Suez Canal — Return to article text above
6 Crescent Corridor, CREATE, and Union Pacific investments in the US and Canada are examples. — Return to article text above
7 2015 Outlook, Association of American Railroads — Return to article text above
8 Speed Bumps in Transportation — Return to article text above
9 The US has 6 major railroads, which account for about 80% of the revenue, with over 400 regional railroad companies. — Return to article text above
10 Australian rail firm in SAP first. — Return to article text above
11 Numbers in the market indicate that there are more than 250 locomotives on order as of this writing. — Return to article text above
12 Most TMs support “asset lite” or “asset free” — freight forwarders, brokers, shippers. Descartes and OTM support various aspects of fleet management, for example. Large fleet enterprises usually have a portfolio of purchases and homegrown applications to manage the totality of the business, railroads being no exception. — Return to article text above
13 The corollary of course, is what kind of business they don’t want to be in. — Return to article text above
14 Railinc’s Umler® system is an electronic resource that contains critical data for North American rail transportation equipment. “Railroads, equipment owners, shippers… [and others] use the Umler system for the safe and efficient placement, movement and interchange of cars for railroad carriers and customers. The Umler equipment registry contains the physical characteristics, transportation management and pool assignments of nearly 2 million pieces of rail equipment in North America. This registry is the base file for other industry reference files and industry equipment accounting files.” — Return to article text above
15 Only a few transportation solution providers, like Descartes, can provide this broad intermodal door-to-door load/shipment planning. Oracle also does some network planning for rail. — Return to article text above
16 Descartes has a strong network, the GLN, with over 220,000 connections as well as Descartes’ GF-X Exchange™ for air cargo to provide seamless any-mode international cargo management for shippers and forwarders. — Return to article text above
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