Rail Freight

In markets that are characterised by commodity provision of rail freight services (perfect or near-perfect substitutability), load capacity/train length and functions beyond speed, both of which are limited by regulations and mechanical factors, non-rail functions (service offerings) will constitute the value-driving, tie-breaking conditions that attract business. Functionality in addition to satisfactory conveyance of freight constitutes a value advantage proposition.

ICT-enabled customer service is such a functionality. DB SR, the rail freight seller, understands customer service and its facilitating technological capabilities as value-driving competitive weapons.  Buyers of rail freight services can harness the advantage of the seller’s customer service, so are able to add value to their own customer offerings. The customer relationship enables service qualities beyond low-price; the functionality represented by technology extends beyond the rail freight provider-freight producer dyad to the freight producer’s customer.

 

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Rail freight marketing has two core challenges:

  1. To attract and maintain trade from businesses whose products are rail-suited.
  2. To entice trade from businesses whose products are less rail-suited but can be conveyed to customers with comparable time/cost.

In the case of 1., the marketing department’s task is the wresting of trade away from competitors moving rail-suited freight. When time/cost equivalence characterises the market, customer service and associated complementary capabilities represent the potential order-winning, business capturing value-drivers. Ambitious railfreight providers will offer superior customer service.

In the case of 2., time/cost factors are prioritized over the modality, which will likely be of little interest to the service user. The provider is able to leverage multimodal capability as a failsafe measure: single modality deliverers lack the ability to switch between modalities when constraints arise. The group’s multimodal logistics capability is thus exploited.

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A Kraljik Matrix will likely be useful. The matrix, informed by the previous diagrams, will show the relative criticality and risk represented by items/classifications of supply under the current procurement/supply management scheme. Centralized procurement will likely provide the strongest economies of scale. Local procurement may however provide particular and attractive local advantages, but incur coordination complexity and erode group-wide procurement economies. The close coupling of DB with its suppliers will reduce internal logistics risk and possibly general commitment discounts, and other collateral economies.

Use of KPIs by the buyer (DB) will incentivise strong performance on the part of suppliers; long-term commitment (subject to formal KPI satisfaction) on the part of DB will encourage suppliers to invest in R&D and share expertise with DB. Mutual visibility of relevant data – supplier’s stock levels, locomotive performance – should also amplify the efficiencies of both parties and, ideally, generate economies that could feed into price reduction or less resourced DB SR activities.

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In the context of pure rail freight, identifying what constitutes value for the customer is problematic but strategically critical because value reveals those areas of the business that attract profit and should therefore be resource-enriched.
In intramodally rich transport markets – where there are multiple rail freight companies capable of moving goods with comparable efficiency – differentiating value will likely be gleaned from reliability and the provision of capabilities that the customer requires beyond basic conveyance, such as freedom from the costs of procuring, maintaining, and crewing rolling stock, the ability to monitor freight progress, and ensured safe handling of loads. More will be said about the core profit-driving activities that generate value from the customer’s perspective in a later document. Price factors will be determinative in competitive markets characterised by capability equivalence between competitors. For buyers, price-based selection is more likely if the transaction is unusual (obviating need for long-term contracts), if the freight is time and handling insensitive, and if functionality beyond basic point-to-point conveyance is unrequired. ...continue reading

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Proposal: if comprehension of DB’s supplier interaction is required, a diagram like the following will be useful. The diagram will depict DB’s suppliers and customers. The central entity is DB SR. Tier 1 suppliers are indicated on the left. Customers are indicated on the right.

If necessary, tier 2 suppliers could also be identified, but the insight obtained might be of limited value to DB.  Of primary concern at this stage is identification of the geographical location of DB’s main customers. Centre of Gravity (CoG) modelling might then be applicable, if determination of optimal facility location is required.

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The DB rolling stock procurement strategy must be ascertained. DB’s fleet will combine directly-owned and, presumably, leased locomotives and wagons. If the fleet consists of both directly owned and leased vehicles, the respective proportions must be known. Increasingly, transport providing companies favour vehicle leasing, since leasing replaces high CAPEX with steady OPEX, and the leasing entity provides maintenance and bears associated costs of running. Leasing also provides the using entity to scale capacity according to changes in customer demand patterns: extra vehicles can be leased at short notice and on a short-term basis.

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The advantages of rail freight give us some insight into the possibilities and challenges faced by a rail freight service provider. The strengths and weaknesses of rail freight as a modality have been briefly covered. A rudimentary appreciation of the constraints reveals the activities in which value can be amplified or eroded, according to management decisions, group-wide concerns, long- versus short-term ambitions, and so on.

So far, we can see that value-creative activities are likely to cluster around the risk-incurring activities, which are:

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The advantages of rail freight can be summarized thus:

  1. The inflexibility of the modality is also its strength, provided the characteristics of the commodity conveyed exploit the economies supported by the characteristics of rail (see points 7, 8, and 9 below).
  2. There are several CSR advantages for companies who switch to rail (see 3, 4, and 5 below).
  3. Rail is increasingly seen as an effective “green” alternative to road transport.
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