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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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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When business is acquired, the customer interface priority moves from attraction to provision of service quality. The longevity of the business relationship is contingent on the continuous and consistent delivery of the service in the form promoted in the enticement/attraction stage (1. and 2.).

Whether the freight is traditional (i.e. rail-suited) or novel (multimodal-suited), quality/value in rail freight customer service can be divided into three phases of activity, which are depicted as the following trinity.

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Supplier and supply chain management are means by which cost-reducing efficiencies can be obtained and profits thereby increased. DB customers want to minimize logistical costs in order to maximize returns from the sale of freight. For the manufacturing customer, movement of goods to consumer or retailer/distribution centre constitutes “outbound logistics”, usually the final physical distribution stage for which the manufacturer is responsible. The provider decision is usually the responsibility of a supply chain or logistics managers (in some companies, transport is often purchased by generalist procurement personnel). Supply chain-aware managers will prioritize capability rich, known-good providers, ideally with robust supply chains of their own. ...continue reading

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The following figure illustrates the four constitutive elements of value obtained by customers engaging with DB.

Quality

“Quality” is a variously interpretable, somewhat overused and overextended term. In manufacturing and operations management generally, and service industries specifically, quality is defined by the customer. Performance quality expectations are usually formally encoded in key performance indicators (KPIs) or Service Level Agreements (SLAs) that DB will accept or reject prior to commitment. Normally, KPIs enforce performance conditions on service providers, so are of extreme importance to all parties. Failure to meet a KPI, such as 90% OTIF (“on time, in full”) would result in compensatory remuneration or, if persistent, discontinuation of contract. As already mentioned, if competitors can meet quality requirements while offering attractive prices to their customers, and if contractual conditions are comparable between competitors, quality of service beyond basic requirement will acquire significance. The railfreight provider that is capable of providing service quality that meets or exceeds customer requirement has greater order-winning potential when no other differentiating provisions exist. ...continue reading

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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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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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