- Track – labour (skilled, technical, engineering, and unskilled), signalling equipment, electrification management and support (possible but unlikely, since most of these functions will be provided in-house).
- Facilities – construction and maintenance of yards and permanent way.
- Fleet – locomotive and wagon manufacturers (including supplier liaison), maintenance of wagons and locomotives, and stabling of locomotives and track maintenance vehicles.
- Transport operations – automated (and possibly manual) train formation switches, shunting engines, GPS and RFID technology and management, goods and materials distribution facilities (additional logistics processes involving, for example, forklift trucks, container cranes, warehousing), road vehicles.
- Fuel – procurement and handling/distribution.
- Transport support functions (waste management).
- Products and supplies (IT products and consumables).
Detailed knowledge of the general DB procurement strategy will be valuable, if a supply chain-level understanding of the organisation is sought. Central procurement is likely to generate volume purchase economies, but given the variety of rail systems across Europe, locally-specific locomotives might have several cost/efficiency advantages, such as proximity to the maker’s facilities, local availability of drivers qualified to drive that class of locomotive, low cost of spares, network suitability, and so on. However, from the group perspective, such advantages are likely undermined by the practical difficulties of deploying a highly regional locomotive to elsewhere in the group (in response to sudden requirements for capacity increase, for example).
The following figure illustrates the four constitutive elements of value obtained by customers engaging with DB.
“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
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.
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
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.
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:
The advantages of rail freight can be summarized thus:
- 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).
- There are several CSR advantages for companies who switch to rail (see 3, 4, and 5 below).
- Rail is increasingly seen as an effective “green” alternative to road transport.
This diagram outlines the value driving-significance of rail freight operations.
Blue indicates core rail freight functions; orange indicates customer value-drivers. Solid lines indicate direct translations of function capabilities into customer value drivers.
Red dotted lines indicate major challenges, i.e. conflicts of function/systemic capabilities and customer value-drivers.
The following is based on Step 1 and Step 2 of the Value Chain Analysis approach. The subject of this analysis is the DB Schenker Europe-wide rail freight business and operations system.
Step 1. Function and Asset analysis
Step 2. Value Chain Risk summary
Step 1 consists of, in this case, obtaining a comprehensive understanding of the rail freight industry: objectives and constraints.
Step 2 consists of, in this case, identification of the risks imposed by each DB SR rail freight operation, i.e. a detailed appreciation of the risks and, if possible, the costs – potential and actual, represented by each activity within the general operation.
- IP: e.g. fuel-saving stop-start locomotive power systems (see DB Railways magazine, 2015)
- Knowhow and technologies: public, shared, and proprietary; interoperability – and profit gains possible – with DB group operations and external entities.
- Third party relationships. This must be further divided: (I) suppliers of plant and products; (II) third party entities.