Cost transformation and strategic sourcing for North American Class 1 railroad
Even the most successful transportation providers face constant pressure to improve their cost structure. Leading companies have learned that conventional approaches to dealing with their purchased spend do not always generate the type of results necessary to compete in today’s market. Instead, they seek innovative approaches such as taming demand through operations transformation and restructuring key supplier relationships into integrated partnerships.
Challenge
A North American Class I railroad was experiencing significant growth in its top line revenue. However, it found that costs were increasing as well, and its operating ratio continued to lag behind those of the sector’s top performers. The challenge was to improve profitability and ensure an adequate return on investment for the years to come.
With purchased spend typically representing 75% of Class I’s operating expenses on a cash basis, it was the single largest means to improve their operating ratio. The railroad’s procurement organization was already employing advanced sourcing strategies and was in the midst of a new strategic sourcing initiative. To further accelerate the company’s aggressive operating ratio targets, the company recognized that new and innovative approaches would be required.
Approach
The railroad engaged A.T. Kearney to help identify further innovative areas for improvement. With a diverse set of categories ranging from IT support to freight cars, it was clear that a one-size-fits-all approach would not be sufficient to achieve the breakthroughs the company was seeking.
Beyond the typical spend segmentation and supply market refresh, A.T. Kearney dove deep into key underlying operating drivers. Some of the innovative approaches included:
- Using Total Life Cycle and Cost of Ownership lenses to reduce underlying spend demand (e.g., reducing MRO and facility expenses through a reduction in excess fleet)
- Reinventing key supplier relationships to exploit mutual benefits
- Challenging sub-optimized business processes
- Field testing leading maintenance practices
- Optimizing asset utilization and valuation
Opportunities were evaluated in terms of ROI and timing of impact to operating ratio. An accelerated roll-out schedule was developed to balance the savings realization against the resources required for implementation. A.T. Kearney consultants worked hand-in-hand with the procurement and operations teams to vet, enhance, and ultimately implement the cost transformation strategies.
Although the company was already using many advanced sourcing techniques, the effort identified further improvement opportunities. The company’s purchasing organization and policies were evaluated using A.T. Kearney’s proven Stages of Excellence methodology to identify process redesigns. The teams then worked jointly to develop catered solutions to ensure benefits and knowledge could be sustained into the future.
Results
Even with a targeted effort, the company was able to realize a 4% savings across nearly all of its external spend. In addition, the company was able to accelerate its operating ratio objectives and decrease current and ongoing capital requirements. Example highlights include:
- Rail and track: using a Total Lifecycle Costs analysis to drive 6-8% cost reduction
- Fleet optimization: 5-7% reduction in costs through “right sizing” fleet
- Intermodal: 25% reduction through specification rationalization, demand management, and global sourcing
- Maintenance: reducing planning and scheduling to drive ES Maintenance improvements and increased track availability; additionally, reduced external spend by approximately 6%
The collaborative approach used by A.T. Kearney also helped embed change and facilitate the transfer of knowledge and innovative methodologies into the company’s purchasing organization.
Contact
For more information, please contact
 Tim MacDonald, Partner, A.T. Kearney Toronto
 Steve Mehltretter, Partner, A.T. Kearney Toronto
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