By Jeffrey Rothfeder  |  Posted 07-19-2002 Print Email
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Win-Win Technology

Last year, the railroad surprised transportation experts by teaming up with DaimlerChrysler to launch an aggressive Web-based delivery-management system as cutting-edge as any the railroad industry has ever seen. Under the terms of the agreement, Union Pacific formed Insight Network Logistics, whose sole purpose is to set up a 20-person network control center to track every car Chrysler makes in the U.S. from the factory to the dealer. Expected to go online by the end of this year, INL will coordinate the mix of railroads and trucks that Chrysler uses to distribute its vehicles, managing the schedules of the companies involved to be sure they're tightly synced and that the automaker receives the most efficient and cost-effective timetable for its shipments. INL will post this information on an intranet so every car and truck in distribution can be tracked simply by typing in the vehicle identification number. Because Union Pacific will essentially be overseeing much of Chrysler's distribution logistics, whether UP rail cars are carrying the vehicles or not, the railroad is, in effect, taking on the unlikely role of a technology services provider. The benefits to Chrysler? The automaker claims it will save about $280 million over six years and reduce by 25 percent the 12 days it takes to move a vehicle from assembly plant to dealership. "This is a nimble move for a railroad, to set up a subsidiary to create a logistics system so quickly," says Tony Hatch, independent railroad analyst and owner of ABH Consulting in New York. "It shows a commitment to technology to help the top and bottom line, and it also shows an understanding of customer needs."

The architect of UP's makeover is Bryan. UP's 57-year-old CIO, who has been at the railroad for more than two decades, cut his teeth in the complex integration of the computer systems of UP, Western Pacific and Missouri Pacific in the early 1980s. Bryan, who heads up an IT organization with more than 1,000 employees and a $250 million-plus budget, has an almost blasé attitude about UP's recent strategic embrace of technology. "When you have management that's not willing to let a company fail, you'll always see a lot of technology programs being developed," Bryan says. "In today's world, the two—company growth and new technology—go hand in hand. What we're doing at Union Pacific should be the norm for most companies, not the exception."

Perhaps, but there are so many technology initiatives at UP these days that it's easy to lose track of them. The company was the first railroad to install a full-fledged EDI system to handle electronic billing and shipping orders, and it's the only railroad that uses a sophisticated yield management system—similar to the airlines'—to balance customer deliveries with available space in trains to make sure that the shipper gets on the next trip and that UP's rates are in line with supply and demand. The railroad has also built a 30,000-mile fiber-optic and microwave telecommunications network along its right-of-way, some of which is used by other railroads as well, that provides bandwidth for train-to-train communication anywhere in the system.

In addition, for an industry whose idea of customer service traditionally has been a roomful of people with access to file cabinets, UP's newly installed customer relationship management system is an eye-opener. By tracking customer activities using virtually any search criteria, UP marketing and sales staff can actively seek out additional business from customers based on prior shipping activity. On top of this, in 2000, UP invested in Arzoon Inc., a San Carlos, Calif., start-up that makes a logistics program that lets companies compare rates, delivery times and scheduling for their shipments over any mode of transportation. Previously, companies would have to look up separately the prices and timetables for truckers and railroads because the data has never been integrated in one place. Potentially, Arzoon could result in lower transportation prices for shippers, because trains are 20 percent to 30 percent cheaper than trucks. It could also mean greater market share for the railroads.

It's difficult to determine exactly how much the technology renaissance is responsible for Union Pacific's recent uptick in financial performance and share price, but railroad analysts say technology has helped it outscale its competitors. In the first quarter of 2002, even as the manufacturing, mining and agricultural business in the U.S. was at a crawl, Union Pacific revenue increased nearly 1 percent, and operating income rose almost 14 percent over the same period the year before. By contrast, Burlington Northern's sales fell more than 5 percent, and its operating income tumbled about 12 percent. Securities analysts haven't yet focused on UP's New Economy push, because there aren't overwhelming tangible results yet. But the railroad's visibility on Wall Street has increased quite a bit, because it's getting high marks for improving dependability and customer service—two by-products of its emphasis on new technology, UP management would argue. So while overall rail shares were flat or down for the 12 months through May 2002, UP's stock ended the period near its high of $65, up from about $50 the year before. "With recent improvements in service and reliability, customers are returning, and UP is finding it easier to boost prices," says Jonathan Schrader, an analyst at Morningstar. "We think Union Pacific is back on track."


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