November 12, 2019 • Posted in Market Insights

Precision Scheduled Railroading (PSR) and Its Impact on the Plastics Industry

There’s a transportation revolution that’s been shaking up the rail industry. It’s called Precision Scheduled Railroading (PSR), and it’s been changing the way cargo is moved across the country — including the way suppliers and plastics manufacturers ship and receive railcars of resin. Consequently, it has serious implications for M. Holland, our clients and business partners who rely on rail to do business.

The late Hunter Harrison, railroad executive, pioneered this new approach – overhauling rail logistics by instituting strict cost controls, asset optimization and reduced downtime. By the time of his death in 2017, he had instituted PSR at four different railroads where he served as CEO (Canadian National, Canadian Pacific, Illinois Central and CSX Corporation). Before PSR, trains waited for cargo, then left when they were filled with shipments. Upon arrival, railcars would often be temporarily stored on rail sidings until they were “called in” by the consignee. With PSR, freight railroads are run more like Amtrak: trains leave according to a schedule, full or not, and routes focus on high-volume lanes. With departures set in advance, everyone knows how and when their goods will get from point A to point B, and they coordinate their schedules with the railways. The result: railcars spend less time idling on tracks or in storage, meaning more tonnage can be moved using fewer assets and with lower operating costs.

Most North American railroads have adopted this approach. Tighter schedules mean greater efficiency and profits for the railroads. Union Pacific, which is transitioning to a PSR strategy, reported a profit of $1.6 billion in the second quarter of 2019 even with a 4 percent drop in volume. In January 2019 an article in Barron’s noted, “Every publicly traded U.S. and Canadian railroad has attempted to adopt PSR in some form — or has had to explain why it isn’t doing so.”

A Bumpy Start

As with any major business transformation, there have been some hiccups as railroads and their business partners adapt to this fundamentally different approach. When CSX first implemented PSR in 2017, it was very nearly a disaster, with delayed deliveries due to congestion and a lack of railcars. Since then, however, the company has continued to implement PSR and says it is addressing the problems. Other railroads ran into similar issues. Michael Nappi, president and CEO of M. Holland warehouse partner Pax Industries, noted that when Norfolk Southern adapted its Chattanooga railyard as part of its transition to PSR last year, “The service was degraded significantly. It took us about three months before we were able to see improvements in service.” It has since returned to normal, he said.

Better Service, But Added Customer Costs

Several M. Holland logistics partners have reported that, after some adjustments, PSR has served them well. Nappi said his company now has an improved service window for shipments, benefiting from seven-day-a-week rail service instead of the previous five days. He also reported decreased travel times: “Instead of the standard 14 days, it might now take 10 or 12 days.” Brian Steenbeke, director of customer services for Brunk Plastic Services, pointed out that the railroad now switches cars at his site five days a week instead of three, allowing for more flexibility. “In the end, we’ve noticed a big improvement,” he said. “Efficiency is definitely better.”

However, these benefits come with a trade-off: predetermined and scheduled deliveries mean that railroads no longer provide railcar storage for free. Cars either must be unloaded immediately, or companies must make sure they have track capacity to store them — otherwise, they must pay fees to the railroads for storage. This means some companies are incurring more costs in the short term as they adjust to the new model. In an unfortunately timed coincidence, Brunk was receiving approximately three times the normal number of inbound railcars when the railroad started enforcing the fees last year. “It was the perfect storm,” said Steenbeke. As a result, Brunk had to increase its storage capacity by leasing additional space and monitoring customer volumes more closely.

Other companies have not been affected by these storage fees. Nick J. Mihiylov, president of ASW Supply Chain Services, says being served by a short-line railroad and having spots for 161 cars means his company hasn’t been impacted. “As soon as cars are reported, we have a place for them,” he said. However, most of M. Holland’s clients don’t have much in the way of rail storage capacity, so they may be subject to railroad fees.

How the Plastics Industry Can Adjust

The plastics industry is characterized by fluctuating demand, making it particularly challenging to plan for and manage deliveries and storage, as illustrated by Brunk’s experience. Plus, all railroads implement PSR differently, and communication can be challenging. Nappi says that he didn’t receive advance notice when Norfolk Southern changed its service model for two of his company’s facilities.

Yet, companies can adjust and work with the railroads to our mutual satisfaction and benefit. Some suggestions for adapting to PSR include:

  • Improve planning and engage in more accurate forecasting.
  • Spread out purchases and plan inventory and deliveries to help avoid capacity overloads.
  • Look into leasing, buying or building more track space for storage.
  • Include buffers in budgets and scheduling to reduce risks from the unexpected.
  • Work closely with railroads and third parties handling logistics to refine schedules, deliveries and other procedures.

But the main thing to do is work on improving communication with the railroads, customers and partners as companies continue to adjust to the effects of PSR. This can help strengthen relationships and uncover potential solutions, which is essential in such a complex landscape with so many moving parts (literally). Brunk’s experience with PSR “opened our eyes to be more aware and communicative with customers,” said Steenbeke. “We are able to get a better idea of what’s coming in and take control over things we didn’t really control before.”

PSR is a double-edged sword. It’s an opportunity for all of us to expand our business, but right now there are new costs and the pains of adjusting to a new system. Large-scale change doesn’t happen overnight, but our ultimate goal is to personally oversee solutions for each client to ensure an uninterrupted, consistent and on-time supply of raw materials as PSR disrupts freight rail service as we know it.

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