Canadian National's 'precision-railroading' strategy designed to reduce inefficiencies angered some customers when backups, problems in any part of supply chain threw off other components; company now focuses on total supply chain efficiencies

OTTAWA, Canada , November 17, 2011 () – CN's "precision-railroading" strategy, though efficient,angered customers when one supply-chain hiccup would turn "just intime" into "just missed it."

Engage more effectively with customers to co-ordinate shipments and increase the efficiency of the entire supply chain -not just CN's leg of it.

Figure out a way to deal with unhappy shipping customers or face the possibility of government intervention. That was the dilemma facing Claude Mongeau as he rose to the position of chief executive of Canadian National Railway Co. at the start of 2010, replacing the outgoing Hunter Harrison.

It was Mr. Harrison who had reimagined the rail giant under his "precision-railroading" concept, a business model designed to reduce inefficiencies in shipping in order to maximize the
utilization of its trains. That meant, essentially, that the trains wo uld follow their schedule - regardless of whether the cargo they were hired to ship had fully appeared.

The business strategy made CN a leader in the industry, but it also frustrated some customers. The anger of Canadian rail-shipping customers led the Canadian federal government to
launch a review of rail-freight service in 2008. The report, made public in March, identified numerous inefficiencies in the way freight-rail services like CN operated.

According to CN, Mr. Mongeau was, in an attempt improve customer satisfaction, already conceiving the next level of the precision-railroading model long before the government's report was made public.

"The whole service review happened to occur when we had a leadership transition," says Keith Creel, CN's chief operating officer. "As that report transpired, we started to deal with the
questions that came up (via the service review) and started talking t o our customers and reflecting. It be-came apparent for us to adapt and change. Whether or not the government would have ultimately done that or compelled us to do that - we hope we've given them proof they don't need to."

Mr. Creel argues that in the past two years CN has altered its business model to work more in partnership with its key customers. He calls the changes an "evolution" from the precision-railroading model. Mr. Harrison's vision for the company has not disap peared, he argues; instead, it has evolved to involve CN's customers at agreater level - in turn creating service agreements that allowshipments to be made more effectively - without jettisoning the concept that has made CN one of the industry's leaders .

"Because Claude had been the CFO, he knew the model worked," Mr. Creel says. "So his vision was: Instead of changing it, we should evolve it; instead of being inwardly focused, let's also reach out to our customers and see if we can work with them. To ove simplify it, we wanted to help them grow their business - and, in turn, they'd reward us with more business."

The problem with precision railroading, Mr. Creel says, is that not all other shipping services and customers are as precise.

The issues come when CN connects with suppliers and other shipping companies. For the supply chain to work properly, goods and products have to move smoothly and efficiently from one supplier to the railway, and from the railway to other shipping methods (often boats for international goods). One backup or problem in any part of the supply chain throws off the other components.

Mr. Creel compares the supply chain to a busy highway, especially if the problem is at a location like the TDI Terminal in Vancouver, which deals with 60% of merchandise imported into
Canada. On a highway, an accident immediately stops traffic and,even a fter it has been cleared, it can take a long time to clear up the backlog.

Similarly, if one part of the supply chain breaks down - if CN delivers goods to TDI when they can't be off-loaded, for instance
- it can take time to get back on schedule - and the resulting issues can leave railway customers fuming as they try to get their products to market in a timely fashion.

In order to fix the issue, CN needed to monitor the efficiency ofthe entire supply chain - not just its own trains.

"Our systems are second to none," Mr. Creel says. "And we've livedby the mantra that, if it is important, you measure it and live bythe results." Under Mr. Mongeau's leadership, he says, CN shiftedfrom focusing on maximizing efficiency within CN's supp ly chainto measuring the efficiency of the complete supply chain.

CN says this strategy is steadily resolving previous issues. Overthe summer, the railway says it signed 20 service-level agreementswith customers, largely companies involved in the forestryindustry, that detail how shipping problems can be resolved.

"It isn't about finger-pointing," Mr. Creel says.

In some instances, the improved oversight of the complete supplychain has resulted in dramatic increases in the amount of productthat can be shipped. Mr. Creel points to coal shipments to theRidley Terminal in Prince Rupert, B.C., as one example that t hesupply-chain alterations are having an impact.

Previously, the terminal would struggle to off-load more than 250cars daily, Mr. Creel says. But since service-level agreementsallow the terminal to have a better sense of when trains will
arrive and how big a load they are bringing, it can better manag estaffing and machinery.

That has resulted in a significant increase of up to 340 rail carsa day being off-loaded, CN says. Due to the increase, the terminals making investments in newer machinery that will allow even more cars to be processed, Mr. Creel adds.

The Canadian economy benefits from this increased efficiency, he says. "And, because we are part of that supply chain, CN benefits."

The hope, Mr. Creel says, is the changes have not only improved the experience and success of CN's customers, but will also stave off the spectre of government intervention in the Canadian freightrail sector.

"The only way we [are able to] do this is because we have supply-chain partners that work collaboratively and trust each other," he says. "When you are sharing metrics and each other's faults, so to speak, in this environment, it is okay. When you get int o a regulated environment ... then everyone shuts their books and they get into protectionism instead of sharing."

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