Cementing rail efficiencies [page 2]

-- Logistics Management, 4/1/2006

Page 2 of 2 -- Infrastructure Investment

To start the transformation from problem to solution, CEMEX's logistics and transportation managers met with UP executives. They explained the long-term cost for both shipper and carrier of the old way of doing business. They also consolidated current and projected shipment volumes to determine what would be needed in the way of rail service. In return, UP agreed to launch a "Customer Service Review Process" to ensure that it committed sufficient resources to CEMEX's business and that the entire railroad would be on board with any plan that would be developed.

The second part of the initiative saw shipper and carrier discussing how to resolve specific issues. "Solutions did not just jump out at us. It was a joint problem-solving process," Burns says.

The plan they came up with required significant financial investments and changes in long-standing procedures. For example, CEMEX historically had used both manifest (booked with other shippers' commodities) and unit trains for cross-border shipments. CEMEX began shipping longer car blocks, nearly eliminating manifest shipments in Arizona in favor of unit trains. That change allowed UP to move CEMEX's cars from origin to destination without interruption.

CEMEX also began providing more accurate shipment forecasts. Predictability further improved when the shipper standardized car-block lengths by destination and began shipping to certain destinations on specified days of the week. Additionally, CEMEX made extensive changes in its infrastructure in Arizona. It reopened a terminal in Casa Grande, closed some existing terminals, and opened some new ones that were less economical in some respects but could be better served by the railroad. CEMEX even used its own capital to upgrade UP-owned track to one of its terminals when the railroad declined to make that investment.

CEMEX's efforts to make loading and unloading faster and more efficient have had a positive impact, say railroad officials. "The CEMEX team has added capacity to handle larger unit trains, upgraded material handling systems to improve haul-away capacity, and improved inventory-holding capability to maximize efficiency of the rail delivery network," says Dave Purcell, Union Pacific's senior business manager of industrial products.

The railroad made some changes, too. Now that it knew in advance what CEMEX's capacity needs would be, UP was able to commit more and longer unit trains to the shipper; to better match traffic with available resources, it also added some trains on weekends. In some instances, the railroad switched from four-axle to more powerful six-axle locomotives to accommodate CEMEX's needs.

Collaborative Effort

Operational changes are never cheap or easy, but the resulting improvements in cost, efficiency, and increased sales have been worth the effort, Burns says. "In 2005 we had a really good year. For a good deal of that time, rail capacity was still limited. But we achieved double-digit growth in sales in Arizona. Most importantly, we are better serving our customers."

Granted, there are still a few bumps in the road to a better bottom line. Burns says rail capacity, not customer demand, is now the source of service bottlenecks. Some customers must pick up their orders from terminals that are farther away from their markets. And because the cost of making operational and infrastructure changes was not shared equally, some "second guessing" still goes on, Burns says.

Rate negotiations, moreover, are still contentious and difficult, Burns says, adding, "But more than ever, we can count on UP executing according to plan, and this builds trust." CEMEX's relationship with UP has improved in other areas, mainly because his group's focus has shifted from negotiations to more of an emphasis on problem solving, and because there is more involvement by both companies' operations personnel. "The CEMEX team understands the importance of optimizing the transportation network," says UP's Purcell. "They are always interested in finding ways to make their business and the distribution of shipments more efficient."

Improvements would not have been possible without the support of every link in the shipper's supply chain. "Maricopa County is among the fastest-growing communities in the country," says Ken Pramik, CEMEX director of transportation. "Meeting [customers'] needs during a time of constrained transportation has been a huge challenge. Our success is a great example of collaboration and execution involving our logistics counterparts in Mexico, Ferromex Railroad, Union Pacific, our terminal operators, and trucking companies in the Phoenix area."

Getting to that point, though, took some creativity. Says William T. Bayes, CEMEX's director of Western U.S. logistics operations: "By creating a cohesive relationship throughout our entire supply chain, we were able to improvise, adapt, and overcome the many obstacles we faced."

To which Burns adds: "Collaboration with railroads can provide better results than confrontation."

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