TRANSPORTATION

Downsizing, rail company mergers, and electronic information sharing are reshaping the function of paper company transportation departments

BY KELLY H. FERGUSON, Editor

Costs, Customer Service Concerns Cause Changes in Paper Transport

In the past several years, the transportation departments at North American pulp and paper companies have undergone radical change. Driven by a need to focus on core competencies, many paper companies have pared their transportation staff at the corporate level and outsourced much of the mill-level function to third-party providers. Others have pulled the usual switch by decentralizing what was once centralized or centralizing what was decentralized.

On the carrier side, rail companies have been merging and carving out territory, which unfortunately has sometimes meant a decline in service. This comes at a time when the manufacturing community in general is already nervous about the shrinking number of competitors. Trucking companies, meanwhile, have continued to focus on drawing short-haul traffic away from the rail companies and improving the customer service aspect of their business.

To discuss some of these issues, Pulp & Paper recently interviewed transportation consultant Mike McInerny, president of Celtic Logistics in Greenville, S.C. McInerny is on the board of directors for the International Forest Products Transport Association (IFPTA) and a former transportation manager with Bowater Inc.

PULP & PAPER: In the mid- to late-1980s there had been a suggestion that paper companies needed to centralize their transportation function to leverage their size and get the most out of their transportation dollar. Is there still a feeling that this should be done and are companies moving in that direction?

McINERNY: This is really a company-by-company issue. Some of the transportation departments at larger companies are centralized and their logistics activities tend to move through that centralized structure. But some companies are pushing profit and loss responsibility outward, either to a division or to the mill level. Thus, some of the transportation and logistics management is migrating back to those locations. And if managers have to account for their distribution costs on the bottom line, then they want to have input into the decisions that are made.

The one problem with shifting that responsibility-whether centralizing or decentralizing-is that if it hasn't resided at that level before, then companies must allow for a learning curve for the employees managing the coordination and contracts. I think that is where opportunities open up for a third party to advise the companies or even to manage part of that function. Some of this outsourcing is also driven by the size of the operation. For example, a one-mill operation might be better off outsourcing their transportation function to a specialized logistics manager.

There tends to be the belief that a large company can leverage its size to get better deals with suppliers, and many times that is true. However, it doesn't always work that way. For example, large companies tend to develop contracts that lock them into specific prices and services nationwide. However, smaller operations, operating at the local level, can sometimes negotiate lower prices than those found in a blanket procurement contract. And this is true for contracts on fuel prices, trucking services, and logistics management.

Paper companies that are buying or merging with other companies need to analyze the benefits of those blanket contracts when integrating a new company or mill into the existing organization. Sometimes the cost benefits are more favorable at the local level.

P&P: Another issue has been that the paper industry's customers have really driven the transportation decision-making. Are customers more demanding now about such areas as transportation modes and inventorying?

McINERNY: Customer pressure is for on-time delivery with no product damage-the same basic requirements that customers have always had. They are becoming ever more sensitive to inventory. There are customers taking the position that they are not going to hold inventory, so they are pushing it back to the paper producers to manage for them.

The development by some paper companies of central distribution warehouses is obviously a reaction to that. Canadian paper companies move a lot of tonnage to warehouses at the U.S.-Canadian border for easier distribution, but they have done that for years and it makes sense for them from a logistics standpoint.

Other companies are focusing on regional distribution points where they can make a delivery within 24 hours or at least some fixed time period to enable faster deliver when the customer calls. Much of this depends on the way paper companies handle sales contracts and how the customers and sales/marketing group put together the contracts.

One change in the industry is the involvement of cross-functional teams at the paper mill-production, marketing, logistics, procurement, etc.-to examine exactly what is needed to service the customer in the most efficient way. In the past, that was essentially left to the sales department at the paper company.

This is similar to having papermakers go to customer sites to discuss technical issues. More of the transportation level operations people-finishing and shipping employees, logistics managers, etc.-are going to see customers, discussing such things as ways to improve timely delivery and reduction of product damage. And customers visiting a mill aren't just touring the machine room but are spending time with the finishing and warehousing employees to discuss problems and solutions. I think that benefits everybody because it puts employees in a position where they have the information to make the right decisions.

P&P: An area of rapid growth within transportation is the ability to exchange information, whether it is roll quality data, shipment tracking, or electronic invoicing. Are paper companies making the best use of the ability for electronic data interchange (EDI)? Along with that, are there any companies using the Internet to track shipments?

McINERNY: I think electronic data interchange has been on the minds of paper producers for a number of years. EDI has been a challenge because many companies want to use it, and there are accepted standards for making the transmissions. But every company wants to put something unique into their own transmission-whether it is something about the product or reel position or any other piece of information. There are a number of trade groups that have come up with standards that work.

EDI is still evolving, particularly how information is shared. For example, when a rail car or truck is loaded, all of the information about the product can be sent electronically to the customer and downloaded into the customer's inventory system. Or if the product is shipped to a warehouse, the warehouse system can receive the data and then share it with the customer when the product is delivered, as well as send confirmation data back to the paper mill or company so that a receivable is generated at that particular time.

Such systems can mean a great deal in terms of cash flow, since paper companies want to generate that receivable as quickly as possible because pulp, paper, and paperboard products are expensive commodities. If product sits in the warehouse for any length of time, it costs money not purely from storage but from carrying the cost for the product itself.

EDI is still an untapped resource. Many of the large commercial printers are using it. And European manufacturers and customers are using it. There are so many aspects of product and process management-logistics, inventory, stock management, replenishment-that can benefit from a well-designed EDI system.

The one transportation company using the Internet that I know of from personal experience is CSX, although I'm sure there are others. CSX has hopped on the Internet in a big way, allowing the supplier or customer of cargo to track their cars on the Internet. But they've only introduced this in the past few months.

Traditionally, the railroads have provided a couple of diskettes and then a company can dial into the system and find out where the rail car was interchanged and that a particular train was on its way. With this new Internet system, my understanding is that a shipper or receiver can tap in live to the system and dial up the car number using an access code. Information includes the train the product is on and where the train is in its trip from the mill to the customer. If the product is destined for export, the receiver at the port can look at those cars as well.

This type of Internet system obviously allows companies and customers to have instantaneous information on where the product is, but it also helps the customer determine inventory and better manage the stock being used. From the rail companies' perspective, such systems are good because the customer will be better prepared to receive the load, the car can be turned around more quickly, and other loads can be scheduled more efficiently to keep that individual car generating revenue.

P&P: The major railroads have struggled in the past decade with loss of market share, problems with consolidation, and poor delivery performance. With all the mergers yet to be settled, how has this reshaping of the rail companies affected service to the paper industry?

McINERNY: I expect the U.S. will probably end up with four major railroads by the year 2000 to handle a good portion of the long-haul traffic. Then there will be short-line railroads emerging as major players to handle the product on the lines that the major carriers don't feel are financially worthwhile. This gives paper companies rail service options that they haven't typically had before.

Norfolk Southern and CSX continue to work on absorbing the various parts of Conrail. It is a business challenge for both of them. From a railroad customer perspective, there is certainly some concern that competition is ending and shrinking the shipping options that they've had. Some comfort level must be reached, and there are concessions being made by CSX and Norfolk Southern to ensure no roadblocks by the manufacturing community. If consolidation is a win/win situation for both producers and shipping companies, then it makes good business sense. But if one or the other is not happy, then there will continue to be problems.

On the West Coast, there are the Burlington Northern-Santa Fe and Union Pacific-Southern Pacific mergers that are both still going through some growing pains. One of the major problems that seems to be confronting those mergers is a struggle with car supply-there are fewer and fewer cars available, which causes continued problems with late delivery. Some of this, however, isn't just integrating two railroads but the union operations of both companies and the computer systems of both. It is amazing how important computer systems have become in operating rail companies-for example, invoicing customers, tracking rail cars, maintaining the rail fleet, etc.

P&P: While these companies try to integrate their operations, are they in danger of further eroding their share of the shipping market to other rail companies or trucking companies?

McINERNY: For competition between rail companies, it would have to be a situation where a company is served by two rail lines. Obviously if there is a service problem with one railroad, the other will get the business. But some rail business is absolutely captive. There are companies that want to use rail and don't want to see a truck at their location.

However, if a site is served by only one rail line, then the rail company is certainly in danger of losing that business. There have been situations where freight has been seriously delayed. I have heard of situations-not necessarily in the paper industry-where cargo was shipped from a facility in April and didn't move out from a seaport until July primarily because of delays in rail delivery.

Will producers remember those problems in the long term? The primary issues here are customer service and cost. The supply chain between a producer and a customer must include an effective and reliable method of transporting the product-whether it's newsprint or pulp or linerboard. If a paper company makes a great product, they won't necessarily get a reorder from their customer if the product isn't delivered in a timely fashion. That certainly puts a great amount of burden on both the producer to choose the right shipping method and the shipper to do the job effectively. I know "partnership" is an overused word, but I haven't heard one that is better to describe this process.

P&P: Trucking companies have obviously benefited from these rail problems. What have they done to maintain and continue drawing paper business?

McINERNY: Trucking companies are becoming better at tracking product. Many of the larger trucking companies are using satellite dishes on the tractors to pinpoint where a driver is during the delivery.

Some contracts between producers and trucking companies are beginning to include a performance clause that provides a monetary bonus for on-time delivery. But on the downside, there is a monetary or loss of business penalty for being late. This is helping to make both parties more responsible. While it seems an obvious incentive for the carriers, the producers must also be responsible for having the product ready at the appointed time so that a driver doesn't sit for three or four hours waiting for pickup. That has been a major point of contention for the trucking companies. In relation to that, one change that paper companies are making is that more of them are pre-loading trailers so that a driver can drop off an empty trailer and hook up a loaded one. That streamlines the operation.

In the longer term, I think there is a movement toward more professional drivers. With the insurance issues that carriers have and the reputation that some truck drivers have, the type of individual that drives for a carrier is much more critical. It's not just a matter of moving from Point A to Point B. Drivers are now representatives of the carrier and the companies making the product. There is much less tolerance from producers and customers for unprofessional behavior.