Fortune‘s latest issue (June 15, 2015) contains two separate articles that tie together our discussion of railroads in Chapter 11, Supply Chain Management. The contrast between bullet trains and freight trains in the U.S. is evident. The 1st article, “Super Fast Trains on a Roll Globally”, notes that over the past decade, China has built the world’s biggest high-speed-train network, with some 6,900 miles of track. Since the service was first launched in 2007, the number of passengers riding each day has risen from 237,000 to 2.5 million. To give you an idea of the scale, China is investing more than $128 billion in domestic railway construction in 2015–adding another 4,700 miles of passenger tracks this year alone. By comparison, the U.S. invests $1.4 billion annually in Amtrak. Amtrak’s Acela Express is America’s fastest train, yet its average speed is only 68 mph on the trip between Boston and Washington, D.C. The train does hit 150 mph along a few stretches of straight track.
In contrast, America’s freight rail industry is flourishing. The 2nd article, “Profit Engines on the Rails,” describes the 153-year-old Union Pacific, which is beating almost every other industrial company in the Fortune 500. The old-economy warhorse generates profits at a rate that rivals those of the best tech, pharmaceutical, and financial services companies. There are 3 reasons. First, Union Pacific’s central tenet is network planning, which mean that every outlay for new track, locomotives, or terminals must yield a return of at least 15%.
Second, the railroad enjoys a big, and growing, cost advantage over trucks for long-haul shipments. Third, Union Pacific is an expert at constantly, relentlessly improving its efficiency. In a hugely capital-intensive business, that means increasing its volumes of freight far faster than it adds new employees, locomotives, and boxcars. Its capital expenditure has almost doubled, from $2.2 billion in 2006 to $4.2 billion in 2015.
Classroom discussion questions:
1. Why is the railway industry important to operations management?
2. What are the advantages and disadvantages of shipping by railroad vs. air, trucking, and water?
| Existing miles of high-speed rail | |||
| China | Europe | Japan | U.S. |
| 6,917 miles | 4,699 miles | 1,655 miles | 456 miles |