How did CN transition from an emphasis on profit margins, he asked, to one of growth?
“We are, as you say, the pioneers of Precision Scheduled Railroading. It is initially a difficult process for customers,” Janet Drysdale, CN’s vice president of financial planning, responded.
“Certainly one thing we learned going through it, and having the benefit of hindsight, is that we felt like we were acting fast,” she says. “The pace of PSR I think has picked up in recent times. But we were acting fast and we weren’t necessarily communicating with our customers as well as we should have during that difficult transition period. I think we’ve learned from that.”
CN realized in 2010, when it was pivoting to growth under new CEO Claude Mongeau, that it had a low cost structure and high fixed costs in an industry that’s asset intensive. The only way to produce earnings growth, Drysdale explains, is to generate revenue growth.
“The lowest cost way to grow is to grow with your existing customer base,” Drysdale says. “So you want to have a relationship where the customers actually want to do business with you.”
CN set out to mend fences with customers who had been put off by former CEO E. Hunter Harrison’s disruptive implementation of PSR over the previous 10 years.
“Our pivot was really understanding that operational excellence, which drives our low cost operation, is not always relevant from a customer point of view,” Drysdale says.
CN talked to shippers and developed a new set of service measurements that are important to customers.
“If I’m a customer, what’s more meaningful to me? Is it that the railroad has a low operating ratio? Or is it that the railroad brings me the empty cars that I’ve ordered on the day that I’ve ordered them, and is consistent in the end to end service that they provide to me,” Drysdale says.
“We are trying to balance operational excellence with service excellence, and I think we’re trying to take an end to end supply chain approach,” she says. “So getting the empty car back to the customer is as important as picking up the load.”
“When you start to do the operational and service excellence well, this is what’s been supporting our growth level that has outpaced the economy and has outpaced the industry,” Drysdale says. “So it’s about managing what’s good for us as a business, but also managing what’s good for the customer. And when our customers win, we win.”
Drysdale spoke at the Stephens Nashville Investment Conference on Wednesday.