Too
Many Cars and Not Enough Trains Prompts Buffett to Expand Rail Unit
ABSTRACT
This
article is about the issues between the transportation industries; primarily
the cargo transportation of automobiles. Automobile production has
significantly increased but unfortunately there is a shortage of rail cargo
cars for transportation; also, the cargo rail cars big enough to fit taller
trucks and SUVs were of double concern. The average American family is moving
away from cars to the bigger trucks and SUVs; this has created an increased
demand for bigger sized railcars in the automobile industry. Furthermore,
weather conditions also make the already bad situation worse.
While
automobile companies like Toyota and Ford are making difference efforts to
manage this situation, Warren Buffet is making plans to manage the situation as
well. Buffet Berkshire Hathaway Inc. (owned by Warren Buffet) plans to take
advantage of this situation by buying almost 1,900 railcars through its
subsidiary BNSF Railway Co. These railcars will be suitable for the taller
trucks and SUVs. The plans include spending significantly more than other
existing railroad company and creating the much needed capacity.
SUMMARY & COMPANY BACKGROUND
.bloomberg.com/news/articles/2015-03-03/buffett-rail-car-shortage-has-toyota-parking-suvs”>http://www.bloomberg.com/news/articles/2015-03-03/buffett-rail-car-shortage-has-toyota-parking-suvs
The
success of the companies in general depend on not only their own success but
also the success of third parties. In the article, the demand in automotive
industry is fluctuating and the logistics of the industry is not able to handle
this surging demand.
The carmaker
companies such as Toyota, Ford etc. have increased their production by the
demand in the market. But the rail industry who serve to carmakers were not
able to keeping up with this demand increase. They have struggled with the
demand of moving cars from stockyards to dealerships. 250,000 vehicles has
waited to be shipped by rail even the typical industry standard is having about
70,000 shippable vehicles on the ground and waiting to move. BNSF Railway Co,
owned by Warren Buffetâs Berkshire Hathaway Inc. has decided to increase their
capacity and service by adding more rail cars in 2016 and 2017. Some other rail
car companies have also decided to expand their capacity in order to struggle
with market demand.
BNSF
Railway is one of North Americaâs leading freight transportation companies,
with a rail network of 32,500 route miles in 28 states and three Canadian
provinces. BNSF is one of the top transporters of the products and materials
that help feed, clothe, supply and power communities throughout America and the
world. Today’s BNSF Railway is the product of nearly 400 different railroad
lines that merged or were acquired over the course of 160 years. The company
has 48,000+ employees. It operates in 28 states and three Canadian provinces.
With significant growth in key areas on BNSFâs network and a rebounding U.S.
economy, BNSF invested a record $4 billion in capital in 2013 to continue to
improve its network. The companyâs 2014 total operating revenue was about $23
billion.
PROBLEM DESCRIPTION
There are two predominant problems
presented in the article. First is the dependability involving the current
methods of transporting new cars from automobile manufacturing facilities to
their destinations. Within the Bloomberg article, we see
numerous symptoms of this problem. For example, one of the symptoms of the lack
of dependability of the transportation method is the exceptionally harsh winter
that has plagued much of the Midwest and eastern part of the United States this
past winter. The second problem listed is the rail car industryâs inability to
synchronize their efforts with the auto industry. The rail industry is
competent in its understanding of its specified tasks, which are explicitly
stated and involve shipping cars from the manufacturer to the dealership.
However, it has a poor understanding of its implied tasks, which involve their
ability to maintain a proactive stance in its response to the auto industry,
which includes being able to reasonably forecast changes in demand. For
example, the article states that ârailroad companies are struggling to keep up
with surging U.S. demand for trucks and sport utility vehiclesâ one of the best
months in nearly nine years, according to industry analysts. With that said, it
makes it increasingly difficult to ascertain the magnitude of the effect of
experiencing a backlog of transportation. Those familiar with the industry will
continue to wonder what it could have been, but let that not marginalize the
problem at hand. Rail carsâ inability to keep pace with auto manufacturersâ
requirements will continue to cause car companies to spend unnecessary amounts
of money on purchasing additional land, paving new parking lots, storing
existing inventory on test tracks, and shipping vehicles by bus instead of
rail, which is typically more expensive. These are all symptoms of the problem
and provide at best a very temporary solution to a problem. The real issue at
hand is how to properly synchronize the efforts of the rail industry with the
auto industryâs requirements instead of utilizing the current system which resembles
more of a âpull logisticsâ system, where the auto industry needs something, in
this case more transportation, and the rail industry maintains a reactive
posture in its response to them.
PROBLEM ANALYSIS AND
DISCUSSION OF POSSIBLE SOLUTIONS
The
rail road agency will inevitably need to add more vehicular transpiration carts
to satisfy the increased demand of automobiles.
They should also insure that a certain number of train carts stay within
particular high volume, car transport regions, throughout the year. When non ideal whether enables locomotive
transportation to pick up and deliver products on a scheduled basis, auto
makers must explore other transport options that are least disruptive due to
weather conditions. High demand products
should be transported via highway on a constant basis to insure that the
proximity to customersâ needs are reduced as quickly as possible.
With
the known shortage of rail road carts and the static nature of vehicle
inventory, car makers are still persistent with conducting their business in a
manner so that the profit of shipping a certain number of automobiles to various
places are maximized. Toyota and Ford
alike, have not slowed down production, yet they have decided to increase
storage space near production sites.
Rearranging their capacity cushion does not move inventory at a faster
rate. When the adequate transportation
(train) does arrive, these automobile makers expect to ship the majority of
their inventory at one time; which will not occur. If the auto industry wants to continue to
largely depend on the rail road for product transportation, they should take a
closer look at the components of demand.
Production schedules should be highly based off of autocorrelation and
trend. Time series analysis and causal
forecasting will help automakers determine estimated production numbers during
particular times of the year. This could
decrease the excessive inventory problem and also allow the majority of the
inventory to be shipped at one time. Even
though decreasing production schedules leads automobile firms to laying off
employees and creating more seasonal and part time positions, it will be a
required act so that production organization can insure money is not lost
through excess inventory, thus opportunity cost, and possibly damaged inventory
that is not stored in originally designated inventory locations. Rail road
agencies could also develop a line that is exclusively used for automobile
transport; although this will likely increase the cost of locomotive
transportation for the auto industry.
REFERENCE
.bloomberg.com/news/articles/2015-03-03/buffett-rail-car-shortage-has-toyota-parking-suvs”>http://www.bloomberg.com/news/articles/2015-03-03/buffett-rail-car-shortage-has-toyota-parking-suvs
.bnsf.com/about-bnsf/”>http://www.bnsf.com/about-bnsf/