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BURLINGTON NORTHERNTHE ARES DECISION Background The purpose of this report is to identify Burlington Northern's key issues, analyze the situation, and recommend actions regarding the Information Technology System, Advanced Railroad Electronics System (ARES), Burlington Northern is considering implementing. Burlington Northern Railroad was formed in 1970 by merging four different companies. Burlington Northern has seven business segments consisting of: Coal, Agriculture, Industrial Products, Intermodal, Forest Products, Food and Consumer, and Automotive. In addition to its vast rail system, the company owns substantial natural resources, including extensive land holdings containing mineral, timber and oil and gas. By 1989, up to 800 trains per day ran on BN routes.
BN has revenues of $ 4, 606 million, net income of $ 242 million, and total assets of $ 6, 146. In 1989 s capital expenditures were $ 465 million. Burlington Northern's biggest source of revenue, approximately 1 / 3 its of total revenue, is Coal. Ninety percent of revenue from coal is generated in Powder River Basin, Montana and Wyoming, Agricultural commodities -primarily grain, Industrial products, generate the second largest revenue stream, followed by Intermodal, Forecast products, Food and Consumer and Automotive. The companys headquarters in Ft. Worth, Texas houses senior management and the Finance, Strategic Planning, Marketing, and labor relations functional groups.
The Operations Department, the largest department overseeing Operating Divisions (train dispatchers, operators, and their supervisors, research and development, engineering, and maintenance) is located in Overland Park, Kansas. Corporate staff functions, such as Information System Services, are located in St. Paul, Minnesota. Background on ARES The ARES program started in 1981 when BN was searching for ways to lower costs and improve fuel efficiency for trains. This idea led a collaboration between Collins Air Transport, a division of Rockwell Intl, and BN to see whether aircraft technology could be applied to the rail industry.
The project was funded in 1985. By 1986, ARES had become a full-blown project. Since ARES showed the potential to add value to BN by integrating control, communications and information in a locomotive, a team was formed consisting of dispatching, mechanical, maintenance-of-way, control systems and communication, freight car management, and information system services. In 1990, the ARES team proposed the implementation of the ARES system to Burlington Northern's senior executives. ARES capital requirement is $ 350 million and it has been under consideration for 9 years. The ARES team tested the ARES software prototype at Iron Range a closed loop system since 1987.
The prototype has shown that greater efficiencies were possible yielding better asset utilization and reduced costs. By the time the ARES prototype ran, the composition of BNs corporate management had significantly changed from that which had authorized earlier phases. Because the current senior management did not authorize and support the choices that had guided ARES development, there are concerns about the financial requirements of ARES and BNs financial position, and the companys recent restructuring and high level of debt. Senior Management was also not sure if an old company that is used to doing business the old way is ready to make an easy transition into a high tech system. To ensure the ARES team was not making a recommendation because the members were too close to the project and were no longer objective, Burlington Northern hired an outside consultant to study the benefits, technologies of this project and to determine whether ARES can be unbundled and implemented separately. The companys objective is to transform itself into a customer-oriented company by reducing cost, preventing accidents, enhancing revenues and staying ahead of the competition.
Management believes that this objective can be realized by better asset utilization and providing better customer service. The most important issue was whether ARES could help BN meet these objectives. A significant issue is whether BN can justify the capital requirement of $ 350 million to implement. ARES is not expected to generate cash flows until 1996.
BN has been trying to reduce its debt-to-total-capital ratio of 76 % by accelerating its debt payment, leaving the company with tight funds. As a result, BN is not in a strong position to raise capital easily and does not have enough money in retained earnings. However, to continue to utilize a system that is over a hundred years old, while other technologies are available that could help the company meet its objectives is detrimental. In 1989 the company spent $ 465 million in capital expenditures consisting of; $ 297 million in railroad, $ 154 million in equipment, and $ 14 million in other areas. Although detail information showing how this money was spent is not available, it appears that BN spent over 40 % of its capital expenditure on Roadway.
Part of this expenditure is assumed to be spent on replacement of railroad or maintenance, which could be reduced, with the implementation of the new technology. On the other hand, being the front runner in technology is not always the answer. This technology could be available to others within years at a much cheaper cost and in a tested environment. What BN needs to do is figure out what part of the ARES system is most important to BNs overall success. The decision to implement ARES should also be assessed as it relates to opportunity cost of not implementing ARES, and also the opportunity cost of $ 350 million capital required to implement ARES. BN can certainly find other places to spend or invest the $ 350 million dollars and gain favorably, however, the opportunity cost of not investing now in a technologically driven global economy can be costly in the future.
BN may eventually be forced out of business because of inefficient and ineffective technology. According to the consultants studies of ARES benefits source, it is likely that a some portion of current and future expenditure could be reduced with the implementation of a system that will help measure and inform management inefficiencies in its asset utilization and better information on customers and competitors. Existing Segments The Automotive segment yields the highest profit for BN, followed by Food and Consumer food parts for various finished products industries and Forest products. BN can earn even more profit by making these two segments more efficient as a result of modern technology. Coal is the companys main revenue generator.
Ninety percent (90 %) of the coal carried by BN originates from Powder Basin, Montana. Coal also has the highest growth potential. If the U. S. government enacted anticipated acid rain legislation, demand for the Powder River Basins low-sulfur coal is expected to increase substantially. Coal also holds the greatest potential for export to Japan and other Pacific Rim nations from the west coast ports served by BN.
Coal with its single-track line has no excess capacity compared to competitors such as UP heavy-duty double track. upgrading this facility and eliminating the existing bottlenecks can turn this high revenue-generating sector into a large profit center. Agricultural commodities, primarily grain are BNs second revenue generator. Although demand is cyclical, the certificate of transportation program is helping with the scheduling of grain delivery in the future.
This is a segment of BN which is also expected to grow because of global economic growth and one which could also benefit from an updated, more reliable rail transportation system. KEY ISSUE: Should BN implement ARES? Meets and Passes: Meets and Passes describes the points where two trains meet on a single track with one of them directed off to a siding to make way for the other train. BN appears to have no control over this procedure. As many as 10, 000 meets and passes occur every day. BN can certainly benefit from improved scheduling to prevent idle trains waiting for others to pass.
A technology that will help substantially reduce this waste of time and fuel is highly desirable. Scheduling: IT technology could greatly expedite the scheduling from the current 20 - 30 trains per shift. Today, schedulers are dedicated to intermodal and merchandise traffic, giving disproportionately less attention to the companys two largest revenue generators, coal and grain. This is a problem area which an definitely be eliminated by ARES technology.
ARES can help dispatchers not only increase their efficiency but also enable them to share information with other sectors of the company, furthering better coordination of vehicle and product movements. Maintenance-of-way (MOW): Another weak system in BNs current operations is the current MOW crew. Being unable to predict the exact arrival time of trains, wastes a tremendous amount of time and money. In addition, clearing off workers much sooner than the time the train is predicted to arrive, time spent on establishing radio frequencies with trains, physically getting out of the train to inspect fuel gauge, and finally having no knowledge of when a train needs service or repair until it actually breaks down is an inefficient and costly system, which leads to several problems. We venture to say that part of the 1989 capital expenditure of $ 297 million spent on Roadway is partly the result of the inefficiency of the current system. COMPENSATION AND BENEFITS: The most recent financial data shows that approximately 1 / 3 of BNs costs and expenses are spent on compensation and benefits to employees.
Technology offers an incredible opportunity for reduction of manpower. Automating the complete system of BN will reduce the total required number of employees and offer the company additional savings. For example: collecting data manually, checking fuel gauge manually, time spent by schedulers communicating with other trains, and visually inspecting train arrival times by schedulers are some of the areas BN can improve in manpower efficiency by automating its system. BNS OPTIONS: 1) Partner with others to share costs and benefits: BN can attempt to find a partner (s) that will share the costs and also share in the foreseeable benefits from ARES.
This partner could be in the same industry or different industry but should not be a direct competitor of BN. For example: BN could find a partner that is in the railroad business but not competing in the same geographies or transporting people or cattle and other products that are different from BNs current segments. This is one way BN can shield itself from further loss of revenue if the expected benefits are unobtainable. Partnering is also beneficial if BN does not or can not solely invest in the software development. However, if BN to develop its own software, it must make sure that it is easily upgradeable. 2) Most Beneficial Applications of ARES BNs biggest inefficiencies are with its Meets and Passes, MOW, Schedulers, and Maintenance of its trains. BN is going to implement Data Link (Wayside Communication) regardless of ARES.
On-Board equipment, which consists of MOW, LARS and Energy Management System, appears to be a technology which BN can implement to improve many inefficiencies in its current system. The highest cost, Control Center (software development) is something BN can attempt to outsource or share the cost with a partner to develop the broad features of the software, but separately fine-tune the software in its own applications. However, the issue of sharing information with a partner or outsourcing poses a problem of security, which must be properly managed to protect the competitive edge ARES can provide. There may also be emerging benefits that BN can not see which will occur during the implementation of the ARES. For example: The ease and functionality of this system may produce additional savings by identifying unnecessary manpower currently used to run a stable and redundant system. BN may also decide to centralize its IT department to further cut down on administrative costs.
These and others are benefits, which companies usually can not foresee until a new system is implemented and well established. If BN wants to keep these unforeseeable benefits exclusively for itself, it should forgo a railway partner for this project. Implement ARES as is: ARES is a sophisticated system, which will no doubt improve BNs efficiencies. However, because of its high cost, untested market, the fast pace of changes in technology and uncertain future revenue, BN will be taking high risk by spending a lot of money on capital budgeting unless it can divert some of the annual expenses it currently spends on known quantities such as: roadway, equipment and other unnecessary cost currently spent on manpower, meets and passes and, MOW, unscheduled maintenance etc. , However, with a high risk is also a corresponding opportunity for high reward in gaining a technology no one else has. Not implementing the complete ARES system also has drawbacks such as: missing out on more opportunities to improve competitiveness, maximize efficiencies and also gain competitive edge in the industry. Another importance of great significance to implement complete ARES system is to protect its complete IT system from being copied by others.
RECOMMENDATIONS: We highly recommend that Burlington Northern implement the complete ARES system. The decision to implement ARES is a strategic decision to the growth and / or survival of BN. In an economy where competition is fierce and modern technology is available to obtain information on customers, competition, asset utilization and future business outlook, BN can not afford to continue using century old techniques of running railroads. However, transforming BN from a company that was oblivious to new technology one to a completely new IT system complete with an integrated command, control, communication and information system is quite a drastic move. Improvements to existing Meets and Passes system, MOW vehicles, dispatching and the LARS system is critical to the companys ability to reduce cost. The development of the software internally, implementation of Data Link and On-Board Equipment will give BN a competitive edge that will put the company ahead of competition.
In addition, BN can be expected to reduce its annual capital costs on roadway and equipment on a long-term basis when IT can accurately predict and schedule equipment replacement and maintenance schedule. Therefore, we recommend implementing ARES completely despite the fact that BNs operational leverage will increase in the short-run, followed by high risk. However, management must be aware that implementing a complete IT system or new IT system in an old fashion company is not an easy matter. Extra care should be taken to train employees and encourage their participation in maximizing the new opportunities created by this system and abstain from enforcing rigid policies and company rules that are often hinder complete employee cooperation.
BN should also protect the security of the system from competitors, and upgrade the systems as needs arise to maintain the companys competitive edge for the future.
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