Getting the Most Out of Your Assets: Railroads and Trucks

Asset utilization measures management’s ability to make the best use of assets to generate revenue (Source: www.bdc.ca, others). After all, assets are (very) broadly defined as things you use to make money. Some companies require a large investment in assets- a railroad is a good example. One way to recover that large cash investment is to use the assets to generate revenue. Eventually, that revenue is converted to cash.

A recent Wall Street Journal article discussed a trend in shipping toward railroads and away from trucks (“Boom Time on the Rails: Railroad Capacity, Spending Soar” 3/26/13).

Why companies are shifting to railroads:

·            Energy Growth: Shale-related crude oil is growing. Fortunately for railroads, many of their existing rail lines run through areas of the Northern Plains where the crude oil is being mined. Why not just use the available rail capacity for shipping?

·            Fuel Use: The article explained that a typical railroad can move a 1 ton shipment 500 miles for one gallon of fuel. That makes the railroad 3 to 4 times more efficient than using trucks.

·            Improved Reliability: Railroads, according to the article, are overcoming problems with reliability. A business owner needs a shipping company that’s reliable- one that gets the goods to the destination on time. If not, the business owner will have an upset customer. That may mean less business in the future.

Factors that affect asset utilization:

You can image that buying rail cars and engines is an expensive and risky proposition. Several sources reported an average replacement cost for a railcar of $88,000 to $100,000. So, if you buy a railcar, you need to maximize its use to make money!

I went to Union Pacific Railroad’s 2013 10-K and found some interesting statistics that the firm uses to measure asset utilization:

·            Average train speed: The firm reported a 2012 average train speed of 26.2 MPH. The speed was up 4% from the prior year. OK- the faster the train gets to the destination, the quicker that the railcar can be unloaded. At that point, the railroad has completed their service- and can get paid. Even better: The faster you unload the railcar, the sooner you can load it again.

·            Average terminal dwelling: This term refers to the length of time that a railcar is sitting in the terminal. In other words, how long is the asset (the railcar) sitting idle- or in the process of being loaded or unloaded. The 2012 Annual Report reported an average time of 26.2 hours- the same average time as the prior year (yes- both stats happen to be 26.2....). Union pacific explained that their railcars carried larger loads in recent years. The larger load meant more time in the terminal to fill the railcar. More business- but more time to load.

When you’re kicking around asset utilization, consider the railcar example: how much time is the railcar out on the tracks carrying a product for a client?

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Ken Boyd

St. Louis Test Preparation

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