Background and Challenge
A leading agricultural logistics provider faced an increasingly competitive environment, including new domestic and international rivals, a shifting political climate and a carryover of suboptimal contracts from the recent economic recession. A key challenge for the client, an incumbent owner of the majority of Australia’s grain storage and logistics network, was making sense of the country’s diverse and rapidly changing grain and rail landscape. Over the past decade, decreasing costs of road transport and on-farm storage had eroded the client’s business and value proposition. How could the client widen the cost gap between over road hauling and rail transport, its bread and butter?
Approach and Recommendations
L.E.K. set out to develop an optimized network blueprint to decrease costs and maintain price competitiveness while increasing internal margins and volume capacity. Our approach looked beyond short-term wins to create a long-term (10+ year) blueprint for the entirety of the client’s rail operations. We started from the ground up, engaging with the client at all stages, to produce a complete and collaborative plan. This plan included the development of a consensus on service philosophies and general rules of the game, as well as benchmarking current practices. Next, we developed a robust analysis of rail and road operating economics with a dynamic P&L model, including standard operating metrics and costs, as well as infrastructure considerations. We worked closely with the client to ensure that government priorities and outlooks were considered to inform future decision-making. Finally, we developed an optimized network and cost analysis was developed that centered on:
- Site rationalization: investigating and assessing a move to a simpler network with fewer country storage & handling sites
- Rail connection rationalization: investigating and assessing a move to a simpler network with a smaller number of sites directly connected to the rail network
- Rail model: identifying opportunities to improve the efficiency of hauling grain from country to port through changes in the overall operational model
- Rail operator economics: providing initial input to the client’s preparation for forthcoming rail operator negotiations by estimating the margin that existing operators were making on services provided to the client and testing the viability of the client operating part of the services themselves
Looking beyond the network plan, we conducted workshops with the client to define an implementation strategy and engagement plan. The plan was detailed enough to address all stakeholders, e.g., state governments, regulators and rail operators, but still flexible to allow freedom in implementation.
Upon completion, the client had a clear blueprint for the operational changes and infrastructure investments they should make. There was widespread understanding of and support for the blueprint amongst the client’s executive team, as the identified efficiencies gave them the opportunity to improve the company’s margin, increase its capacity, and re-invest in rates to improve its competitiveness and drive greater volumes. Our modeling tool helped the client optimize its approach to rail haulage on an on-going basis.