railway demand forecasting and service planning processes

8/3/2019 Railway Demand Forecasting and Service Planning Processes

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March 2010

Railway Demand Forecasting

and Service Planning Processes

Prepared for: Rail Freight Service

Review


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March 2010

2 | QGI ConsultingRailway Demand Forecasting and Service Planning Processes

TableofContents1. Purpose of the Project ................................................................................................................................. 4

2. General Approach ....................................................................................................................................... 5

3. Demand Forecasting ................................................................................................................................... 6

3.1 Long Term Demand Planning .............................................................................................................6

3.2 Annual Demand Planning ...................................................................................................................7

3.2.1 CN Annual Planning Process .............................................................................................. 7

3.2.2 CP Annual Planning Process............................................................................................. 12

3.3.3 Revenue and Capital Expenditure Planning ......................................................................... 13

3.2.4

Challenges ............................................................................................................................ 14

4. Service and Asset Planning ...................................................................................................................... 17

4.1 CN Annual Service and Asset Planning ...........................................................................................17

4.1.1 Rail Car Fleet Planning ......................................................................................................... 17

4.1.2 Service Design Planning ....................................................................................................... 19

4.1.3 Locomotive Planning ............................................................................................................ 20

4.1.4 Train Crew Planning ............................................................................................................. 21

4.2 CP Annual Service and Asset Planning ...........................................................................................21

4.2.1 Operational Demand Planning.............................................................................................. 21

4.2.2 Supply Planning .................................................................................................................... 22

4.3 Annual Service and Asset Planning Challenges ..............................................................................23

4.4 Short Term Planning and Asset Management..................................................................................23

4.4.1 CN Short Term Planning Processes ..................................................................................... 24

4.4.2

CP Short Term Planning Processes ..................................................................................... 26

5. Summary ................................................................................................................................................... 28


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|3QGI ConsultingRailway Demand Forecasting and Service Planning Processes


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1. PurposeoftheProjectOnMay30,2007,theGovernmentofCanadaannouncedtheintroductionofaBill,whichcontainedimprovementsto

theshipper

protection

provisions

of

the

Canada TransportationAct. The announcement also indicated that the

governmentwouldundertakeareviewofrailfreightservice.

Theoverallobjectivesofthisreviewareto:

Conduct a review of the railbased logistics chain (including shippers, terminal operators, ports, and

vessels),witha focuson serviceprovided toCanadian shippersand customersbyCanadianNational

Railways(CN)andCanadianPacificRailway(CP)withinCanada,includingtoandfromportsandborder

crossings;

Identify problems and issues with respect to railway service including those stemming from other

elementsofthelogisticschain;

Forshipperslocatedonshortlinesandexperiencingproblemswithrailservice,examinetherelationship

betweenshortlinesandthemain linecarrierstodeterminewhethersuchproblemsareattributableto

service,operating,ormarketingpracticesofthemainlinecarriers;

Identifybestpracticesandhowthesecanbeexpandedtoaddressserviceissues;and

Makerecommendationsonhowtoaddresstheseproblemsandissues,includingbothcommercialand,

ifnecessary,regulatorysolutions.

The review isbeing conducted in two stages. The first stage consistsofquantitative and analyticalwork. In the

secondstage,

draft

recommendations

are

being

developed

by

aPanel

of

three

eminent

persons

based

on

the

results

oftheanalyticalphaseandanyotherrelevantinformationthatisavailable.ThePanelwillconsultstakeholdersonthe

draftrecommendationsandsubmitafinalreporttotheMinisterofTransport,InfrastructureandCommunities.

OnJuly24,2008TransportCanadareleasedthetermsofreferenceforthequantitativeandanalyticalstageoftherail

freightservicereview. Thisreporthasbeenprepared inresponsetotherequirementsoftheRequestforProposals

(RFP)covering thedescriptionof railwaydemand forecastingandserviceplanningprocesses. Theobjectiveof this

reportistoprovideacomprehensivedescriptionofhowrailwaysforecastdemand,howandtowhatextentrailways

interfacewiththeircustomersindevelopingtheirdemandprojections,andhowdemandprojectionsaretransformed

into

railway

service

and

asset

plans.

This

report

also

describes

the

railways

ongoing

short

term

planning

and

management activities as they manage the asset and service plans developed through these annual planning

processes.


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2. GeneralApproachThe railwayplanningprocessesdescribed in this reportarebasedonextensive interviewswithCNandCP subject

matter experts directly involved in and responsible for the development of the railwaysdemand forecasting and

service planning processes. QGI has also relied on the experience and background of the team members that

participatedintheinterviewsandpreparedthisreport.

Prior toconducting the interviewsQGIprovidedCNandCPwithadiscussiondocument that identified the specific

topicstobediscussedforeachelementoftheplanningprocess. Keytopicsofdiscussionincludedthefollowing:

DemandForecasting1. MediumtoLongtermplanningprocess(annualand35yearsout)

a. Howcustomerdemandinformationiscollectedandusedinthebroaderplanningprocess

i. Keychallenges

associated

with

collecting

and

inputting

customer

demand

projections

into

overall

process

ii. Differencesincustomer/marketinputsacrossbusinesslinesandbyshippersize

iii. Systemsusedtocaptureandanalyzedemand

iv. Demandforecastingunitsusede.g.tons,cars,containers,etc.

b. Key noncustomer factors accounted for in demand planning and process for balancing between

customerstateddemandandwhatendsupinthefinalplan

2. Shorttermdemandforecastingandplanmanagement(monthlyandquarterly)

a. Periodicdemandadjustments

i. Keyfactorsthatdrivechangestointernaldemandforecastplanningduringthecourseofayear

ii. Frequencyofadjustments

iii. Nature of ongoing customer dialogue with respect to shifts in demand due to: seasonal factors,

changesinmarketconditions(demandsurgeorreduction),changesresultingfromdisruptions

iv. Processforcommunicationofshorttermchangesindemandtooperatingdepartments

b. ForecastPerformanceMeasurement

i. Natureandfrequencyofexistingmeasurements

ii. Mechanismsforprovidingcustomerswithfeedbackonaccuracyoftheirprojecteddemand

c. Demandforecastingoutputs

i. Structureofoutputs(majorflows(corridors),origindestinationdemandforecasts,etc)

ii. Internalusersofdemandforecastinformationandforwhatpurpose

d. Keyrailwaychallengesindevelopmentofshortandlongtermdemandforecasts

NetworkandAssetPlanningIssues1. HowMarketingdemandforecastisusedforassetplanningfor:trainservice,crews,locomotives,railcarfleetsand

trackcapacity

2. Foreach/alloftheaboveassetplanningprocesses:

a. Definitionofplanningcycle

b. Systemsormodelsused

c. Processesforcommunicatinggapsinsupply/demandinternallyandexternally

d. Significantchallenges


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3. DemandForecastingManyrailwayplanningprocessesincludingfinancial,asset,capitalinvestmentandserviceplanningarepredicatedon

therailways

estimate

of

the

freight

volumes

(demand)

to

be

handled

within

agiven

time

period.

For

this

information

tobemeaningfulandsupporttherailwaysplanningprocessesdemandforecastsmustnotonlyprovideanestimateof

thetotalvolumesbutalsoidentifythecommodities,timing,and theoriginsanddestinationsofthetraffic. Theability

toviewandanalyzedemandacrosseachofthesedimensionsallowstherailwaystoplanthetypeandfrequencyof

trainservice,assetrequirementsincludinglocomotives,freightcarsandtraincrewsandtounderstandthedistribution

oftrafficacrosstheirnetworks.Eachoftheseviewswillprovidethenecessary information toallowthe railwaysto

identify potential capacity constraints and develop strategies to address them. Depending on the nature of the

capacityconstrainttherailwaysstrategiesmayincludecapitalinvestmentintrackandortrafficmanagementsystems,

locomotivesorrailcars,shorttermleasingoffreightcarsandorlocomotives,changestotrainserviceorsmoothingof

demandpeaksthroughcapacitymanagement. Theappropriatestrategiestobeemployedwillbe influencedbythe

typeofconstraint,itsdurationandwhereitisexpectedtooccurinthenetwork.

Each year CN and CP create demand forecasts usingmultiple planning horizons. While the development of the

railwaysannualplans isaprincipalfocusoftheirplanningactivitiestheyalsodevelopmultiyeardemandoutlooks

CNpreparesafiveyearplanandCPpreparesafouryearplan. Furthermorerailwayplanningactivitiesdonotbegin

andendwiththeannualplanningprocess. Theobjectiveoftheannualdemandplanningprocess istoestablishthe

bestviewpossibleoftrafficexpectationsandtodefinetheappropriateserviceandassetplansnecessarytohandle

thesevolumes. ThroughoutthecourseoftheyearbothCNandCPcontinuetodoshorttermtacticalplanningona

monthlyandquarterlybasistorespondtochangesindemandbycontinuallyrevisitingassetandoperatingplans.

ThisreportdescribeshowCNandCPdeveloptheirdemandforecastsacrossthedifferentplanninghorizons. Thiswill

include:howcustomerdemandinformationiscollectedandused,thekeynoncustomerfactorsconsidered,andthe

processforbalancingbetweencustomersstateddemandandthefinaldemandprojections included intherailways

plans.Finally,thereportwilldescribehowtheinformationisusedbytherailwaysforassetandserviceplanning.

3.1 LongTermDemandPlanningMedium

to

long

term

planning

activities

at

CN

and

CP

provide

the

railways

with

ahighly

aggregated

view

of

demand

to

allowthem to identifypotential futurechanges inkeymarketsthatmayalterhistoricaltrafficpatternsandvolume

expectations. Thesedemandprojectionsalsoprovideimportantdataforthedevelopmentofmultiyearforecastsof

financialperformance. The long leadtimesassociatedwithcapital investment in therail industryrequire themto

developmultiyear investment plans for asset renewal and expansionwith respect to rail cars, locomotives, track

infrastructureandtraincrews.


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CNCNs fiveyearplan isdevelopedeachyearaspartof itsannualplanningcycle. Theplan isbasedon thedetailed

demand forecastand revenueplan for thecomingyearand isadjustedusinga topdownapproach toaccount for

mediumto

long

term

macroeconomic

assumptions

and

known

market

issues

of

significance.

Key

macroeconomic

assumptions included in the long rangeoutlookwill include international,nationaland regionaleconomicandGDP

outlooks,currencyexchangeratesandglobalcommodityforecastsforthosecommoditieshandledbyCN.

Theplanisalsoadjustedtoreflectsignificantmarketissuesthatareseentohaveareasonableprobabilityofoccurring

withinthe5yearplanninghorizon. Thiswould include itemssuchasnewplantstartups,expansionsorshutdowns

andmineopeningsorclosures. Finallyfromafinancialplanningperspectivetherailwaywillfactorinitsassumptions

forannualpricingyieldthatisachievablethroughrateincreases.

CPAspartofitsannualplanningcycleCPdevelopsafouryearplan. Thisplanningexerciseisfocusedoneighty(80)key

markets e.g. Canadian grain exports via Vancouver. Much like CN, CP beginswith its base year forecast then

calibrates its plan to factor in macroeconomic assumptions such as GDP projections as well as industry specific

forecasts from independent sources. Macroeconomic data and forecasts are drawn from independent sources

includingthemajorbanksandeconomicandforecastingorganizationssuchasIHSGlobalInsight.

KeyindustryinputsincludevolumeforecastsproducedbyCanadasmajorportsforimportexporttrafficandindustry

specific production and sales forecasts such as for the automobile industry. In addition the railwaywill factor in

significantmarketeventssuchasplantclosuresorexpansions.

3.2 AnnualDemandPlanningTherailwaysannualplanningprocessesincludethedevelopmentofdetailedplansforrevenuesandexpenses,freight

carandlocomotivefleetsizing,crews,trainservicesandcapitalinvestmentplanning. Thefoundationforeachofthese

planningprocessesisthedevelopmentoftheannualdemandorvolumeforecastforeachcalendaryear.

3.2.1 CNAnnualPlanningProcessCNsannualplanningprocessbeginsinmidsummerwithatargetofmidfallforcompletion. Whilethefinaldemand

forecast results from the combination of bottom up and top down planning itbeginswith the development of a

detailedbottomupdemandplan.

Theobjectiveofthebottomupplanningprocess istodevelopadetailedandquantifiedviewofthetrafficvolumes

thatareexpectedtobehandledbytherailwayinthecomingyear. Forplanningpurposesdemandwillbeexpressed

differentlydependingonthelineofbusiness. AtCN,withtheexceptionofIntermodal,theprincipalunitofdemand


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forecast iscarloads. Fortherailwaysdomestic Intermodalbusinessdemand isexpressed incontainerunitsandfor

importexporttrafficastwentyfootequivalentcontainerunits(TEUs).

Therearethreeprincipaltypesofinputstothedemandforecastingprocess. Theinitialorbaseplanisgeneratedusing

acombinationofthemostrecenthistoricaland forecast informationavailable. Specificallythestartingpoint isthe

currentyearsexperiencewhichreflectssomesixmonthsofactualperformanceandthemostcurrentforecastforthe

remainingmonthsoftheyear. Thesecondprincipalinputconsistsofdemandinformationgatheredfromtherailways

customers including any significant issues such as permanent or temporary plant closures, expansions, shifts in

destinationmarketsandseasonal fluctuations involumes. Finallytherailwaywillapply itsownmarket intelligence

includingmarketshareassumptionsforindividualcustomers,marketforecastsforselectedcommoditiesandindustry

sectorsandmacroeconomicforecasts.

BaseYearForecastThe

railways

demand

forecasting

process

should

be

thought

of

as

an

exception

based

planning

process.

Given

the

breadthandcomplexityofCNsmarketitisnotpracticaltoattempttodevelopdetaileddemandforecastsforeachof

itsmorethan2500shippers,roughly150commoditiesand13,000origindestinationpairs.1 Atanaggregatelevela

significant portion of the railways traffic base remains relatively stable from year to year. It is thereforemore

practical for theseplanningactivities to focusonhowvolumesareexpected todiffer frompriorexperience rather

thantryingtoconstructanewforecasteachyearfromthegroundup. Thebeginningpointisthereforeadetailedbase

forecastconstructedfromrecenthistorythat issubsequentlyvalidatedthroughdirectcustomerdiscussionsandthe

analysisofcommoditymarketandmacroeconomicforecasts.

CN

uses

a

centralized

demand

forecasting

system

that

is

detailed

and

hierarchical

in

structure.

At

the

highest

level

of

aggregation itprovidesaviewoftotalsystemdemandbymonthfortheplanningperiod. Italsoprovidesintegrated

viewsoftherevenueprojectionsassociatedwithprojecteddemand. Underlyingthisaggregatedviewareincreasingly

detailedviewsthatsegmentmonthlydemandacrossanumberofdimensions including lineofbusiness,commodity

andcommoditysubgroupwithineachbusinessunit,networkcorridorandultimatelybycustomer.

1Canadian originated traffic for calendar year 2007 as provided by CN for the development of a representative sample for transit time

performance measurement.


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Figure1 IllustrativeSchematicofCNDemandForecastingSystem

Forecast informationcanbe inputatany levelofdetailandtheplanningsystemwillautomaticallyaggregateupor

disaggregatedown. Disaggregationof forecastdata to the lowest levelofdetail isdoneon thebasisofhistorical

trafficmovements.Detailed traffic forecasts, including thoseat the individual customer level,can subsequentlybe

adjustedmanuallytointroducemorecurrentcustomerormarketinformation.

CustomerInvolvementThe

principal

responsibility

for

customer

interaction

at

CN,

including

the

collection

of

demand

data,

rests

with

CNs

account managers that report through its Sales and Marketing organization. CN estimates that customers that

generate approximately 90% of its annual revenues have an accountmanager assigned to them and that 85% of

demandinputs,excludingregulatedgrainandIntermodaltraffic,canbedoneatanindividualcustomerlevel.2

2If regulated grain and intermodal traffic are included the company estimates that 70% of demand inputs are able to be done at the

individual customer level.

TotalSystemDemand

Forest

ProductsIntermodal

Petroleum

&Chemicals

Grain&

FertilizerCoal Automotive

Lumber&Panels

Metals&

Minerals

PaperProducts

Commodity1

Commodity2

Commodity3

Commodity4

Carloads Tons Revenues

Customer1

Origin1

Customer2

Origin2

The appropriate level of detail at which

to forecast traffic will depend on a

number of factors including the line of

business, volume of traffic for a given

custom er a nd t he di ver si ty of a

customers business including the

number of commodities shipped and the

number of origindestination pairs.

In some market segments such as grain it

is not necessarily meaningful to forecast

traffic volumes at a customer specific

level as where traffic will be shipped to

and from and by which grain companies

will be determined by both crop

production and export sales programs.

In instances such as this a forecast at the

commoditycorridor level using historical

movements and for wheat and barley

specifically adjusted to reflect forecast

export sales from the Canadian Wheat

Boa rd a re m or e mea ni ngful a nd

appropriate.

Destination1

Destination2


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DuringtheplanningperiodCNaccountmanagerswillmeetwiththeircustomerstodiscussdemandprojectionsforthe

comingyear. Thiscustomer interfaceprocess isbestcharacterizedas informalwiththenatureofthesediscussions

varying from customer to customer. Some shipperswill provide detailed forecast data on amonthly basis at a

commodity,origindestinationlevelthatcanbedirectlyinputtoCNsplanningprocess. Inothercasesdiscussionswith

customersare

less

formal

with

volume

outlooks

for

the

coming

year

discussed

in

general

terms

with

no

specific

data

necessarily provided by the customer. The information gathered from customers can then be input to CNs

centralized forecastingsystemonan individualcustomerbasisattheappropriate levelofdetail. Inmanycasesthe

informationgatheredfromcustomerswillbeusedtovalidatethebaseplandevelopedfromhistorywithadjustments

madetoreflectchangesinthetimingofshipments,specificcommoditiestobeshipped,andorigindestinationpairsas

appropriate.

AlthoughCNsplanning systemprovides thecapability toenterdemand forecastdataat thecustomercommodity

origindestination level for many customers entering data at this level will not be meaningful. This is because

forecastsat

this

level

are

now

predicting

both

the

behaviour

of

commodity

markets

and

the

market

share

of

individual

customers. Ithasbeentherailwaysexperiencethatthe levelofprecisionofsuchforecastsdiminisheswitheach

increasing level of detail and that downstream asset and service planning processes do not require this level of

precision.

There is no formal process for CN to communicate the results of its demand planning process back to individual

customers. Individualaccountmanagersmaydiscussbudgeteddemandwiththeircustomersalthoughthisprocess

isinformalatbest.

MarketReconciliationWhile account managers are responsible for gathering most customer information and inputting and validating

customer specific forecasts inCNsplanning system, the developmentof systemwide commodity and commodity

subgroupforecasts istheresponsibilityofmarketmanagerswithineachofCNsbusinessunits. Individualcustomer

forecasts are aggregated to the commodity levelwhere they are reconciled bymarketmanagers against broader

marketviewsforthosecommodities. Thisreconciliationprocess introducesmarketshareassumptionsfor individual

customers in some cases the sumof individualcustomermarket shareassumptionscanexceed totalanticipated

marketvolumesgiven theexpectedperformanceof themarketasawhole. For instance indevelopingdemand

forecastsfor lumberandpanelproductsamarketmanagerwouldlookatmarketforecastsforCanadianlumberand

panel exports to the United States (US) and projections for US housing starts using independent industry and

economic forecastingdata. OnceCN establishes the forecast for totalCanadian exportsof these commodities it

would thenweigh individual customer forecasts,historical traffic volumesand competitive factors toarrive at the

expectedvolumesfromeachmajorshipper.

Therelativeweightgiventoindividualcustomerforecastsascomparedtobroadermarketforecastswilldifferacross

individualrailwaybusinessunits. Intermodalandgrainforecastsfor instancewilltypicallyplaceagreateremphasis


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ontheexpectedperformanceofthetotalmarketasopposedtothespecificvolumesthatmightbeshippedbyanyone

customer. Projectedrailwayvolumesofcontainerizedimporttrafficthatconsistprincipallyofconsumerproductswill

be heavily influenced by the expected performance of the Canadian economy as awhole and in some instances

perhapstheexpectedperformanceofindividualprovincialeconomies. FordomesticIntermodaltrafficwhere85%of

volumesmovebetweenCNssevenlargestintermodalterminalsbuttrafficisgeneratedbymorethan1,000individual

shippersunderstanding forecastdemandata terminal level ismore importantandpractical than trying topredict

shipmentvolumesandpatternsforindividualcustomerswhenplanningassetandservicecapacity levels. Asnoted

earlier, forgrainshipments it isnotnecessarilymeaningfultoforecasttrafficvolumesatacustomeroriginspecific

level because volumes shipped by any individual grain company or processor from any given location will be

determinedbyregionalcropyieldsand inthecaseofwheatandbarleytheexportsalesprogramscontrolledbythe

CanadianWheatBoard.

TopDown

Planning

The topdown forecastingprocessdonebyCNsFinancialPlanninggroup isdesigned tovalidateandchallenge the

detailed planning assumptions used byMarketing. The topdown process uses the preliminarydemand forecasts

developed by Marketing and examines at an aggregate level the year over year growth projections as well as

developing trends or significant changes to historical shipment patterns. The plan is then validated against

independenteconomicandcommoditymarketforecaststotestforreasonableness. Thefinalvolumeforecasttobe

usedforcorporatebudgetingpurposesreflectsareconciliationofthebottomupandtopdownprocessesarrivedat

throughdiscussionbetweentheFinancialPlanningandMarketingdepartments.


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3.2.2 CPAnnualPlanningProcessCP,muchlikeCN,doesitsannualbusinessplanningbetweenAugustandOctobereachyear. CPsintegratedplanning

process isknownastheSalesandOperationsPlanningProcess. Thefirststep intheannualplanningprocess isthe

developmentofthecompanysdemandforecastforeachcalendaryear. Thisforecastisthefoundationforallother

components ofoperationalplanning through to ongoing planmanagement. Figure2below provides a high level

summaryofeachstepoftheplanningprocess.

Figure2 CPSalesandOperationsPlanningProcess

SalesForecastCPsmarketplace is similar to CNs withmore than 2500 shippersmoving more than 100 commodities between

approximately14,000origindestinationpairs.3 Forpractical reasonsCP, likeCN,alsouseshistorical volumesand

shipmentpatternstocreateitsbaseforecastpriortoincorporatingcustomerandmarketspecificinformationforthe

currentplanning

horizon.

Thedemand forecastingprocess looksatCPsthreeprincipal linesofbusiness Intermodal,bulkandmerchandise.

Forplanningpurposesthecompanywillforecastitsbusinessusingdifferentunitsofdemand,suchascarloadsortons,

dependingonthespecificbusinessunitormarketsegment. Theprincipal inputsto theSalesForecastingprocess

3Canadian originated traffic for calendar year 2007 as provided by CP for the development of a representative sample for transit time

performance measurement.

Sales

Forecast

DemandPlanning

Supply

Planning

Production

Planning

Production

Execution

PlanningProcess KeyActivities Outputs

Gathercustomerdemandforecasts

Reviewindependentmarketandeconomicforecasts

InputdemandoutlooktoRevenuePlanningSystem

Preliminaryviewofunconstrained demand

Carloads,tons,containers, etc.

Revenueprojections

Translationof

market

forecast

to

workload

forecast

Createoperationaldemandviewsforsupplyplanning

Corridorcapacityanalysis

Operationalworkload

units

Grosstonmiles,trainmiles,trainstarts

Potentialnetworkconstraints

Assetplanningandfleetsizing

Traindesignmodifications

Assetrequirements

Assetstrategiestomeetplanneddemand

Locomotives,crews,freightcars,traindesign

Production planningforservicedelivery Integratedoperatingplan

Serviceplan

execution

Monitoringandmeasurement

Tacticalplanmanagement

Performanceto

plan

metrics

Tacticalplanadjustments


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include customer specific demand information and independent market and economic forecasts. Once the

preliminarydetailedforecasthasbeendevelopeddemandvaluesareentered intoCPscentralizedrevenueplanning

system(RPS)atthecommoditycorridor level. Corridorsdefinetheorigindestinationcombinationsforthe forecast

trafficalthoughtheymaybedefinedatvaryinglevelsofdetaile.g.stationtostation,regiontoregion,etc. Thedata

enteredintotheRPSsystemsubsequentlydrivesdownstreamoperationalandfinancialplanningprocesses.

CustomerInvolvementAs noted earlier,withmore than2500 shippers across its Canadiannetwork that ship anywhere from one car to

250,000carseach,itisnotpracticalforCPtotryandengageallcustomersindemandplanningdiscussions. However,

thecompanydoeslooktohaveexplicitplanningdiscussionswithitslargestcustomersineachofitsmarketsegments.

CPhasestablishedathresholdof$1millioninannualrevenuestoidentifythecustomerswithwhomexplicitplanning

discussions are to be held annually as part of its sales forecasting process. It is estimated that this represents

approximately100

customers

across

all

lines

of

business.

These

100

customers

would

be

responsible

for

well

over

80% of CPs total annual freight volumes. Customer discussions are managed by CPs Marketing and Sales

department.

There is no formal process for CP to communicate the results of its demand planning process back to individual

customers. Individualmarketing representativesmay choose todiscuss budgeteddemandwith their customers

althoughthisprocessisinformalatbest.

MarketReconciliationThe

initial

view

of

forecast

demand

that

is

created

using

history

and

subsequently

adjusted

for

specific

customer

input

is thenvalidatedbyCPs individualmarketandcommoditysegmentgroups. Thisvalidationexercise relieson the

knowledgeandexperienceofCPsmarketingpersonnelandtheuseof independent industry,marketandeconomic

forecasts. Theobjectiveofthisprocessistodeterminewhatthecompanyexpectstohandleforagivencommodityor

marketsegmentandthenreflectthis in individualcustomerforecasts. Inmakingassumptionsregarding individual

customer volumes CP assesses the probability that an individual customer will achieve the level of traffic they

anticipategiven theexpectedperformanceof themarketasawhole. Thevalidatedplanbecomes thepreliminary

viewofdemandthatisusedastheprincipalinputtodownstreamoperatingandfinancialplanningprocesses.

3.3.3 RevenueandCapitalExpenditurePlanningRevenuePlanningThe demand forecast establishes the basis for the development of the railways revenue projections. Revenue

budgetsforbothrailwaysareessentiallydevelopedbyapplyingfreightratesperunitofdemand(carloads,intermodal

units,tons)againstforecastdemand. Estimatedrateswill,dependingonthe levelatwhichtheyareappliedagainst

demand, consistofeither rates fora specific customercommodityorigindestination forecastorweightedaverage


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rates incaseswhererevenuesareestimatedagainstamoreaggregateddemandforecast. Revenueprojectionswill

also incorporate the companies yield strategies and targets for revenue growth established by their respective

executiveteams. Theseyield,orpricing,strategiesmusttakeintoaccounttherailwayscompetitivestrategiesversus

theirdirect railand indirectmodal competitors. Railwaypricing strategieswillalsoneed to reflect theexpected

financialperformance

of

their

key

customers

and

the

effect

of

freight

rates

on

their

customers

competitiveness

in

the

customersfinalmarketsparticularlyinmarketswheremarketandproductcompetitionareimportantfactors.4

CapitalExpenditurePlanningPrincipal areas of railway capital investment include track infrastructure, rail cars, locomotives, facilities and

information systems. These investments aremade to achieve a range of corporate objectives including safety of

operations,marketgrowthandoperationalefficiencyorproductivity.

Therailwaymarketingorganizationsprincipal involvementwithcapital investmentplanningrelatesto investment in

freight

cars,

containers

and

customer

facilities

such

as

commodity

trans

load

facilities,

to

support

revenue

growth.

For

investmentssuchasthesethevolumeoftrafficandrelatedrisksaswellastheassociatedrevenuesandprofitability

arekey inputstothe internalbusinesscasesdevelopedwhenseekingcapitalexpenditureauthority. ForOperations

departments, capital expenditure planning activities focus primarily on investments in basic plant renewal and

expansionincludingtrackinfrastructureandtrafficcontrolsystems,locomotives,railwayfacilitiesincludingyardsand

repairshops. Theseinvestmentswillbemadetomaintainandenhancesafetyofoperations,improveproductivityof

operationsandthusreduceoperatingcostsortoexpandnetworkcapacity. Allthese investmentstendtobemulti

yearprogramsalthough forecasteddemandcan influence the timingof these investmentsbasedonshifting traffic

patternsthatmayresult incapacityconstraintsorcapacitysurplus inspecificpartsofthenetwork. Wheresurplus

capacityisforecastinthenetwork,therailwaycanpursuestrategiestosalvagetrackortrackmaterialsfromsidingsor

main track and in themost extreme examples of surplus capacity they can pursue rail line sale or abandonment

strategies.

3.2.4 ChallengesAs was noted in QGIs report on stakeholder operating practices5 supply chain planning requires stakeholder

collaborationwithrespecttodemand forecastingandcapacityplanning. Whileshippershaveexpressedtheview

thattheybelieverailwaydemandforecastsdonotalwaysreflectthetruedemandtheycommunicatetotherailways

therailwaysarguethattheymustweightheinputofshippersagainsttheexpectedperformanceofbroadermarkets

andconsiderpotentialvolatility indemandwhenplanningcapacityandassets inordertomanagethefinancialrisks

4For more discussion of the dynamics of railway competition see: Description of Canadas Rail Based Freight Logistics System.

QGI Consulting. November 2009. pp 56-635Analysis of Operating Practices: Key Issues from Stakeholder Interviews Potential System-wide Solutions, QGI Consulting October

2009.


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March 2010


associatedwiththese investmentsandensureacommercialreturnwillbeachievedoverthe lifeofthe investments

beingconsidered.

QGIsinterviewswithrailwayrepresentativesrevealedthatmanybelievethatsomeoftheircustomershavedifficulty

providingaccurate

medium

to

longer

term

demand

forecasts.

Railway

staff

identified

many

reasons

for

this

including:

inefficienciesincustomerslogisticsmanagementprocesses;

unrealisticorinaccuratemarketforecastsandmarketshareprojections;and

anunwillingnessofcustomerstorevealtheirownmarketingprojections.

Inparticular railway representatives indicated that theybelieved that shippersoftenhadmore accurate forecasts

available within their own organizations but that railway representatives simply were not able to access this

informationthroughtheirregularcontactsintheshippersorganizations. Somerailwayrepresentativesalsobelieve

thatcustomers

may

have

an

incentive

in

certain

situations

to

inflate

their

traffic

volume

forecasts

in

order

to

ensure

thatrailwayinvestmentwillbemadeatlevelsexceedingdemand,inordertoensureshipperaccesstocapacityduring

timesofconstraintduetohighdemand forcustomersproductsorduetooperatingdisruptionthat limitsavailable

transportationcapacity.

In addition, the timingof annual railwayplanning activities is, inmany cases,notalignedwith the timingof their

customers internalplanningactivities. WhereasCNandCP look tobeginplanning for thecomingyearearly inQ3

many of their customers planning activities do not begin until early ormid fall, about the time the railways are

targetingtocompletetheirplanning.

Atan

aggregate

level

railway

forecasts

of

demand

are

accurate

within

approximately

10%

over

the

course

of

ayear.6

Anadditionalchallenge for railways is toeffectivelymanageday todayvariability indemand that results from the

individual decisions of shippers regarding the timing of their shipments. The railways core service design7 does

assumeadayofweekdistributionfordemandacrossitsnetworkbasedonhistoricalmovementsandusesthistoplan

itsdailytrainservice. Whilehistoryisareasonablygoodpredictoroftrafficflowsshipperbehaviourcanchangeduring

thecourseofyear foranynumberofreasons that the railwaycannotanticipatewhen itestablishes itbaseservice

plan.

Shippersinallbusinesssegmentsdonotdisputethesignificantchallengestheyfaceindevelopingreliableforecastsof

transportationdemand.

However,

they

point

out

the

special

difficulties

they

face

in

predicting

not

only

their

own,

but

also their competitors and their customers expected behaviour, capacity and requirements in developing such

forecasts.

6Analysis of Railway Fulfillment of Shipper Demand and Transit Times, QGI Consulting March 2010.

7Excludes bulk traffic moving in unit trains that while included in annual planning for capacity purposes are not included in the railways

basic service design as unit trains are proposed and activated based on monthly and weekly planning activities.


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March 2010


Forecasting accuracy can be further complicated when issues of competition and market concentration are

considered. While great effortmay be expended by both railways and shippers in the development of detailed

demandforecaststhevolumeoftrafficultimatelyhandledbytherailwayswillbeimpactedbymodalandintramodal

competitionaswellascompetitiveforces intheircustomersmarkets. Generallyspeakingthemoreconcentrateda

marketsegment

is,

coal

or

sulphur

for

instance

where

there

are

only

ahandful

of

shippers,

the

easier

it

is

to

develop

demandforecastsatthecustomeroriginlevel. However,insomebusinesssegmentssuchasIntermodal,wherethere

areavery largenumberofsmalland infrequentshippers it isdifficultand inmanycasesnotpracticaltoattemptto

forecasttrafficvolumesforindividualcustomers. Theaccuracyofdemandforecastswillalsobeimpactedbybroader

marketforcessuchasoccurredduringtheglobalfinancialmarketupheavalof20082009. Customerdemandforrail

freight transportation fell precipitously during late 2008 however; it would be unreasonable to criticize railway

customers (orrailways)forfailingtoproperly forecasttheseverityofthereduction infreightdemandthatresulted

fromtheseextraordinarymarketforces.

Finally,unplanned

disruptions

in

railway

operations

can

lead

to

changes

in

the

level

or

timing

of

rail

freight

demand.

Examples includeweatherrelateddisruptionssuchasoccurredduringthewinterof20072008whenrailwayservice

was severelydisruptednumerous timesbetweenDecemberandMarch. When railwayoperationsaredisrupted

someunfilled transportation demandwillbe shifted to the future creating ahigherdemand for transportation in

futureperiods. Determining thedegree towhichunfilleddemandcanbeshifted to the futureand thedegree to

whichtheeconomicopportunitiesarelostisdifficulttopredictandasourceofcontentionbetweenrailwaysandtheir

customers. However, such disruptions can occur off the railway network aswell, particularlywhen unplanned

productionshutdownsduetostrikes,plantoperationsproblems,oroceantransportationdisruptionsresultinchanges

tofreightlogisticsdemandlevelsandtiming.


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March 2010


4. ServiceandAssetPlanningIdentifyingandforecastingthevolumeoftrafficthat isexpectedtobehandledduringayearistheinitialstepinthe

railwaysplanningprocesses. An importantoutputofdemandforecastingactivities isaseriesofdifferentviewsof

forecasttrafficvolumesthatareused inrailwayassetandserviceplanningprocesses. Thefollowingsectionofthe

reportdescribeshowmarketdemandforecastinformationistransformedandusedforrailwayoperationalplanning.

4.1 CNAnnualServiceandAssetPlanningAsdescribedearlier,CNsprincipalunitofdemand is thenumberof railcars the railwayplans tomoveduring the

courseofayear. However,thisunitofdemandalone isnotsufficienttomeettheneedsofCNsdownstreamasset

andserviceplanningactivities. Assuchthecarloadforecast istranslated intootherunitsofdemand includingtons

andrevenuetonmiles(RTM). 8 Tonnageforecastsarederivedfromthecarloadforecastbyapplyinghistoricaltonper

carratiosatthe individualcommoditycartype level.9 Theseforecastsarethenusedtocalculaterevenuetonmiles.

RTMsareameasureofrevenueworkloadcalculatedbyapplyingtheaveragelengthofhaulagainstforecasttonsfor

allmovementsata commodityorigindestination level. At themostgranular level this calculation isdone foran

individual shippercommodityorigindestination combination. Where traffic is forecast at a higher level of

aggregation such as commodityorigindestination CNs planning system will calculate RTMs using the average

weightedhistoricallengthofhaulforalloftheforecasttrafficincludedataparticularlevelofaggregation.

4.1.1 RailCarFleetPlanningForecastcarloadsareusedtoplanCNsrailcarfleets. Thisunitofdemandisseentobeeffectiveandappropriatefor

thisplanningactivitybecause it isaccurateatanaggregate level. It isnothoweversufficientlyaccurateatadetail

levelsuchas theorigindestination flow level tobeeffective fortrainservicedesignplanningas thisrequiresmore

accurateestimatesofthetonnagestobemoved.

Indeveloping itsrailcar fleetplanCNsobjective istodefinethetotalnumberofcarsby individualcartypethat it

believeswillberequiredtohandletheforecasttraffic. Thenumberofcarsrequiredtohandleadefinedvolumeof

trafficisdependentonanumberofvariables including:theabsolutevolumeoftraffictobemovedandtheplanned

carcycles10 foreach individual car fleet. In situationswhere rail carsareused in singlepoint topointdedicated

8Revenue ton miles are also referred to as net ton miles.

9CNs planning system associates a specific car type against all forecast commodities.

10A freight car cycle is a measure of the elapsed time for the movement of a car including the time for each segment of a car trip. The

segments include time in loading, loaded transit, unloading and empty transit to its point of next loading. Car cycles for individual fleetsare generally computed by summing the time spent by all cars for all car trips in each cycle segment and dividing by the total number ofcar movements in that segment. The weighted average times for all segments are then added together to produce an average carcycle number.


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March 2010


servicethesizingofarailcarfleetisrelativelystraightforward. However,withtheexceptionofspecializedequipment

operatingincustomerassignedpoolsthisisrarelythecase. Rathertherailwayscarfleetsarelargelyusedingeneral

freightserviceandaresharedbymanyshippersformovementsbetweenmanyoriginsanddestinationswithvarying

lengthsofhaulwithhighlyvariablecycletimes. Assuchtherailwayusesaveragecycletimesforagivenfleetbasedon

historicaltraffic

distribution

patterns.

Theprincipalstepsinsizingeachrailcarfleetcanbesummarizedasfollows:

1. Developdemandforecastexpressedincarloads

2. Identifyspecificcommoditymovementswithintheforecastforwhichtherailwaywillsupplythecars

3. Calculateaveragecarcyclesbycartypebasedonhistoricaltrafficmovements

4. Adjusthistoricalcarcyclestoreflectassetutilizationtargets(carcycleimprovements)bycartype

5. Applycarcycledatabycartypeagainst forecastdemandtodeterminethenumberofrailcarsrequiredto

handlethetrafficthroughthecourseoftheyearaccountingforseasonalfluctuationsintraffic

6. Compare calculated car requirements against existing fleet positions including planned car retirements,

expiringleases

during

the

planning

period,

target

bad

order

ratios11,

planned

rail

car

maintenance

or

modificationprogramsandassumptionsregardingsubstitution12ofcarsbetweenfleets

7. Identifyforecastfleetshortagesandorsurplusesbycarfleet

In caseswhere the fleet planning process yields a projected car shortage for a given car fleet CNwill assess the

strategiesavailableforeliminatingtheshortageconsideringthesizeanddurationoftheprojectedshortage. Options

generally include the leaseorpurchaseofadditionalcars. Becauseof the long leadtimesassociatedwithnewcar

construction,typicallyoneyearormore,thisoptionwillnotbeconsideredunlesstheshortageisprojectedtobelong

term and a business case can be developed to support the investment. Leasing options will be limited by the

availabilityofcarsintheNorthAmericanfreightcarmarketandtheapplicableleasecosts. Giventhehomogeneous

nature ofmost rail car fleets inNorth America if a car shortage is being driven by a general increase inmarket

volumes, in grain for instance, the leasemarketmay also present limited options as other railwaysmay also be

pursuingthesamecartypesatthesametime.

Wheretherailcarplanningprocessidentifiesaprojectedsurpluspositiontherailwaywillseektominimizethecosts

associated with the surplus asset through leasing or sales opportunities with other railways or rail car leasing

companies,storageofcarsorreturningleasedcarstolessorsifitisfinanciallyadvantageous.

11The term bad order is used to describe a rail car or locomotive that is removed from service due to mechanical failure. In fleet

planning for both rail cars and locomotives railways assume a certain level of ongoing bad orders or the average percent of a fleet that isunavailable for service on a daily basis. (Bad order ratio = cars unavailable / total cars in fleet) The bad order ratio applied for a givenfleet of cars or locomotives will typically reflect the average age of the fleet, its mechanical history and targets for asset utilizationestablished by the company.12

While some freight movements require very specific car types to handle the traffic, other traffic can be moved with a variety of cartypes. For example, while some woodpulp shippers may request cars of a specific weight capacity with a specific door type, they mayaccept substitute cars with lower weight capacity and different door configurations. Similarly, users of covered hopper cars may prefercars with specific types of top hatches and unloading gates however railways may substitute cars that do not have the preferred loading,unloading and capacity configurations.


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March 2010


4.1.2 ServiceDesignPlanningTheobjectiveoftheservicedesignortrainserviceplanningprocessistodevelopthedetailedbasetrainserviceplan

required to handle the forecast traffic volume and to accommodate where required scheduled passenger train

operations.The

output

of

this

planning

process

is

asystem

wide

base

train

service

design

that

identifies

the

schedules

andfrequencyoftrainsthattherailwayplanstooperateduringtheplanningperiod. Atadetaillevelthetrainservice

planwillidentifytheoperatingparametersforeachscheduledtrainserviceincluding:

thedaysoftheweekitwilloperateandscheduleddepartureandarrivaltimes;

theoriginanddestinationterminalforeachtrain;

thetypeoftrafficplannedtobemovedincludinghowtrafficwillbeblocked(groupedonthetrain)tofacilitate

thesettingoffandpickingupoftrafficatintermediateterminalsfordeliverytocustomersandtomakeplanned

trainconnections;

establishedprioritiesfortrafficincaseswhereavailabletrafficexceedsavailabletraincapacity;

onlinework(switching)tobeperformedbyeachtrain;and

maximumtrainlengthsandweightsbasedonroutingtoaccountforgrades,curvatures,maximumgrossweight

onrailrestrictionsandsidinglengthstoallowfortrainoperationsinbothdirectionsonsingletrackterritories.

In addition to scheduled train operations, the railway needs to plan for themovement of trains that operate on

demand,inresponseprimarilytobulkshippersrequirements. Mostunittrainmovementsoperateinresponsetothe

productionandmarketing requirementsofbulkshippers. Thedemand for this typeof traffic isusuallydefined in

termsof thenumber,tonnageandweightand lengthofunittrainmovementsthatwillneed tooperate inspecific

corridorsonamonthlyandweeklybasis. Thedemandforthesetrainmovementsmaynotbescheduledinadvance

forparticular

days

and

thus

may

need

to

take

advantage

of

capacity

windows

on

the

railways

networks

in

the

corridorswheretheywilloperate. Thustheservicedesignplanwillneedtoprovideforthesecapacitywindowsand

anticipatehow the expected volumesofunit train trafficwillbe accommodated taking into account theneedsof

regularlyscheduledtrainservice.

Finally,therailwaysservicedesignteamswillneedtoforecastandplanfortimeperiodswhentracksmayberemoved

fromserviceorhaverestrictedoperationstoallowforscheduledmaintenanceoperationstotakeplaceontrack,track

materials,rightofwayortrafficcontrolsystems.

Theprincipaldemandinputtotheservicedesignplanningprocessisforecastgrosstonmiles(GTM). Grosstonmiles

areameasureofrailwayworkloadcalculatedasthenumberofgrosstons includingfreightcarsandtheircontents,

companyserviceequipment,andcaboosesmultipliedbythedistancemovede.g.10,000grosstonsx1mile=10,000

grosstonmiles. ForplanningpurposesGTMsarecalculatedbasedontherevenuetonmileforecastusinghistorical

GTM/RTMratiosofapproximately2:1. FortrainservicedesignGTMsratherthanRTMsareusedasGTMcalculations

will includetheweightoftherailcarsandemptycarmovementsthatmustbeaccountedforwhencalculatingtrain

capacity,locomotiverequirementsandtrackmaintenance. Figure3belowprovidesaschematicviewofhowtheGTM

forecastiscreated.


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March 2010


Figure3 GTMForecastDevelopmentProcess

TheforecastGTMsarethenappliedagainstthe

base service design at a detailed level using

historicaltrafficroutingpatterns.

This allows CNs service design team to

determine if the existing service design has

sufficient capacity to handle the forecast

workload. Plannerswillalsoassessoptions for

changestothebasedesigntoaddresspotential

capacity issues or to identify opportunities for

changes in train configuration or service

frequencytoachieveoperatingefficiencies.

4.1.3 LocomotivePlanningWithitscoreservicedesigninplaceCNthenplansthelocomotiverequirementsassociatedwiththeanticipatedtrain

operations. LocomotiveplanningatCNisdoneinthreeincrementalphasesthatdefinethelocomotiverequirements

foreach

line

of

business

and

service

type.

The

three

planning

phases

are:

thebaseserviceplanincludingallmanifestandintermodaltrainservice

bulktrainserviceincludingcoalandsulphurmovinginunittrains

graintrainserviceincludingunittrainandcountryspottingoperations

CNuses train service simulationmodels to identify thedemand for locomotivesassociatedwithoperating itscore

servicedesign. These simulations identify the locomotive requirements for each train run and allowCNplanning

personneltoidentifythetimelocomotivesspendhaulingtrainsversusthetimespentinyards. Bylookingatinbound

tooutboundtrainconnectionsCNcanidentifythemostefficientwaytocyclelocomotivesbetweentrainsinorderto

minimizeterminal

dwell

time

and

obtain

the

most

efficient

utilization

from

its

fleet.

As

with

rail

car

planning

CN

will

factorintoitslocomotivedemandprojectionsaplannedbadorderratio. Thisyieldstheplannedlocomotivesupplyfor

thebaseserviceplan.

Locomotivedemandforforecastcoalandsulphurtrafficunittrainserviceisbaseddirectlyonthecommoditydemand

forecast. Theforecastdemandisconvertedintoplannedtrainrunsbasedonanexpectednumberofcarspertrain.

Eachtrainhasaplannedtraincycletimethatwillincludeloadingatorigin,loadedtransit,unloadingatdestinationand

MonthlyForecastCarloads

(bycommodity,origindestination)

Applyhistoricaltonpercar

ratiosbyindividualcartype

MonthlyForecastTons


Applyaveragelengthof

haulbyorigindestination

MonthlyRevenueTonMiles(RTM)


ApplyhistoricalRTM/GTM

ratio(approx

1:2)

MonthlyGrossTonMiles(GTM)



21/29

March 2010


emptytransitbacktoorigin. CNplansforthistraffictomoveinunittrainservicewithdedicatedlocomotivesforeach

trainoperated. Thenumberoflocomotivesrequiredthereforewillbebasedonthenumberoflocomotivesassigned

toeachtrainmultipliedbythenumberoftrainsdividedbytheplannedtraincycle.

Forgrain

traffic

locomotive

demand

planning

takes

into

consideration

grain

service

type

grain

traffic

moving

on

manifesttrains,inunittrainserviceandforcountryspottingandpickupoperations. Graintrafficmovinginmanifest

servicewillhavebeenincludedinthebaseserviceplanandisthereforeexcludedhere.

4.1.4 TrainCrewPlanningInplanning itstraincrewsCNneedstoaccountfortwodifferentwagestructureshourlyandmileagebasedcrews.

Train crews in Quebec, on the former BC Rail territory, and in the United States operate under hourly wage

agreementswith all other train crews in Canada undermileage agreements. The total number of train crews

required

is

determined

by

calculating

the

number

of

train

miles

(mileage

based

crews)

and

train

hours

(hourly

based

crews)requiredtoexecutetheoperatingplanincludingscheduledtrainservicesandunittrainservice. Oncethebase

requirementisestablishedtheplanisadjustedtofactorinexpectedsickdays,vacationtimeandplannedretirements.

4.2 CPAnnualServiceandAssetPlanningAs discussed earlier CP employs an integrated annual planning process called the Sales andOperations Planning

Process. Thisprocessencompassesallplanningactivitiesfromthedevelopmentoftheinitialdemand(sales)forecast

throughtotheexecutionoftheintegratedoperatingplan. Thedemand,supplyandproductionplanningmodulesof

thisintegrated

planning

structure

are

where

asset

and

service

planning

activities

happen.

In

interviews

with

QGI,

CP

indicatedthatthepurposeofitsoperationalplanningprocessistocreateabalancednetworkplanwhilemaximizing

trainlengthinordertoensureeffectiveassetutilizationandoptimizethecapacityofitsnetwork.

4.2.1 OperationalDemandPlanningThe operational demand planning phase uses the sales forecast as its key input and translates market demand

expressedintonsintounitsofworkloaddemandthatcanbeusedfortrainserviceandassetplanning. Therearethree

keysmethodsemployedinthisphaseofplanningforecastingoftrainmiles,trainstartmodeling,andproductdesign

andanalysis.

The

planning

process

uses

all

three

methods

to

estimate

the

operating

workload

and

rationalizes

and

bringsthemtogetherintotheIntegratedOperatingPlan.

TrainMileForecastCP, likeCN,translates itsmarketdemandforecastexpressed intons intorevenuetonmilesbyapplyingtheaverage

lengthofhaul formovements at the commoditycorridor level. GTMs are subsequently calculated from theRTM

forecast using historical ratios. Lastly train miles are calculated from the GTM forecast by applying historical


22/29

March 2010


GTM/trainmileratios. Underlyingthesecalculationsisthecoretraindesign. Thekeyoutputfromthisprocessisthe

totalestimatedworkloadforCPsnetworkstatedintrainmilesbyserviceareaandtypeoftrainservice. Becausethis

viewofworkloadassumes thehistorical train service it is subject toadjustment if changesaremade topast train

design.

TrainStartModelingInparallelwiththetrainmileforecastprocessisthedevelopmentofplannedtrainstarts.Trainstartmodelingisdone

forapproximately80corridorsand15major terminals inCPsnetwork. Train startsare calculated from forecast

carloadsfromthesalesforecastingprocess. Totalcarloadstobehandled,both loadedandempty,arecalculatedby

applyinghistoricalemptyloadratiostotheforecastforloadedcars. Thenumberoftrainsrequiredisthencalculated

by applying historical average car lengths and train length/weight ratios against the total number of cars. The

principaloutputof thisprocess is an estimateof the total numberof trains required tomeet thedemand in the

forecastexpressedintermsoftotalmonthlytraindemandbynetworkcorridor. Estimatedtrainstartsatanindividual

corridorlevelarethencomparedtocorridorcapacitiestoidentifypotentialconstraints.

ProductDesignandAnalysisTrainservicedesignplanningisdoneusingCPsinternallydevelopedProductDesignandAnalysisVisibilityTool(PDAE)

in conjunctionwith theMultiRail13 train service planning application. Theobjectiveof thisplanning exercise is to

assess the capabilityof theexisting servicedesign toadequatelyhandle the forecast traffic volumes. The current

demandforecastistranslatedintoadetailedtrafficfilebyapplyingtheforecastvolumesagainstahistoricaltrafficfile

thusprovidingaviewofforecastdemandbyorigindestinationstationbydayofweek. Thistrafficfilebecomesthe

inputto

the

MultiRail

system

that

CP

uses

for

service

design

planning.

The

detailed

forecast

traffic

file

is

loaded

to

theMultiRailsystemwhichenablesCPplanningpersonneltoassesstheabilityoftheexistingtrainservicedesignto

accommodatetheforecastdemand. Thesystemidentifiesopportunitiesforchangestotheexistingdesigntooptimize

handlingoftheforecastvolumes.

4.2.2 SupplyPlanningThe supplyplanningphase looks to size theassets required toexecute the serviceplan. This includes railcarand

locomotive fleet planning and train crew planning. All asset planning builds in defined productivity initiatives.

Locomotivefleet

sizing

uses

the

MultiRail

Locomotive

planning

module.

This

module

identifies

the

locomotive

demand

associatedwiththeoperationoftheservicedesign.

Railcar fleetplanning isdonebyCPscarmanagementteam. Carmanagementusesthemonthlydemand forecast

from thesalesand revenue forecast toplan fleet requirements for sevenmajorcar fleetsconsistingof twenty sub

fleets. Carrequirementsarecalculatedbyapplyingaveragemonthlycarcyclesadjustedforproductivityinitiativesand

13MultiRail is a third party train service planning software developed by MultiModal Applied Systems of Princeton, New Jersey.


23/29

March 2010


for seasonality against the forecast demand. CP also factors in an average 46% bad order factor based on the

mechanical history of individual car fleets. Some fleets will have higher maintenance requirements and thus

corresponding bad order ratios based on the types of commodities they handle and the loading and unloading

practicesofshippersandreceivers.

Crew planning is done by CPs crewmanagement team. Crew demand projections are based on projected train

demandbycorridor. Thenumberofcrewsrequired iscalculatedbydeterminingthecrewingrequirementsforeach

forecasttrainrunwithineachindividualcorridor. Traincrewrequirementsareadjustedforplannedabsenteerates,

sickleaveandvacationtime.

4.3 AnnualServiceandAssetPlanningChallengesThebiggest challenge to serviceplanning forCN andCP is the volatilityofdemandon aday todaybasis. While

planningactivities

are

detailed

and

use

the

best

available

information

regarding

expected

traffic

volumes

they

cannot

realisticallyaccountforthe inevitableebbandflowofdailytrafficvolumesresultingfromthedecisionsof individual

shippers, the actions of other supply chain participants or unanticipated events in either the railway network or

customersmarkets. Railwaysrecognizethatperfection inthisenvironment isunachievableastherearetoomany

factors that arenotwithin the railways control. Theobjectiveof theseplanningprocesses is to establish a core

serviceplan,supportedbysufficientassetstomeetexpecteddemandwithsufficientflexibilitytorespondtodayto

dayoccurrencesatanacceptableleveloffinancialrisktotherailways.

4.4 ShortTermPlanningandAssetManagementTheannualplanningprocessesatCNandCPestablishthevolumeandrevenueexpectationsforthecomingyearand

contributetothedevelopmentofoperatingplansthatdriveexpenseforecastsandprojectionsforcorporatefinancial

performance. Oncefinalizedtheseindividualplansaretranslatedintofinancialbudgetsandworkloadprojectionsfor

theyearandbecomethebasisagainstwhichactualperformance ismeasured. Whiletheannualplanningprocess

comestoacloseatthispointbothCNandCPcontinuetodoshorttermplanningonamonthlyandquarterlybasisto

measureperformancetobudgetandadjust theoutlook fortheremainderoftheyearregularly revisitingassetand

operational

plans.

Althoughsignificanttimeandeffortisexpendedincreatingtheannualplanaforecastcreated34monthspriortothe

beginningoftheyearcannotperfectlyanticipateevolvingmarketconditionsandcustomerbehaviourparticularly in

timesofmarket volatility. As suchboth railways reviseprojections for revenuesand volumesusingmonthlyand

quarterlyoutlooks. Theseoutlooksseektoincorporatethemostcurrentcustomerandmarketinformationtoconfirm

expectationsforthebalanceoftheyearandthentranslaterevisions intorefreshedviewsofassetandtrainservice

requirementsgoingforward.


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March 2010


Thequestiontherailwaysarecontinuallyattemptingtoansweriswhetherornotperformancetodate,whetherabove

orbelowplan,isaleadingindicatorofvolumeandfinancialperformancetofollow. Incaseswheredemandhasfallen

shortofexpectationsshouldtherailwayexpecttoseeasnowploweffectwherebydeferreddemandwillmaterialize

later intheyear? Otherpossibilitiesarethatthedemandexpiredas itwaseithertimesensitiveorwassatisfiedby

othersuppliers

or

via

another

transportation

provider

and

is

effectively

lost

to

either

the

shipper,

the

railway

or

both?

Similarly, insituationswheredemandhasexceededplannedvolumestodate isthisan indicationofasustainable

increaseindemandthatwillcarrythroughtotheendoftheyear;hasdemandprojectedforlater intheyearsimply

movedforward;orwillvolumesreturntoplanned levels? Theseare important issuesfortherailwaystomanageas

theycanhaveasignificantimpactonrailcar,locomotiveandtrainserviceplansthathavebeenputinplaceusingthe

originalplanassumptions.

Monthlyandquarterlyplanningprocesses, includingdiscussionswith theircustomers,attempt toprovide thebest

possibleshorttermoutlooksthatcanbeusedtomakedecisionsregardingchangestorailcarand locomotivefleets

andwhether

or

not

the

existing

train

service

plan

is

suitable

going

forward.

In

addition

to

trying

to

maintain

service

levelstocustomersandensuresufficientcapacityisinplacetherailwaysarelookingtomaintaincontroloftheirshort

termoperatingcosts.

Both CN and CP have implemented formalized processes for reviewing current year performance and translating

changes indemandoutlooks intooperationalworkloadprojections thatallow for theongoing reviewofassetand

serviceplans.

4.4.1 CNShortTermPlanningProcessesCNs

Equipment

Requirements

Team

(ERT)

is

responsible

for

conducting

ongoing

reviews

of

the

companys

asset

requirements and plans throughout the year. The team is comprisedof executives from theMarketing, Financial

PlanningandOperationsPlanninggroupsand ischairedbythevicepresidentofFinancialPlanning. TheERTmeets

monthlytoreviewassetplansforbothmarketingandoperationsbasedonperformancetodateandrevisedoutlooks

goingforward.

ForrailcarfleetplanningthemonthlyERTprocess issupportedbyaweeklyprocessthattracksforecastchanges in

short term customer demand as identified by Marketing and actual realized demand as measured through the

companyscarorderingprocesses. Withaviewofprojecteddemandandcurrentactualdemandonrailcarfleetsas

wellas

fleet

performance

(car

cycles)

the

process

projects

potential

surpluses

or

shortfalls

for

rail

cars

by

individual

car

type. Also included inthisanalysisaremeasuresofrecentandshortterm fleetattrition includingretirements,cars

destroyed,andexpiring leases. Usingallof these factors theERTprocessdeterminesactions tobe taken tomeet

expecteddemandwithinexpectedperformance levels inconsiderationofestablishedexpensetargets. Decisionsof

theERTarerequiredtobeunanimousandrequiresignoffattheVPlevelineachfunction.


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March 2010


LocomotivePlanningCNcontinuallyassesses theperformanceof its locomotive fleet to identify situationswhereshort term locomotive

capacity isbecomingconstrainedorsurplus. CNuses its internallydevelopedLocomotivePlanningSystem (LPS)to

measureboth

the

daily

performance

of

its

locomotive

fleet

and

the

near

term

demands

on

planned

train

operations.

This isdoneby loading thecurrentcoreservicedesignandplannedbulk traindemand into theLPSwhichprovides

CNsmanagementteamwithadynamicviewof forecastdailysupplyanddemandfor locomotivesatthe individual

terminalandtrainlevel.

AspartofthelocomotivemanagementandplanningprocessCNmonitorstheperformanceofanumberofkeydrivers

including:railcardwelltimes,train length,andcarvelocity(averagecarmilesperdaypercar). Theperformanceof

each of these operational elements is used to identify emerging trends that may signal the need for additional

locomotivesoralternativelyasurplusfleet. Forterminaldwelltimesthefocusisonidentifyingcarsthathavedwell

times

greater

than

24

hours.

An

increase

in

the

number

of

such

cars

may

signal

the

need

to

either

operate

additional

trains or longer trains in order to avoid a build up of cars in terminals.Operating additional or longer trains can

increasedemand for locomotives. Similarly average car velocity isused as an indicatorofnetwork efficiencyand

fluidity. Ifperformance fallsconsistentlybelowestablishedthresholds itmaysignaltheneedtoactivateadditional

trains.Therailwaystrainservicedesignassumesaplannedtrain lengthandweightanda locomotivehorsepowerto

trainweightratio. Shorttermfluctuationsindemandcanresultinlessormoretrafficbeingavailableforadesigned

trainservicethatmayresultinlongerorshortertrainlengthsthanoriginallyplanned. BytrackingthisperformanceCN

isableto identifydeveloping trendsandmaketacticaladjustments to its locomotivedistributionstrategies. When

train length isdecreasing itmaypresenttherailwaywithopportunitiestocombinetrainsthusoperatingfewertotal

trains and reducing the demand for locomotives. When train length is increasing itmay signal the need to run

additionaltrainsthusplacinggreaterdemandonthelocomotivefleet.

Where short term locomotive shortagesor surplusesare identified they are typically addressedusing locomotives

madeavailablefromortootherrailwaysorlocomotiveleasingcompaniesthrougheithershorttermleasingortrading

ofhorsepowerhours. This latterapproach isrelativelycommon intheNorthAmericanrailway industry. Individual

railways establish bilateral agreements to use one anothers locomotives for short periods of time. In lieu of

traditional commercial lease arrangements the railways track the use of their respective locomotives using a

debit/creditsystem. Horsepowerhoursareassignedadollarvalueandagreementsmayprovideforreconciliationof

imbalancesbetweenrailwaysatprescribedtimes.


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4.4.2 CPShortTermPlanningProcessesCPs ongoing planning activities and performance oversight are managed through its internal Butterfly Team

structure. Thisgroup,whichexistsinparallelattheseniormanagementandexecutivelevelswithinthecompany,has

directresponsibilityformeasuringperformancetoplanandconductingongoingassessmentsofrailwaycapacityissues

throughoutthecourseoftheyear. Attheworking leveltheButterflyTeamconsistsofrepresentativesfromallkey

Marketing and Operations functions within the company including product design, fleet planning, locomotive

planning,crewplanning,engineering,yieldmanagementand revenueplanning. TheButterflyTeamapproachwas

adoptedbyCPRailinrecentyearsindirectresponsetocapacityissuesencounteredinitscriticalwesterncorridor.

The team conducts amonthly reviewof updated demand forecasts that incorporate themost recentmarket and

customer intelligence and the companys performance and experience to date. Using analytical and planning

techniquessimilartothoseusedinthedevelopmentoftheannualoperatingplanstheteamlookstoidentifypotential

near term capacity constraints in all aspects of network operations by asset class and location.Where potential

capacity issuesare identified the teamassesses the rangeofalternativesavailableandmakes recommendations to

CPsexecutiveteam.

A keymanagement toolusedby the team is anetwork statusmodel thatdescribes the capacity conditionof the

networkbasedondefinedthresholds. Networkcondition isclassifiedatahigh levelusingcolorcodeddescriptions

(blue,green,yellow,red)thatdescribethestateofnetworkcapacityfromsurplustoconstrained. Thedesignationofa

networkcorridororassetclass(crews,locomotives,freightcars)asyelloworredindicatesthepotentialfornearterm

capacityconstraintsandleadstotheassessmentoftacticaloptionsavailabletoalleviatetheprojectedcapacityissue

basedonthespecificnatureandlocationoftheconstraint. Capacityconstraintsinarailwaynetworkcanbethedirect

resultofoperationalormarketissues.

Fromanoperatingperspectiveshorttermcapacityconstraintscanresultfromnetworkdisruptionsincludingweather

based disruptions and operational disruptions such as train derailments or problems experienced by one of the

railwayscustomersatamajorbulkorcontainerterminal. Theseverityoftheconstraint,andthereforethesolutions

tobeconsidered,willbedeterminedbythe locationanddurationofthedisruption. Adisruptionona lowdensity

branch linemay impact localservicetosomecustomersbut isunlikelytohaveabroad impactonthenetworkasa

whole. By comparison amain line disruption in a high density corridor such as CPswestern corridor can have

significantimpactnotonlyintheimmediateareabutifofsufficientdurationwillhaverippleeffectsinotherpartsof

thenetwork. Inadditiontodisruptingcorridortrainoperationsthiskindofdisruptioncanimpacttheflowofempty

cars tomeet future orders, reduce rail car fleet capacity by lengthening car cycles, impact crew and locomotive

balancing and create congestion in railway terminals throughout the system as the predicted flow of traffic is

disrupted.

Shorttermmarketshiftscanalsocreatecapacityissuesintherailwaynetwork. Whilemostoftenthoughtofinterms

ofcapacityconstraintssignificantshiftsinmarketvolumescanalsoresultinashorttermcapacitysurplus. Inonecase


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therailwaywill lookatsolutionstotryand increaseshorttermcapacityand intheotherwaystoreducecapacity in

ordertocontroloperatingcostsandmaintainefficientoperations. Bulkcommoditymarketssuchascoalandgrainare

goodexamplesofwherechangingmarketdemandcanresultinbothofthesesituations.

Someexamples

of

tactical

responses

that

would

be

considered

by

CPs

Butterfly

Team

in

these

situations

are

illustratedinthefollowingtable.

AssetClass CapacityConstraint CapacitySurplusTrainCapacity Operateadditionaltrains

Extendtrainlengths

Reduce trainoperationsbycombining trains

inselectedcorridors

FreightCars Add to existing fleets by activating cars in

storageorthroughshorttermleasing

Allocateorrationcarstocustomers

Reducecarfleetsthroughshorttermstorage

ofsurpluscars

Crews

Increasetrain

crew

pools

through

recall

of

laidoffemployeesifcapable

Reducetrain

crew

pools

through

short

term

layoffs

Locomotives Increase locomotivefleetthroughshortterm

leasing or borrowing of locomotives from

otherrailways

Reduce locomotive fleet through short term

storage


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March 2010


5. SummaryTheprocessesfordemandandserviceplanningatCNandCP,whilesomewhatdifferentatatechnicallevelarevery

similarwith

respect

to

the

specific

areas

of

planning,

the

key

inputs

used

and

the

planning

horizons

employed.

Eachyearboth railwaysplan theirexpectedvolumesof trafficand theassetsand trainservicesneeded tosupport

them using a number of different planning horizons. The focus of most planning activity is centered on the

developmentoftherailwaysannualplans. TheseplansformthebasisforlongertermplanningactivitiesforCNa

fiveyearplanandforCPafouryearplanthatlooktoidentifysignificantexpectedchangesinrailwayvolumes,traffic

patternsand financialperformanceby introducingmedium termmacroeconomic assumptionsand industryspecific

forecastsusingatopdownapproach. Theselongertermviewsofdemandareimportanttotherailwaysastheyare

criticalinputstoeachcompanysmultiyearcapitalinvestmentstrategiesforassetrenewalandcapacitymanagement.

Theannual

demand

planning

process

is

the

initial

planning

activity

and

produces

the

forecast

traffic

volumes

that

becomean important inputtothedownstreamfinancialandoperationalplanningactivitiesforbothrailways.These

demandforecastsarecreatedusingacombinationofhistoricaltrafficperformance, directcustomerinputandmarket

intelligence. The railways differ somewhatwith respect to the how they engage their customers and howmany

customerstheylooktoinvolveinplanningdiscussions. However,forbothrailwaysthereistremendousconcentration

oftrafficvolumewithinasmallpercentageoftheirshippers. Ingeneral,onbothrailways,over80%ofrailvolumes

aremovedbyapproximately5%ofshippers. Thus,railwayscanreliablyplantheirassetrequirementsatahighlevel

usingtheinputofarelativelyfewshippers.

Keyoperational

planning

activities

for

both

carriers

are

focused

on

sizing

of

rail

car

and

locomotive

fleets

and

the

developmentoftrainserviceplansatlevelsnecessarytomeetdemandprojectionsincludingtheanticipatedtimingof

demand. Inplanningtheseassetsbothcarriersexplicitlyfactorinassumptionsregardingthemechanicalreliabilityof

theirfleetsandproductivityinitiatives.

Therailwayssharesimilarchallengesindevelopingaccuratedemandforecastsrelatedtocustomerandmarketfactors

beyond their control. With respect to customers the railways sometimes find itdifficult toengage customers in

planningdiscussionsbecausetheirrespectiveplanningtimelinesarenotnecessarilyaligned. Insome instancesthe

accuracyofdemandforecastsprovidedbycustomers issuspectbecauseofthe individualmarketshareassumptions

used

akey

reason

why

the

railways

explicitly

validate

individual

customer

forecasts

against

broader

market

forecasts.

Unforeseeable short term volatility in global commodity markets also present challenges for railway demand

forecastingas theydo for the railways customers. Inaddition thevolatilityofday todaydemanddrivenby the

decisionsofindividualshippersandtheactionsofothersupplychainparticipantscanbeproblematicfortherailways.

Therailwaysnecessarilydesigntheircoretrainserviceusingassumptions,basedonhistory,ofhowvolumeswillflow


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March 2010

onadailyandweektoweekbasis. Whilehistory isareasonablygoodpredictoroftraffic flows,shipperandother

stakeholder behaviour can change during the course of year for any number of reasons that the railway cannot

anticipatewhenitestablishesitbaseserviceplan.

CNand

CP

recognize,

as

do

many

shippers,

that

annual

demand

and

service

planning

is

not

perfect

and

should

not

be

expectedtobe. Thechallengefacingtherailways istoestablishoperatingplansthatprovidesufficientflexibilityto

reasonablyadjusttoshorttermmarketfluctuationsandunanticipateddisruptionswithinthe logisticsnetworkatan

acceptable levelof financialrisk. It is forthis reasonthatbothCNandCPexpendsignificanteffort inmonthlyand

quarterlyplanningactivities. Therailwaysattempttocompensateforthesetypesofeventsbycontinuallymeasuring

theirperformancetoplanandassessingandadjustingtheiroperationstomaintainserviceconsistencyforcustomers

andfluiditywithintheirownnetworks.

railway demand forecasting and service planning processes

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