CEO's turnaround plan wreaks havoc on supply chains for farms, mines, factories

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 23, 2017).

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The freight-train ride from Chicago to Colesburg, Tenn., usually takes a few days. Earlier this month, though, the ride was 18 days, 13 hours and 57 minutes, logs show.

Congestion, delays and erratic service are hitting CSX Corp., one of only two railroad operators that handle nearly all the shipments that move by train east of the Mississippi River. The problems began in May and became much worse this summer, according to customers and weekly performance data reported by the Jacksonville, Fla., company.

It's a colossal mess for businesses that have spent years streamlining supply chains to run with just-in-time inventories.

Coal producers say their stockpiles are growing because CSX is taking longer than it should to pick up coal-filled railcars from mines in Ohio and West Virginia. Food makers have slowed production in hopes that ingredients such as oils and sweeteners will last until the next delivery. Some companies are trying to avoid the worst bottlenecks in CSX's system, including by switching to trucks and other railroads.

McDonald's Corp. has supplemented its regular train shipments of frozen french fries into the Nashville, Tenn., area with truck deliveries, according to a person familiar with the matter. Kellogg Co. has called in truck-hauled tankers of cooking oil to ensure uninterrupted production of Pringles at a Jackson, Tenn., factory, a person familiar with the matter said.

A spokeswoman for McDonald's said french fry eaters haven't been affected because "we have contingencies in place to ensure there is no disruption in our supply." Kellogg didn't respond to a request for comment.

Much of the blame is aimed at Hunter Harrison, the 72-year-old railroad-industry veteran who became CSX's president and chief executive in March as part of a shake-up led by an activist investor. He promised to run the company's 21,000-mile network more efficiently by idling excess equipment, closing some freight yards and running trains on a tighter schedule.

Mr. Harrison used a similar strategy to turn around Canada's two largest railroads, Canadian National Railway Co. and Canadian Pacific Railway Ltd. He conceded that the program is off to a rocky start at CSX but said any short-term problems will lead to improved service in the long run.

"I'm sensitive to the issues that we've had. I don't want to give the impression that I'm not," Mr. Harrison said in an interview. "Some of the characterizations of some of the issues have been inaccurate and have been far overstated."

He added: "Each one that has come to our attention, we have worked and continue to work very diligently" to address the problem.

Mr. Harrison said some of the recent snarls were beyond his control, such as a derailment in Pennsylvania that interrupted service in that region for more than a week in July. Some CSX employees also are resisting the efficiency plan, he said.

In June, CSX fired nine employees in Cincinnati who Mr. Harrison said falsified computer reports about train-car movements to avoid being criticized about delaying customer shipments. He said this month's derailment of a CSX freight train in South Carolina appears to be suspicious. Local news reports said a bulldozer was partially blocking the tracks.

Unions representing CSX workers disputed Mr. Harrison's comments. In a letter to Mr. Harrison earlier this month, they said the unions refuse "to accept responsibility for service disruptions that negatively affect the customers when we have no input on operational changes."

Late last month, the federal Surface Transportation Board ordered CSX to hold weekly meetings with the railroad regulator to discuss the problems. Last week, the STB told Mr. Harrison in a letter that it is concerned about "widespread degradation" of rail service.

"The network needs to be fluid," Ann Begeman, the agency's acting chairwoman, said in an interview. Several companies have told the STB that they were close to shutting down factories because of service-related problems at CSX, she added.

A broad group of freight shippers, the Rail Customer Coalition, told lawmakers in a letter that the service woes "put the health of our nation's economy in jeopardy." The group called on Congress to investigate the problems.

CSX's Mr. Harrison responded that the letter contains "unfounded and grossly exaggerated" statements.

Chemical company Chemours Co. expected Mr. Harrison to make big changes at CSX but was in the dark about when they would occur, said Eddie Johnston, federal government affairs manager at Chemours. The Wilmington, Del., company, spun off from DuPont Co. in 2015, makes Teflon coatings, pigments for automotive paints and cosmetics ingredients.

In May, CSX trains started missing expected stops at Chemours plants in the eastern U.S., according to Mr. Johnston. Sometimes, CSX trains delivered raw materials to Chemours but left behind outbound freight cars meant for customers farther up the supply chain.

Other times, he said, CSX picked up finished goods from Chemours but didn't deliver raw materials or empty freight cars needed for the next pickup.

Mr. Johnston said one Chemours plant came within hours of shutting down in late July before a CSX train arrived with a critical ingredient. Chemours has slowed production at one plant to make sure it can keep running.

"We're sort of hanging by a thread," he said. More than once, Chemours complained to a CSX employee about the problems and then found out the next day that the employee had left. CSX has eliminated 2,300 jobs this year. It had about 27,000 employees in December.

Chemours is using trucks to keep its plants running and deliver finished products to customers. A conversation last month between Mr. Harrison and Mark Vergnano, president and CEO of Chemours, has led to better communications, but service levels haven't improved. "There are people that think normalcy still could be months away," said Mr. Johnston.

Mr. Harrison said CSX customers were "well-informed" of what the changes would look like, given his record at other railroads. "I don't think anyone got caught by surprise," he said.

One of the most jarring changes by Mr. Harrison was the elimination of hump yards, massive facilities that sort long trains by rolling them down an incline and directing them toward tracks where new trains are built. Those trains then roll out to new destinations.

CSX's Mr. Harrison wants more freight trains sorted when the railroad picks them up and to use locomotive power to break apart and reassemble trains. Soon after taking over at CSX, he closed eight of 12 hump yards, adding more strain to the four remaining locations.

One of the closed hump yards, the Avon Yard in Indianapolis, has since been reopened. "We might have made a mistake" there, said Mr. Harrison.

CSX's closed Radnor hump yard in Nashville, Tenn., was part of a 500-acre facility. The entire terminal has struggled to adjust.

A measurement of freight-yard delays called dwell time averaged 53.5 hours in Nashville in the latest week for which CSX has released figures, up 63% from a year earlier. Dwell time has more than doubled since April.

Mr. Harrison said the Nashville terminal "didn't have the best culture," so he brought in some new managers to try to unclog it. He said the worst is behind CSX in Nashville, and dwell times have begun to rebound.

After this article was published online Tuesday, CSX said it has revised how it calculates three service measurements "to more accurately reflect the company's operational performance." Using the new methodology, average dwell time throughout CSX's network was 12.5 hours in the week ended Aug. 18, an improvement of 2.3% from a week earlier.

Some shippers complain that freight is taking roundabout routes that add days to the travel time. The railroad industry calls it ping-ponging.

"All of a sudden, we're seeing a flood of these types of things," said Dennis Wilmot, chief executive of Iron Horse Logistics Group, of Aurora, Ohio, which manages railcars for customers. CSX took an Alabama-bound metals shipment to New Orleans, where it was handed off to a Union Pacific Corp. train and then headed west before turning around and eventually reaching Alabama, according to Mr. Wilmot.

CSX said it has been "sending some cars to less-congested, out-of-route terminals for sorting" to keep "customer deliveries moving as efficiently as possible through some congested terminals."

Poultry farmers are "incurring hundreds of thousands of dollars in additional business costs to make emergency purchases of ingredients transported by truck to keep poultry alive," according to a letter to regulators last week from the National Grain and Feed Association and other agricultural trade groups. The groups said some CSX feed deliveries were delayed nearly three weeks.

Each day that a railcar is delayed costs the owner as much as $100, estimates Herman Haksteen, president of the Private Railcar Food and Beverage Association, which represents large food companies like PepsiCo Inc. and Kraft Heinz Co. For now, companies are absorbing the higher costs.

"They're doing everything they can so the consumer doesn't see it," said Mr. Haksteen. "The customer might see it next year."

Brent Bilsland, chief executive of coal producer Hallador Energy Co., of Denver, said service improved in July and August after "subpar" performance in the second quarter. "The performance of the CSX has been much more precise and really, really quite good," he told analysts Aug. 9.

Shipments of corn and soybean meal by CSX are arriving at a Gettysburg, Pa., facility in seven days, down from 12 days, said Dan Sharrer, co-owner of Agricultural Commodities Inc. The company makes pretzel flour, fertilizer and poultry feed.

"They stubbed their toe, but all in all, they have done me well," he said.

CSX has told customers to brace for a few more rocky weeks. "Shortly after Labor Day, you'll see things return to what we call normal," Mr. Harrison said. "And then they'll start tracking up again."

Write to Paul Ziobro at Paul.Ziobro@wsj.com

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August 23, 2017 02:47 ET (06:47 GMT)