Thursday, June 28, 2012

Continuous Quality Improvement Strategy

Analysis of, “Continuous Quality Improvement as a Survival Strategy:
The Southern Pacific Experience”

When the Southern Pacific Railroad (SP) was purchased for $1 billion by businessman Philip Anschutz in 1988, the company was in a period of decline and struggling to survive.  For every dollar collected from shippers, it was costing SP $1.03 to haul their freight.  Southern Pacific had been without leadership for almost two decades and had been held in trust the preceding five years following a failed 1983 merger.  Anschutz found himself with a 150-year-old railroad with low morale, hostile customers, thin management, and not enough investment in plant and equipment and training.  In addition, the new company was not a single entity, but rather a collection of divisions and subsidiary railroads, each fiercely independent.  He knew he had to fix the company quickly, but also sensibly:  his solution, a total re-focus on customers and a Deming strategy of continuous quality improvement (CQI).

In 1989, Anschutz made top management changes by bringing in an expensive, but highly experienced team of all-stars who had held senior positions in companies with successful CQI programs.   Kent Sterett, a long-time proponent of Juran’s strategic-planning processes and a former judge for the Baldrige Award competition, brought a fresh perspective on quality.  He had set up Union Pacific’s pace-setting Quality Management System, and he did the same for SP in 1990 (Welty, 1992).  The new executive team made a series of benchmarking trips to such quality leaders as Xerox and Milliken where it was impressed by the first-line employees’ involvement in quality.  After a pilot program tested in SP’s Eastern region showed that quality could make a difference, Anschutz began implementing a three-phase quality improvement turnaround strategy in 1990.

Because of the company’s rapidly deteriorating situation, Anschutz was operating on a tighter time schedule than was traditionally thought to be wise for implementing CQI.  Using  Juran’s planning-based approach to improvements, a strategy was developed based on Malcolm Baldrige Award criteria to help top management lead the quality-improvement  process.  The CIO, COO, and the Vice Presidents became the Quality Council.   The design phase began with one-on-one leadership training for upper management.  Based on information gained from the previous benchmarking trips, management group sessions were used to identify techniques that would be most beneficial to SP and its unique needs and to determine key-performance indicators.  A mission statement was developed, objectives for 1991 were set, and a five-year strategy was designed. 

With an action plan and a framework in place, management began to introduce its quality improvement strategy to employees in November, 1990.  In a geographically dispersed company with multiple cultures operating in a turf-protecting mode, changing the behavior of the entire workforce was a monumental task.  Not only was the company operating with a workforce that was older in age than is typical in U.S. industry (some were third generation SP workers),  but it was one that was more than 90 percent unionized by 14 different craft unions.  If all employees had been confronted instantly with QI, anarchy would have probably resulted  from trying to tackle too much at once.

Instead, role modeling by top management and a series of 125 “town hall” meetings led by corporate officers, not first-line supervisors, were held to tell more than 13,000 workers about the quality-driven approach to doing business.  Executive work days were initiated during which corporate officers were out on the track and yards working side-by-side with employees.  Their presence demonstrated the importance of “team play” and helped dissolve distrust that existed between labor and management.  Fifty union leaders were brought to San Francisco and shown the dismal operating performance data, after which they were asked to participate in critiquing the new CSI strategy.  All but 2 of the 14 unions participated.  In addition, forums were set up with union representatives and employees to open communication lines and to identify the common grounds of quality for both groups.  Involving union leaders in management meetings was a first for the industry, but it worked! 

SP’s formal quality program began in May, 1991.  Almost immediately, a blind survey was sent to 600 customers to monitor customer satisfaction (Delsanter, 1992).  Because current customers were never certain if their shipments would arrive on time, initial findings showed customers wanted consistent, quick, on-time service, every day.   These survey results were used as a baseline from which subsequent surveys were analyzed for progress, and improving service reliability became the cornerstone of  SP’s quality efforts.  As SP’s chairman Philip Anschutz stated, the old way of doing business—“you need us more than we need you”—was out (Lustig, 1992).  He wanted to show customers that the new way—with buzzwords such as “quality” and “customer driven”—was in.  To communicate its commitment to customers, management created “the New SP” train that began a 45-day, 20-city, 11-state tour in March, 1992.  At the train’s last stop, SP President Mike Mohan re-emphasized the train’s message to customers:  “SP’s goal is to meet or exceed your needs!”

To this end, SP invested significantly in quality education, with a strong focus on the team approach.  All courses were rolled out in 1991.  Railway-specific training courses included team leadership training, facilitators training, and team members training.  Also included were courses for statistical process control and management quality improvement training.  By November, 1991, more than 600 team leaders had completed training, and 400 quality improvement teams had been formed, with approximately 12 percent of employees working on problem solving  (Delsanter, 2009).  By mid-1992, 900 teams were operating, with 20 percent of SP’s workforce participating in one or more teams, 25 percent of which were cross-functional.  Newly formed Regional steering committees included a “quality facilitator” to support team activities when a line supervisor was unsupportive.  These teams were dedicated to building customer satisfaction through a continuous quality improvement process. 

Launching a quality improvement process in record time takes total top management commitment and a clear understanding of the quality process.  SP has done this, with some of the most experienced “quality” people in the industry managing the CQI program.  Hallmarks of the program include strong leadership, role modeling and other involvement by top management; benchmarking; developing action plans; involving unions; involving managers in process improvement;  and providing quality education and team training for all employees.  Normally, these activities would have been done one at a time.  In SP’s case, they were done in parallel or almost simultaneously, but they were done correctly by knowledgeable leaders employing a combination of Juran, Deming, and Japanese quality concepts that best fit SP’s unique circumstances.

As of this writing (Spring, 1993), SP owner Anshutz appears to have been correct in his conviction that CQI was the correct survival strategy to bring about a successful turnaround.  While not yet getting SP to the break-even point, there was a $43 million improvement in the bottom line during 1991-1992, the first year of the CQI program.  It will not take nearly that much improvement in 1993 to make the company profitable.  By closely listening to what its customers want and by applying the quality process, SP is transforming itself into a customer-driven, cost-effective transportation provider.  If it continues at its present pace, it will be successful.

In 1996, Southern Pacific was the sixth-largest railroad in the U.S. with over $3 billion in revenues and over 15,000 miles of track.  At the end of 1995, an agreement was made with Union Pacific Corp. to purchase Southern Pacific Rail Corp. for $3.9 billion (Ortega, 1995). 

Copyright 2012 James L. Alyea. All Rights Reserved.

For more information, please contact Jimmy Alyea:

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Lustig, D.  (1992, October).  The “new” Southern Pacific.  Trains 51.10.  Retrieved from
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Ortega, F.  (1995, August 4).  SP’s chairman turns attention to oil and gas and new areas.  Wall
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Welty, G.  (1992, November).  SP’s quality comeback.  Railway Age 193.11.  Retrieved from