Chairman's Challenge: 7 + 7

I want to share with you an important challenge I issued during the general management meeting last month in Norfolk. It is a challenge that demands the best of all of us working together.

The message is "7 + 7." We need to begin to accomplish two goals. Number one is to start our revenue number with a 7 - $7 billion, up from $6.2 billion last year. The second is to start our operating ratio with a 7 - as in the 70s. Our challenge is to get well along toward both these goals this year, to demonstrate we can achieve them.

You already have proven you can accomplish good things even in the face of a slumping economy - and even in the face of disaster. In 2001, we did what was necessary to control costs and improve revenue yield to successfully navigate a soft economy. You deserve credit. I expect history to show our accomplishments over the last two years, including NS 21 and the Thoroughbred Operating Plan, are among the most significant things this company has ever done.

With some signs pointing to an economic recovery, now is the time for us to do what is necessary to resume our place as the leader in the transportation industry.

We must make an incremental jump in the improvement of our business if we are to continue to succeed in an environment that continues to change radically. That change, in essence, is this: as we have expanded our transportation network, markets have shifted, and we need to react. We need to continue to improve our service reliability. For example, we must run our merchandise network well above 90 percent on time. When we do that, we can sell our transportation as a high-value service, gain market share and increase revenues.

Also, we must keep working through Six Sigma, a new round of NS 21 process improvements and your own departmental and individual efforts to drive down costs. We achieved last year the industry's best improvement in operating ratio, but 83.7 percent is not nearly good enough for 2002 and beyond.

Our unprecedented success in safety has been the model for other efforts at improvement. Here's a lesson for us. Safety strives for double zeros in incidents and injuries. In our business improvement, let's aim for double sevens-in revenues and operating ratio.

I know you are up to the task. Time and again, the people of Norfolk Southern have demonstrated stamina, determination and pride in the basic values that are the foundation of our company. I am confident we will rise to the occasion again, and I am privileged to serve with you on the team.

"7 + 7" is a big, bold goal for us, but the time has come for all of us to show once again what Norfolk Southern people can do. Let's make it happen.

David R. Goode
Chairman, president and chief executive officer

Employee development is focus for future

Developing and fully utilizing the talents of employees is important to Norfolk Southern's future, according to Tom Mullenix, vice president human resources.

In a breakout session at the 2002 General Management Meeting, he said the company's work force demographics present a challenge.

"We have a significant percentage of non-agreement employees who could retire within the next 10 years, and a very small percentage who are under the age of 30," he said. "That makes it imperative that we work to develop our work force to meet the needs of the future."

Mullenix said the company is implementing major initiatives designed to enhance its ability to attract, develop and retain the best talent for NS. The theme, "Forging our future … together," captures the essence of the initiatives.

Among the initiatives is the formation of a Diversity Council. The council will help NS continuously improve its diversity process and promote a more inclusive work place.

CareerTrack, an initiative that will be introduced later this year, will give employees more control over their career development. With CareerTrack, employees can fill out an online resume and then indicate their interest in specific management jobs. A new management assessment will be used to measure the skills and abilities critical for success at NS.

"We'll be able to identify a larger pool of qualified candidates for management positions using CareerTrack," said Rick Davison, assistant vice president human resources.

A mentoring program has been created to provide guidance and coaching to newly hired or promoted nonagreement employees. Experienced managers will participate in the program as mentors.

"We believe in the value of experience," Mullenix said. "Partnering new managers with experienced managers through the mentoring program is another way to encourage the professional growth and development of our employees."

The creation of an "Employee Resource Center" (ERC) gives NS employees Web-based access to a wide variety of information and services. Employees can reach the ERC from any computer that has access to the NS intranet or the Internet.

Mullenix also said the company has long-term initiatives, such as online learning opportunities and an executive education program at the University of Virginia's Darden School of Business. In addition, the company is exploring updating the tuition assistance program.

"All of these initiatives will give our employees more control over their development and career progress," said Mullenix. "They also will ensure that we have the dynamic work force we need to ensure a sound future for NS."

Service reliability improves with TOP

"We've changed our philosophy about running trains," John Wagner, assistant general manager Western Region, told those attending the 2002 General Management Meeting as he gave an update on Norfolk Southern's Thoroughbred Operating Plan (TOP).

The plan was developed in 2001 to reduce car handling and shorten routes for NS' merchandise network. Merchandise comprises about 60 percent of the company's overall business. Implementation was gradual to avoid operating problems and to make it seamless to NS customers. The plan is now fully implemented.

Wagner said the company always had an operating plan; however, a major consequence of the pre-TOP philosophy and the transit variability it created was the evolution of more and more customized service to improve the predictability of transportation for customers. That led to an inefficient plan that was very difficult to operate.

"We were making changes at the local level and not always considering the effect on the system," he said. "Now, we know what's happening everywhere, and we can make adjustments when necessary that don't negatively impact other areas of the system."

Dale Schaub, senior director service design and transportation planning, explained the process used to develop TOP and how it has helped NS provide more consistent, reliable service to its merchandise customers.

"We've seen significant reductions in transit times, because we've chosen the most efficient route for each merchandise train," he said.

Schaub and Wagner are part of a group located in Atlanta dedicated to monitoring TOP constantly.

Another result of TOP implementation is better asset utilization, according to Wagner.

"We're turning our equipment faster, so we don't need as many freight cars in our fleet," he said. "We're also helping our employees provide better customer service, because they know exactly when trains are arriving. That also means our crews have a more reliable schedule, and our yard employees can count on receiving cars when we promise them."

Schaub pointed out that customers who own their equipment are benefiting as well.

"When we get our customer's equipment back to them quickly, they can realize the efficiencies of a smaller car fleet just as we do," he said.

What's on the horizon for TOP?

Wagner said telling NS customers about the benefits of the plan is one aspect of the second phase.

"We're meeting with customers and showing them how we've improved our service reliability, and we're asking them to think rail in a bigger way," he said. "We're stressing the consistent execution of TOP and the consequences to our customers of not running to the plan every day."

Schaub said the company also is working on interline service improvements with Union Pacific Railroad.

"We can reduce transit times and improve service consistency even more with improved blocking and train schedules that minimize handlings and reduce circuity between our networks," he said.

"TOP will help us achieve our goal of providing reliable, consistent service to our customers and taking more trucks off the road," Wagner said.

NS is making it easier to do business

New technologies and new approaches are making it easier to do business with Norfolk Southern, according to Mike McClellan, vice president intermodal marketing.

It's no secret that our main competition is trucks," he said. "We have to be flexible and provide real-time and easily accessible services and information to meet that competition."

McClellan cited a survey conducted by Georgia Tech that said customers indicated their first requirement is on-time delivery. Safety, cost and reliability followed in order of importance.

He said the intercity truck market has grown substantially over the past few years, and rail has not kept pace, because it is not perceived as being as flexible or reliable as truck transportation.

To improve NS' ability to compete with trucks, the company is using new technologies and strategies.

"We're improving our product while reducing costs," he said. "We're making it easier to do business with us and taking a different approach in selling our services."

McClellan cited the Thoroughbred Operating Plan (TOP) for NS' merchandise network as a major product improvement. He also said developing the ability to "get inside the box" (measure units instead of trains) is an important part of product improvement.

"We'll soon be measuring on-time arrivals of units, not trains," he said. "That will give us the ability to track shipments door to door."

Using new technologies, NS' Web-based Thoroughbred Information System gives customers the ability to order, track and reconsign or divert equipment. Customers also can submit Internet bills of lading to expedite information flow. The company has its Coal Transportation Management System up and running. And another subsidiary, MODALGISTICS, is providing supply chain management.

"We're improving our intermodal products as well with service guarantees and stronger interline products and relationships," McClellan said.

"With these new technologies and services available, we'll realize our potential and take freight off the road and put it on the rails," he said. "If we focus on customer service the way we focus on safety, we'll create a culture of service that others will want to emulate."

Continual improvement assured with Six Sigma

Norfolk Southern's quality processes are getting stronger with the adoption of Six Sigma problem-solving methodology. John Samuels, senior vice president operations planning and support, told the 2002 General Management Meeting audience that the company is moving closer to making Six Sigma "the way we work."

"We've raised the bar significantly for quality over the past few years," Samuels said. "ISO 9001:2000 registration is our quality management system model and Six Sigma is our process for continual improvement."

In a smaller session, managers learned about how to champion NS' Six Sigma methodology. Twenty Black Belts are being trained this spring. These are experts who devote 100 percent of their time to problem-solving projects within their departments. It takes absolute commitment and about seven months to be fully trained, according to Clifford J.G. Roebuck, chief executive officer of Six Sigma Canada Inc. NS is using that company to train its Black Belts. Concurrent with Black Belt training, 24 Green Belts will be trained and will spend 30 pecent of their time applying Six Sigma techniques.

Samuels said the benefits of the data and fact-based problem solving methodology to reduce variation will pay off in a number of ways for NS and its customers.

"As we migrate to using this method to improve the way we do business, our transportation service will become more consistent and reliable, we'll save money and, most of all, we'll delight our customers."

Double Zero - We can make it happen

Chuck Wehrmeister, vice president safety and environmental, set the tone for the 2002 Safety Awards Meeting on March 13 by saying, "We've talked about it, advertised it, but we need to make double zero - no incidents and no injuries - happen."

With "Double Zero - We can make it happen" as the theme, divisions across the NS system challenged each other to do more to achieve this goal.

Steve Tobias, vice chairman and chief operating officer, expressed the importance of communication, attitude and awareness of one's environment to achieve the goal of double zero.

He added that 2001 was a tough but successful year for NS in terms of safety. It won its 12th consecutive E.H. Harriman Gold Medal Award for its efforts in 2000. NS also appears to be on track to win a 13th gold medal for 2001, with the official announcement on May 2, in Washington, D.C.

Tobias cited the employees of the Chattanooga Diesel Shop, who have worked over one million employee hours without a reportable injury, as an example of how NS can further improve its safety record. And, he reaffirmed NS' commitment to preventing all incidents and injuries.

"We can make double zero a reality on this railroad," said Tobias.

David R. Goode, chairman, president and chief executive officer, challenged the NS team to put the same commitment and desire that has made NS the nation's safest railroad to providing the best service to its customers.

"We are beginning the process of changing Norfolk Southern," said Goode, "from the nation's safest railroad, to the safest and most customer-focused railroad."

Guest speaker Rob Gould, associate administrator public affairs, Federal Railroad Administra-tion (FRA), commended NS for having the lowest injury rate among Class 1 railroads.

"Safety truly is a way of life," said Gould. "And Norfolk Southern continues to lead by example."

He said the company's reportable injury rate is 50 percent better than the closest competitor and 60 percent better than the industry as a whole, but he agreed with others that more can be done.

In order to continue to make railroads safer, Gould said the FRA will focus on partnering to strengthen safety initiatives. He added that the FRA will keep successful safety initiatives in place while continuing to find new and better ways to ensure the safety of railroad employees.

The FRA will continue to focus on fatigue awareness and prevention, according to Gould.

Gould also commended NS for its participation on six critical action teams for homeland security created after the tragic events of Sept. 11.

Rick Vickrey, Harold F. Hammond Award nominee

Two NS employees in the transportation department, Sonny Pacifico, Harrisburg division, and Fred Born, Illinois division, received recognition for their heroism in saving the lives of two individuals during 2001.

Pacifico's quick action when a trespasser was injured helped the man survive the incident. Born spotted an overturned car in an icy ditch while inspecting a train and called for help.

Rick Vickrey, yardmaster, Cincinnati Terminal, was honored as NS' Harold F. Hammond Award nominee for his dedication to safety on the railroad, in his community and at home. He summed up the commitment of all NS employees to achieving double zero.

"There's an enemy hiding out there. We have to find it and stop it. Double zero, let's roll."

Benefits extended for reservists called up for Operation Enduring Freedom/Noble Eagle

Norfolk Southern has extended for 90 days benefits to reservists called up for Operation Enduring Freedom/Noble Eagle. Active agreement and nonagreement employees called to active military duty will receive a monthly income supplement of $1,500 and existing health care coverage (including medical, dental and vision coverage as applicable) and life insurance will continue on the same basis as for active employees.