On Wednesday March 4th, Mike Bernard, Director of Capital Planning and Finance for Union Pacific, met with the CRMER Risk Management Fellows to discuss the many factors that go into Union Pacific’s enterprise risk management policy (ERM). Since the beginning of established business, a major risk for companies has always been the opportunity for failure. Union Pacific (UP) has established a continuous process to identify, assess, manage, and control potential events or situations that might threaten the longevity of the company.
The level of risk associated with certain events fluctuates over time and environments. The number one risk for UP is safety. Included in that is the transportation of toxic inhalation hazard materials (TIH), such as anhydrous and chlorine gas. However, the recent oil industry boom from fracking technology has created another rising risk. Without enough pipeline capacity, much of the crude oil produced in the U.S. is transported by rail. The primary threat from hauling oil and other hazardous materials is the possibility of a dangerous mishap that could endanger both UP employees and the public.
Yet, with this new risk, comes new opportunity. The oil fields require fracking sand, pipe, and equipment that is transported by UP. This has caused a shift in UP’s primary routes. Originally a major East-West railroad, North-South routes have become crucial to meet the demand of the oil fields. Business in connection with the oil industry now accounts for 6% of UP’s revenue.
Bernard listed several other threats included in UP’s ERM, including: Terrorism (associated with both TIH and economic impact); Oil price fluctuations (UP is the largest consumer of diesel in the world); work stoppages (the labor strike at west coast ports caused huge disruptions in rail and other shipping industries across the supply chain); the European economy; the U.S. debt crisis; regulation; etc. In response to all these scenarios, UP has protocols and procedures aimed at preventing and mitigating their potential damage; even as specific as using technology to measure the quality of bearings as the train rolls down the tracks.
Bernard mentioned that a major component of risk is the velocity of risk. The more time available to prepare for risk, the less potential for damage. Thus, correct monitoring systems can never be underestimated. The ability for a company to remain adaptable and agile can also steer businesses from disaster.
To demonstrate the effectiveness of UP’s ERM strategy, Bernard gave the example of two different hurricanes that affected Houston, a major hub for UP. Hurricane Rita struck 100 miles north of Houston in 2005, before their current ERM plan was in place. As a result, UP’s Houston activity was shut down for 13 days. By the time Hurricane Ike directly hit Houston in 2008, UP’s ERM was well in place and the hurricane only caused a 3 day shutdown.
Yet again, listening to the perspective of an industry leading professional on the subject of risk management proved a great opportunity for the Risk Management Fellows. Especially interesting was gaining perspective on all the different economic, environmental, and industry elements that impact the railroad industry every day. As Mike Bernard put it, “expect the unexpected.”