transportation/logistic strategy rate determination/negotiation mode choice/carrier selection...

Transportation/Logistic Strategy Rate Determination/Negotiation Mode Choice/Carrier Selection Documentation: Bill of Lading Freight Bill Loss & Damage Claims Vehicle Load Planning Determining Shortest Routes Managing the Private Fleet Handling Small Shipments Shipping Hazardous Materials Handling International Shipments Appearing Before Rate Bureaus, Commissions, and Courts Planning/Evaluation Functions of the Traffic Manager

Transportation/Logistic Strategy Rate Determination/Negotiation FOB vs Delivered Pricing Value of Service/Differential Pricing Optimal Pricing Factors that Affect Rates Weight Breaks Rate Negotiation

Transportation/Logistic Strategy Free on Board FOB Origin (Buyer Owns Goods in Transit) FOB Destination (Seller Owns Goods in Transit) Prepaid vs Collect/Allowed vs Charged Back Delivered Pricing Seller Retains Ownership in Transit Seller Arranges Transportation Seller Files Freight Claims Average Transportation Market Expansion Phantom Freight Freight Absorption FOB vs Delivered Pricing

Transportation/Logistic Strategy. C1C1 C2C2 Delivered Price to all = $13/cwt FOB vs Delivered Pricing FOB Plant= $10/cwt Rate to C 2 = $4/cwt Rate to C 1 = $2/cwt C 1 pays more than fob C 2 is subsidized

Transportation/Logistic Strategy FOB Destination, Freight Allowed: Buyer is allowed to deduct the freight charges from the invoice. FOB Origin, Charged Back: Seller is allowed to add freight charges to the invoice. FOB Destination, Collect and Allowed: Buyer pays freight but deducts it from the invoice. FOB Origin, Prepaid and Charged Back: Seller pays the fright but adds it to the invoice. Forms of FOB Pricing

Transportation/Logistic Strategy What is it? Why Use it? High Fixed Costs Excess Capacity Opportunity Competition When is it Profitable? When Above Full Cost When Below Full Cost If: Above Variable Cost Excess Capacity Elastic Demand Value of Service/Differential Pricing

Transportation/Logistic Strategy The Unwise Truck Lines Company operates five pieces of equipment daily over five routes with end points in common. The company just hired a new comptroller who is studying the profitability in order to determine which, if any, of the routes are not covering full costs, and, thus, not contributing to profits. He found that each route incurred $500 per day in variable operating expenses and earned the following revenue per day: Route 1 = $1,440; Route 2 = 1,220; Route 3 = 960; Route 4 = 800; Route 5 = 640. The new comptroller has stated that any route showing a loss after variable costs and a prorated share of overhead will be eliminated. Presently, the daily overhead is $1,500, or $300 per route. If any run is eliminated, overhead will decline by $50. Equipment will be sold to payoff any outstanding debt. Unwise Truck Lines Value of Service/Differential Pricing

Transportation/Logistic Strategy Should any routes be eliminated? RevenueVariable Over- Routeper RunCost/RunGrosshead Net 11,440(500) 940 (300) 640.00 21,120(500) 620 (300) 320.00 3 960(500) 460 (300) 160.00 4 800(500) 300 (300) 0.00 5 640(500) 140 (300)(160.00) Value of Service/Differential Pricing Unwise Truck Lines

Transportation/Logistic Strategy Eliminate Route 5 RevenueVariable Over- Routeper RunCost/RunGrosshead Net 11,440(500) 940 (300) 640.00 21,120(500) 620 (300) 320.00 3 960(500) 460 (300) 160.00 4 800(500) 300 (300) 0.00 5 640(500) 140 (300)(160.00) Value of Service/Differential Pricing Unwise Truck Lines

Transportation/Logistic Strategy Eliminate Route 4 RevenueVariable Over- Routeper RunCost/RunGrosshead Net 11,440(500) 940 (362.50) 577.50 21,120(500) 620 (362.50) 257.50 3960(500) 460 (362.50) 97.50 4800(500) 300 (362.50) (62.50) Value of Service/Differential Pricing Unwise Truck Lines

Transportation/Logistic Strategy Eliminate Route 3 RevenueVariable Over- Routeper RunCost/RunGrosshead Net 11,440(500) 940 (466.67) 473.33 21,120(500) 620 (466.67) 153.33 3 960(500) 460 (466.67) (6.67) Value of Service/Differential Pricing Unwise Truck Lines

Transportation/Logistic Strategy Eliminate Route 2 RevenueVariable Over- Routeper RunCost/RunGrosshead Net 11,440(500) 940 (675.00) 265.00 21,120(500) 620 (675.00) (55.00) Value of Service/Differential Pricing Unwise Truck Lines

Transportation/Logistic Strategy Eliminate Route 1 RevenueVariable Over- Routeper RunCost/RunGrosshead Net 11,440(500) 940 (1,300)(360.00) Value of Service/Differential Pricing Unwise Truck Lines

Transportation/Logistic Strategy Price Elasticity of Demand Elasticity = Response in Quantity Sold to a Change in Price Q% P% E = Q% P% Q% P% = 1 = Unitary Elasticity > 1 = Elastic < 1 = Inelastic

Transportation/Logistic Strategy Elastic Inelastic Unitary P Q Price Elasticity of Demand

Transportation/Logistic Strategy Price Elasticity of Demand Changing Prices Increase price in an elastic market and decrease revenue Decrease in price in an elastic market and increase revenue Increase in price in an inelastic market and increase revenue Decrease in price in an inelastic market and decrease revenue

Transportation/Logistic Strategy Optimal Pricing To Maximize Profit: Price Where Marginal Cost Equals Marginal Revenue Which Financial Statement has Marginal Cost? Which Financial Statement has Marginal Revenue?

Transportation/Logistic Strategy Optimal Pricing Maximizing Revenue Optimal Pricing Revenue Curve Price * $ Zero Price, Large Q, 0* = 0 High Price, Zero Q, P*0 = 0 8 Inelastic RangeElastic Range

Transportation/Logistic Strategy Profit = Revenue - Cost ( = R - C) Revenue = Price * Quantity (R = P * Q) Cost = Fixed Cost + Variable Cost * Q (C = F + VQ) Quantity = a + bP (Q = a + bP) ( = R - C) (R = P * Q) (C = F + VQ) (Q = a + bP) Optimal Pricing

Transportation/Logistic Strategy Y X Y = a + bX a b (Slope) Intercept General Form of a Straight Line (Quantity Sold is Dependent upon Price) Optimal Pricing

Transportation/Logistic Strategy Q P Q = a + bP a b (Slope) Intercept Optimal Pricing General Form of a Straight Line (Quantity Sold is Dependent upon Price)

Transportation/Logistic Strategy Optimal Pricing Q = a + bP However, the slope (b) is probably negative, but that must be determined) General Form of a Straight Line (Quantity Sold is Dependent upon Price)

Transportation/Logistic Strategy = [PQ - (F + VQ)] Q = a + bP = [P(a + bP) - (F + V(a + bP))] = [aP + bP 2 - (F + aV + bVP)] = aP + bP 2 - F - aV - bVP To maximize Profit, set 1 st derivative = zero, solve for P Optimal Pricing

Transportation/Logistic Strategy = aP + bP 2 - F - aV - bVP First Derivative = ' = [aP + bP 2 - F - aV - bVP] To maximize Profit, set 1 st derivative = zero, solve for P ' = a + 2bP - bV = 0 2bP = -a + bV -a V + 2b2 P* = Optimal Pricing

Transportation/Logistic Strategy Price Slope Positive Slope Negative Slope = Zero * Profit = aP + bP 2 - F - aV - bVP Optimal Pricing $ Profit Curve

Transportation/Logistic Strategy Optimal Pricing What does Theory Explain? -a V + 2b2 P* = What happened to Fixed Costs? Relate this to Differential Pricing. Are Fixed Costs relevant? -a/2b = price that will maximize revenue (check back in derivation). Add half your variable costs (or anything), and you are in the elastic range. Relate to Differential Pricing. Lower price to expand revenue, only if demand is elastic.

Transportation/Logistic Strategy Cost Related Commodity Factors Route Factors Demand Related Commodity Factors Route Factors Factors that Affect Rates

Transportation/Logistic Strategy Commodity Factors Loading Characteristics Susceptibility to Loss and Damage Volume of Traffic Regularity of Movement Equipment Requirements Route Factors Distance Operating Conditions Traffic Density Backhaul Factors that Affect Rates Cost Related

Transportation/Logistic Strategy Commodity Factors Value of Commodity Economic Conditions of User Industry Competing Rates Route Factors Competition with Other Carriers Competition in Shipper Industry Competition in Receiver Industry Traffic Density Factors that Affect Rates Demand Related

Transportation/Logistic Strategy Weight Breaks A point of indifference between a given rate and a rate charged for a larger volume TL LTL Volume $

Transportation/Logistic Strategy TL * MW = LTL * X Example: TL = $8.00/cwt MW = 40,000 LTL = $20.00 8*400 = 20* X 3200/20 = X X = 160 or 16,000 lbs If shipment is less than 16,000 lbs, ship LTL If shipment is over 16,000 lbs, ship TL as full TL (40,000lbs) Weight Breaks

Transportation/Logistic Strategy New Business Threat of Loss of Old Business Rule of Analogy (Protests) Bases of Power Reward Coercive Legitimate Referent Expert Know the Cost of Your Next Best Alternative Rate Negotiation

Transportation/Logistic Strategy Rate Determination/Negotiation Mode Choice/Carrier Selection Documentation: Bill of Lading Freight Bill Loss & Damage Claims Vehicle Load Planning Determining Shortest Routes Managing the Private Fleet Handling Small Shipments Shipping Hazardous Materials Handling International Shipments Appearing Before Rate Bureaus, Commissions, and Courts Planning/Evaluation Functions of the Traffic Manager

Transportation/Logistic Strategy Carrier Selection Available Modes Selection Criteria Carrier Competition Total Cost

Transportation/Logistic Strategy Motor Carriers Express, LTL, TL, Contract, Private, Exempt Railroads Carload, Unit Train, TOFC/COFC, Contract, Private Airlines Express, All Cargo, Combination, Private Water Carriers Trades, Barge, Private, LASH, RORO Pipelines Crude, Products, Private Intermediaries - Brokers, Freight Forwarders, Shipper Assn, IMC, 3PL Available Modes

Transportation/Logistic Strategy Importance Selection Criteria ScoreRank Transit Time Reliability/Consistency 1.301 1 Door to Door Transport Rates/Cost1.405 2 Total Door to Door Transit Time1.551 3 Willingness to Negotiate Rates1.611 4 Financial Stability of Carrier1.807 5 Equipment Availability1.878 6 Frequency of Service1.892 7 Pickup and Delivery Service1.8998 Freight Loss and Damage2.037 9 Shipment Expediting2.05410 Carrier Selection Criteria

Transportation/Logistic Strategy Importance Selection Criteria ScoreRank Quality of Operating Personnel2.10811 Shipment Tracing2.11812 Willingness to Negotiate Services2.16213 Scheduling Flexibility2.26714 Line Haul Service2.38915 Claims Processing2.33816 Quality of Carrier Salesmanship2.63517 Specialized Equipment3.47618 (Continued) Carrier Selection Criteria

Transportation/Logistic Strategy Carrier Competition Distance $ MC RR RR= Higher Fixed Costs, Lower Variable Costs MC= Lower Fixed Costs, Higher Variable Costs

Transportation/Logistic Strategy Express Carriers: Traditionally restricted to shipments under 150 lbs LTL: Defined by the ICC as shipments up to 10,000 lbs TL: Full truckloads of 40,000 lbs Actually a lot of competition between segments Basic Competition Motor Carrier Competition

Transportation/Logistic Strategy Small shipments are a problem of long standing. Express Carriers do well with shipments under 150 lbs. LTL does well with shipments over 500 lbs. Shipments between 150 lbs and 500 lbs are a problem. FedEx and UPS moving into LTL, but not set up for it. Express vs LTL Motor Carrier Competition

Transportation/Logistic Strategy Express LTL $ 150 lbs LTL Market Express Market 500 lbs ? 6k 10k Volume ~ Express vs LTL Motor Carrier Competition

Transportation/Logistic Strategy Express vs LTL Motor Carrier Competition Small Shipment Specialists (SSS)? Opportunities for new carriers with specialized equipment? Focus on shipments form 150 to 500 lbs? Focus on service?

Transportation/Logistic Strategy Express LTL $ 150 lbs LTL Market Express Market 500 lbs ? 6k 10k Volume SSS* ~ Express vs LTL Motor Carrier Competition

Transportation/Logistic Strategy LTL vs TL Weight Breaks Between Modes Many traffic managers use TL for shipments of 6K to 10K Some competition between LTL and TL, but also a gap in service: LTL prefers 1,000-5,000 lbs; TL will try to re-sell the capacity remaining. LTL vs TL Motor Carrier Competition

Transportation/Logistic Strategy LTL vs TL Motor Carrier Competition Weight Breaks A point of indifference between a given rate and a rate charged for a larger volume TL LTL Volume $ V*

Transportation/Logistic Strategy Weight Break Example TL Cost [1] = LTL rate * Volume (V) Ship 6,000 lbs from Fayetteville, AR to Phoenix, AZ (1,200 Miles) Actual Rate via ABF = 60.58; with 60% Discount = $24.23/cwt TL Cost = $1.25/Mile * 1,200 Miles = $1,500.00 LTL rate for 5,000 to 10,000 lbs = $25.00/cwt $1,500 = 25.00 * V 1,500/25.00 = V V = 6,000 lbs If shipment is less than 6,000 lbs, ship LTL If shipment is over 6,000 lbs, ship TL (pay for the entire truck) [1] TL Volume at 40,000 lbs LTL vs TL Motor Carrier Competition

Transportation/Logistic Strategy TL LTL $ 150 lbs LTL MarketTL Market 500 lbs ? 6k 10k Volume ~ LTL vs TL Motor Carrier Competition

Transportation/Logistic Strategy LSS = Large Shipment Specialists Opportunities for new carriers with sophisticated information systems? Jevic, Holland Others? Carriers that handle large LTL shipments (i.e., 6k to 20k) like TL carriers (i.e., door-to-door, without terminals). Role of Density? Role of Intermodal? Role of Information? Motor Carrier Competition LTL vs TL

Transportation/Logistic Strategy TL LSS* 6k 10k Volume $ 150 lbs TL Market 500 lbs LTL ? LTL Market *LSS = Large Shipment Specialists ~ LTL vs TL Motor Carrier Competition

Transportation/Logistic Strategy Express TL 150 lbs Express TL 500 lbs SSS ~ 6k 15k Volume LTL LSS LTL $ ??? LSS Motor Carrier Competition

Transportation/Logistic Strategy What will the industry look like in the future? New forms of competition? or Mega Carriers Providing Service to all Segments? Motor Carrier Competition

transportation/logistic strategy rate determination/negotiation mode choice/carrier selection...

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