Functions of the Traffic Manager 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 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

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

FOB vs Delivered Pricing 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 FOB Plant= $10/cwt Rate to C2 = $4/cwt Delivered Price to all = $13/cwt . C1 C2 C1 pays more than fob C2 is subsidized

Forms of FOB Pricing 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.

Value of Service/Differential Pricing 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 Elastic Demand

Value of Service/Differential Pricing Unwise Truck Lines 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.

Value of Service/Differential Pricing Unwise Truck Lines Should any routes be eliminated?   Revenue Variable Over- Route per Run Cost/Run Gross head Net 1 1,440 (500) 940 (300) 640.00 2 1,120 (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 Eliminate Route 5    Revenue Variable Over- Route per Run Cost/Run Gross head Net 1 1,440 (500) 940 (300) 640.00 2 1,120 (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 Eliminate Route 4  Revenue Variable Over- Route per Run Cost/Run Gross head Net 1 1,440 (500) 940 (362.50) 577.50 2 1,120 (500) 620 (362.50) 257.50 3 960 (500) 460 (362.50) 97.50 4 800 (500) 300 (362.50) (62.50)  

Value of Service/Differential Pricing Unwise Truck Lines  Eliminate Route 3   Revenue Variable Over- Route per Run Cost/Run Gross head Net 1 1,440 (500) 940 (466.67) 473.33 2 1,120 (500) 620 (466.67) 153.33 3 960 (500) 460 (466.67) (6.67)

Value of Service/Differential Pricing Unwise Truck Lines Eliminate Route 2 Revenue Variable Over- Route per Run Cost/Run Gross head Net 1 1,440 (500) 940 (675.00) 265.00 2 1,120 (500) 620 (675.00) (55.00)  

Value of Service/Differential Pricing Unwise Truck Lines Eliminate Route 1   Revenue Variable Over- Route per Run Cost/Run Gross head Net 1 1,440 (500) 940 (1,300) (360.00)

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

Price Elasticity of Demand Inelastic Unitary P Q

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

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

$ Optimal Pricing Optimal Pricing 8 Maximizing Revenue Inelastic Range * Elastic Range Revenue Curve Price Zero Price, Large Q, 0* = 0 High Price, Zero Q, P*0 = 0 8

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

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

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

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

p = [P(a + bP) - (F + V(a + bP))] p = [aP + bP2 - (F + aV + bVP)] Optimal Pricing p = [PQ - (F + VQ)] Q = a + bP p = [P(a + bP) - (F + V(a + bP))] p = [aP + bP2 - (F + aV + bVP)] p = aP + bP2 - F - aV - bVP To maximize Profit, set 1st derivative = zero, solve for P

p = aP + bP2 - F - aV - bVP p' = [aP + bP2 - F - aV - bVP] Optimal Pricing p = aP + bP2 - F - aV - bVP First Derivative = p' = [aP + bP2 - F - aV - bVP] To maximize Profit, set 1st derivative = zero, solve for P p' = a + 2bP - bV = 0 2bP = -a + bV -a V + 2b 2 P* =

$ Optimal Pricing Profit = aP + bP2 - F - aV - bVP Profit Curve * Slope = Zero Slope Positive Slope Negative Price

What does Theory Explain? Optimal Pricing What does Theory Explain? -a V + 2b 2 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.”

Factors that Affect Rates Cost Related   Commodity Factors Route Factors    Demand Related  

Factors that Affect Rates Cost Related 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 Demand Related  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

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

Weight Breaks TL * MW = LTL * X Example: TL = $8.00/cwt MW = 40,000 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)

Rate Negotiation 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

Functions of the Traffic Manager 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

Carrier Selection Available Modes Selection Criteria Carrier Competition Total Cost

Available Modes 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

Carrier Selection Available Modes Selection Criteria Carrier Competition Total Cost

Carrier Selection Criteria Importance Selection Criteria Score Rank Transit Time Reliability/Consistency 1.301 1 Door to Door Transport Rates/Cost 1.405 2 Total Door to Door Transit Time 1.551 3 Willingness to Negotiate Rates 1.611 4 Financial Stability of Carrier 1.807 5 Equipment Availability 1.878 6 Frequency of Service 1.892 7 Pickup and Delivery Service 1.899 8 Freight Loss and Damage 2.037 9 Shipment Expediting 2.054 10

Carrier Selection Criteria (Continued) Importance Selection Criteria Score Rank Quality of Operating Personnel 2.108 11 Shipment Tracing 2.118 12 Willingness to Negotiate Services 2.162 13 Scheduling Flexibility 2.267 14 Line Haul Service 2.389 15 Claims Processing 2.338 16 Quality of Carrier Salesmanship 2.635 17 Specialized Equipment 3.476 18

Carrier Selection Available Modes Selection Criteria Carrier Competition Total Cost

$ Carrier Competition Distance MC RR RR= Higher Fixed Costs, Lower Variable Costs MC= Lower Fixed Costs, Higher Variable Costs

Motor Carrier Competition Basic Competition 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

Motor Carrier Competition Express vs LTL 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.

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

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

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

Motor Carrier Competition LTL vs TL 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.

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

Motor Carrier Competition LTL vs TL 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

~ $ Motor Carrier Competition ? LTL vs TL TL LTL 150 lbs LTL Market 6k 10k Volume ~ LTL vs TL

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

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

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

Carrier Selection Available Modes Selection Criteria Carrier Competition Total Cost