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Transcript of Hardee Transportation
Equipment Purchase Price
1. Line-haul tractors = $80,000
2. Line-haul trailers = $24,000
1. Tractors = 5-year straight line
2. Trailers = 8-year straight line
1. Tractors = 10 percent APR for 5 years
2. Trailers = 10 percent APR for 8 years
1. $2.10 per gallon diesel
2. Line-haul tractors = 6.5 miles per gallon
1.Line-haul drivers = $0.42 per mile
2. Pick-up and delivery (PUD) drivers = $30 (fully loaded) per hour
3. Dock workers = $25 (fully loaded) per hour
1. Insurance cost = $0.05 per mile
2. Maintenance cost = $0.15 per mile
3. Billing cost = $5.00 per freight bill
4. Tractors and trailers are available for use 20 hours per day (80 percent uptime), 365 days per year
5. Administrative/ overhead cost = 8 percent of total cost of move.
6. Dock facility cost = $15 per hour
7. Line-haul vehicle averages 45 mph between origin and destination.
The move would be between Pittsburgh and Miami.
Hardee has avoided this market because of the lack of backhaul opportunities.
offers a significant increase in volume
A complicating factor in this move is the request that Hardee perform sorting and segregating at its dispatch centers.
Each shipment will consist of straight (one product) pallet loads of various types of goods freight destined for Miami.
Sorting and segregation at Hardee's location would consist of
breaking the pallets
sorting the freight
repalletizing into rainbow (mixed products) pallets for each store.
Jim O'Brien has realized some of Hardee's customers are more profitable than others.
Hardee has traditionally structured its prices around discounts off their published tariff rates.
Most of the discounts have been based on freight volume only.
Jim knows that his drivers and dock people do more for certain customers:
count freight during loading
sort and segregate freight on the dock
Case Question 2.
How would you develop a methodology for Hardee to price its existing services? Its evolving services? Would you use the same or different strategies for each?
Jim sees some of the new service demands from his customers as being difficult price.
Some of the new demands include:
continuous shipment tracking
Dedicated customer service personnel.
Hardee has used average cost pricing for its major customers.
Pricing managers have urged consider marginal cost pricing.
Jim has developed a keen interest in value-of-service pricing methods versus the traditional cost-of-service pricing.
Case Questions 1.
What would be the advantages/disadvantages of using cost-of-service versus value-of-service pricing for Hardee's customers? When discussing cost-of-servicing versus value-of-service pricing for Hardee's customers? When discussing cost-of-service pricing, what type of cost (average versus marginal) would make more sense for Hardee?
One of Jim O'Brien's customers has presented him with an opportunity for a significant amount of freight moving into a new market for Hardee. :
Hardee is a truckload carrier primarily moving freight in the East/West market in the United States.
some movements in and out of Canada and Mexico
focused on moving freight in eastward and westward directions
Hardee has dispatch centers located throughout the United States which have some dock capacity.
Hardee has never experienced this type of request before.
Jim knows that he needs to put some type of costs to this move to make sure that the moves are profitable.
Because of the large volume, not covering Hardee's costs in pricing could result in losses for Hardee. The relevant information for costing this move is as follows:
Hardee have no form of activity-based costing or any other methodology that will allow them to really get a handle their hidden costs .
what Hardee pays its drivers
the costs of equipment and fuel
the overall costs of dispatch and dock operations. Hardee's average length of haul is 950 miles and its loaded mile metric is 67 percent.
Route and Time of Move
The shipment (40,000 pounds) originates at a customer location in Pittsburgh, located 20 miles from Hardee's dispatch center. A PUD driver is dispatched from the Hardee location at 8:30 am on January 12, 2010, and arrives at destination at 9:00 a.m. the same day. the shipment is loaded from 9:00 a.m. to 12:00 p.m. The PUD driver departs the customer location at 12:00 pm and arrives back at the Hardee dispatch center at 12:30 p.m.
The sort process starts at 12:30 p.m. and ends at 8:30 p.m. on January 12. It requires unloading the trailer, sorting, and repalletizing the load. This operation requires two dock workers, each working the same trailer for 8 hours in the dispatch center.
The line-haul portion begins with the vehicle being dispatched from the Pittsburgh location at 8:30 p.m. on January 12 and traveling to Charlotte, North Carolina, a distance of 481 miles, and arriving at Charlotte at 7:12 a.m. on January 13. The driver rests from 7:12 a.m. until 3:12 p.m. The trip continues with the vehicle departing 399 miles, arriving at Jacksonville at 12:06 a.m. on January 14. The driver rests from 12:06 a.m. until 10.06 a.m. The line-haul portion concludes with the vehicle departing Jacksonville at 10:06 a.m. and traveling to the customer's location in Miami, a distance of 369 miles, and arriving at the distribution center at 6:18 p.m. on January 14.
The line-haul driver stays with vehicle while it is being unloaded (2 hours unload time). The driver then dead heads at 8:18 p.m. from the customer's distribution center and arrives at a Hardee dispatch center located in Miami at 8:48 p.m., a distance of 15 miles from the distribution center.
Case Question 1.
What are the pick-up, sort, line-haul, and delivery costs to Hardee for this move?
Case Question 2:
What is the total cost of this move? Cost per cwt? Cost per revenue mile?
TOTAL COST= $1,243.27
PER cwt= $3.45
PER Revenue Mile= $1,243.27/1295 miles = $0.96
Pick up costs:
Labor: 4 hrs x $30/hr = $120
Fuel: 40 miles / 6.5 mpg x $2.10/gal. = $12.92
Insurance & Maintenance: 40 m. x $0.20/m = $8.00
Tractor Depreciation: 4hrs. x $1.83/hr = $7.32
Trailer Depreciation: 4 hrs. x $0.34 = $1.36
Total Pick Up Costs: $154.50
Labor: 16hrs x $25/hr = $400
Tractor Depreciation: 8hrs x $1.83/hr = $14.64
Trailer Depreciation: 8hrs x $0.34 = $2.72
Total Sorting Costs: $417.36
Depreciation: tractor: 46 hr @$1.83/hr = $84.18
Trailer: 46 hr @$0.34/hr = $15.64
Interest: Tractor: 46 hr@$2.33/hr = $107.18 Trailer: 46hr @ $0.50= $23.00
Fuel: 1249 @ $0.32/mile =$399.68
Labor: 1249 @ $0.42/mile = $54.18
Maintenance: 1249@ $0.15 = $187.35
Insurance: 1249@ $0.03 = $37.47
Total Line-Haul Cost = $908.68
Tractor:2.30hr @ $1.83/hr = $4.21 Trailer:2.30hr @ $0.34/hr= $0.78
Interest: Tractor: 2.30hr @ $2.33/hr=$5.36 Trailer: 2.30hr @$0.50/hr= $1.15
Fuel: 15 miles@ $0.32/mile= $4.80
Labor: 2.30hr @ $30.00/hr= $69.00
Maintenance:15 miles @ $0.15/mile= $2.25
Insurance: 15 miles @ $0.03/mile= $0.45
TOTAL Delivery Cost= $88.00
Case Question 3:
2 Drivers are better than one for Line-haul move
Case Question 4:
Assume the Hardee has no loaded backhaul to return the vehicle and driver to pittsburgh. How would you account for the empty backhaul costs associated with this move? Would you include those in the head haul move? How would this impact your pricing strategy?
Value of service – pricing according to the value of the commodity being transported (more valued comodities are more expensive to transport)
Cost of service – setting prices on the basis of the cost of providing the service
What Is Value of Service and Cost of Service?
Cost of service broken down into:
marginal cost – setting prices at the marginal or variable prices of producing each unit.
total average cost – total cost divided by total output
Advantages of cost of service pricing:
ability to somewhat control prices to maximize revenue
suited for markets that have many providers.
usually competitive pricing.
Disadvantages of cost of service pricing:
potential revenue is lost
Marginal cost is difficult to calculate for smaller quantities
completely effective if only one type of commodity is shipped
fully allocated price approach function may be incorrect because total output level is dependent on prices charged.
marginal costs can fluctuate widely as volume changes
Cost of Service Pricing Pros and Cons
Disadvantages of value of service pricing
customers with more expensive products may look for cheaper rates if available.
in order to be completely effective a monopoly is needed.
relies on different types of commodities to be shipped
in order to use the third degree price approach and the differential pricing approachyou much be able to segment customers.
Continue with Average cost approach as the floor
Since they have no form of basing their costs and don’t know how to get a handle on their hidden costs the average cost approach should cover their bases better than marginal costs which would cause their prices to fluctuate if volume in what they are shipping decreases.
Use value of service pricing as the ceiling
Hardee Transportation can categorize these new customers who have demands for RFID tracking and dedicated service personnel as one group charge them at value of service pricing and receive increased revenue.
Pros and Cons of Value of Service Pricing
Advantages of value of service pricing
charging lower prices for one commodity helps cover marginal costs, which lowers the prices for others.
if done right revenue can increase