What are the different pricing decisions and objectives which

a transportation company can set which will provide

sustainability to the company in the face of market
competition?

Words amount: 4336

CONTENTS
1. Front Page..Pg 1
2. Contents.Pg 2
3. Introduction...Pg 3
4.

Transportation Demand.Pg 4

5.

Literature and Conceptual Issues...Pg 5 - 8

6.

Pricing in Transportation Management.Pg 9 - 17

7.

SummaryPg 18

8.

Bibliography..Pg 19

9. References..Pg 19

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Introduction
The significant roles of transportation in physical distribution of materials are
well appreciated and need not be over stressed. There are many logistical operation
activities will be harness towards enhancement of effective supply chain management.
There is a positive and linear relationship between logistics and supply chain.
Transportation cost is the major area where unnecessary supply chain cost can be
incurred. Insufficient load planning, often lead to longer run around, will lead to cost
escalation of the transportation operation. This may have an impact on their customer
service level. Lower inventory levels can escalate the transportation cost due to smaller
and more irregular loads. Ineffective routing and schedule of orders can also impact on
transportation cost.

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Transportation Demand
Transportation demand refers to amount and type of travel would choose under
specific condition, taking account factors such as quality of the transportation option
available and prices. Understanding demand is important to Transportation Planning and
Transportation Demand Management. There are many strategies that influence the
transportation behavior.
There are many factors can affect the transportation demand. All the factors are
listed below:
a) Demographics Number of people (residents, employees and visitors), incomes
age/lifestyle, and lifestyle preferences
b) Economics Number of jobs, incomes, business activity, freight transportation,
tourist activity
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c) Prices Fuel prices and taxes, vehicle taxes and fees, road tolls, parking fees,
vehicle insurance, public transportation fares
d) Transportation Options Walking, cycling, public transit, ridesharing,
automobile, taxi services, telework, delivery services
e) Service Quality Relative speed and delay, reliability, comfort, safety and
security, waiting condition, parking condition, user information, social status
f) Land Use Density, mix, walkability, connectivity, transit service proximity,
roadway design

Literature and Conceptual Issues

A lot of people agreed that distribution network is influenced by:
a) Respond Time
b) Product Variety
c) Product Availability
d) Customer Experience
e) Order Visibility
f) Returnability
A network designer has to consider product characteristics for both innovative and
functional as well as network requirement when deciding on delivery network. The
decided network is to match the characteristics of the product or the need of the customer.
So that, fast and emergency items are stocked locally or directly shipped then for the
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slower moving items are stocked at distribution centres. For the slowest moving items are
drop-shipped from the manufacturers and involve in longer lead time.
Network design models are used for represent a wide range of planning and
operation management in transportation, logistics, and production distribution. Network
design is related to firms and organizations those operate consolidated transportation
system. It is related to the planning of operation too. This is always referred to as
strategic/tactical or tactical/operational according to the firms planning traditional and
horizons.
The aim is to respond to demand and ensure profitability of the firm. The other
major objective of tactical planning is to achieve the best trade-off between operating
cost, firm profitability, and service performance. So that total logistics cost will reduced
and the firm enhance revenue and profit.
There are four issues will discuss here. There are:
a) Avenue for Transportation Cost Reduction
b) Transportation and Customer Service
c) Elements of Customer Service from an Outbound Distribution Point of View
d) Cost Drivers in Transportation Activities

Avenue for Transportation Cost Reduction

The shipper used the traditional methods to encounter inevitable increases in
transportation costs. The methods are competitive bidding, optimization of networks,
redesign of network, and a repetition of the previous steps. These methods are involved in
network, lane, and node decision.
Great saving can be made in the critical logistics planning of outbound
transportation, inventory management, production planning, warehouse distribution, and
purchasing. These critical logistics planning are needed to reduce static inventory.
Transportation management information system should be integrated with
external enterprise system. From this integrated system, it will achieve more optimized
supply chain, as well as, lower transportation and total logistics/supply chain costs. In the

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other hand, the company with more effective in transportation function will be more
efficient to provide better customer service.
Transportation and Customer Service
Customer service is the most important area in the logistics and supply chain. The
principle is to have the right product to the right customer in the correct quantity and
quality, and the right time without any damages. However, the focus was shifted from
cost reduction to improve the customer service at the end of 1980s. Supply chain
performance improved means that the revenue growth and higher profitability through
the gaining of market share. Focus of reducing supply chain assets and supply chain costs
are slowed during 1980s. The efficiency in transportation have a major impact on both
cost reduction and customer service, also from an outbound and inbound distribution
point of view.
Elements of Customer Service from an Outbound Distribution Point of View
There are three elements of customer service will discuss here. They are listed as
below:
a) Order Cycle Time
b) Delivery Time
c) Reliability
Order Cycle Time
From the sellers point of view, the time dimension will be order cycle time.
Meanwhile, it will be the lead time or replenishment time from the buyers point of view.
Order cycle time is the total time from placing the order at the supplier until the goods are
received by the customer. The lead time is for supplier to place an order with
manufacturer until the goods are received.
Delivery Time
Delivery time is measured from the receipt of the order until the customer
received the goods. It may be difficult for measuring and controlling the time from the

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placement of order until customer receives the goods if the seller uses contact carrier.
That mean he does not have any direct control over the goods.
Reliability
Reliability means that keeping promising delivery schedule. Any delivery
schedule must be communicated to the customer. Some customer thinks that reliability or
dependability is more important than lead time. If lead time is consistent, customer can
keep lower inventory and the cost of the possible stock-out can be avoided.
The important element in the reliability is to make sure that the safe delivery of
the products. If customer received damage goods, they cannot use them and will face
losses in sales due to stock-out. In this case, the customer will keep extra or excess
inventory which will cause t hem higher cost in terms of inventory holding. The customer
will claim for replacement for the damaged shipment, it will result in added in the sellers
transportation cost.
The cycle has indirect link within distribution channel management, which has
undoubtedly become very complex. The basic customer service is not adequate anymore.
Competitors have duplicated the service offerings and offer similar and same services. As
a result, customer used to excellent service, will better service in the future. The increase
in participated customer service has led to increase in transportation costs.

Cost Drivers in Transportation Activities

From the above view, it is highlighted some examples of the cost driver in the
transportation activity centre. It gives an idea about what cost driver could be, relatively
to pricing in transportation business.
There are five examples of the cost driver related to transportation activities, such
as:
a) Volume of Goods Carried
b) Weight of Goods Carried
c) Distance Over Which The Goods Are Carried
d) Number of Delivery
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e) Labor Hours

Pricing in Transportation Management

For many years, carriers relied on their own price list for their services. Under
traditional economic regulation, it is a little different in the incentives among the carrier
through service enhancement or pricing strategies. Now, these tactics are critical for all
modes of transportation, regardless of market structure. However, many carriers still rely
on their own price to set the price as a competitive weapon. Normally, they used cost as a
base and pay little or no attention to price as a part of the marketing mix. Many carriers
know their cost but do not know how to price.

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A basic discussion on pricing for transportation management will discuss here. It

will introduce some common pricing strategies and techniques those are commonly used.
Factors Affecting Pricing Decisions
Many carrier pricing decisions are based on some reaction to a stimulus from
business environment. It comply many constituencies in transportation. Four
constituencies are includes customer (market), government, other channel members, and
competition.
The value-of-service pricing is focused on the role of the market to determine
prices. The profit-maximizing-oriented carrier will not set the price in the long run. This
will prohibit the movement of passenger or freight. They will set the price that maximizes
its return. However, it is depend to the market for the price and in monopolistic situation.
The price elasticity concept plays an important role on carriers prices. For example,
business travelers willing to pay higher airfares for the convenience of short notice
reservations, but the leisure travelers might not. In this case, customers have a formidable
impact on carriers prices.
For over hundred years, transportation had been regulated by federal government.
It is because, of the monopolistic abuses. It is a part of the dealt with carriers prices in
form of how they are constructed and quoted. Surface Transportation Board (STB) was
responsible in the economic transportation regulations. The Justice Department entered in
transportation pricing is to monitor for antitrust violation at the deregulatory efforts late
1970s through 1990s. These government agencies help mitigate the imperfections in
marketplace to control carrier pricing and carrier price their services.
In this case, other channel members can include other carriers in the same and
different modes of transportation. For example, interline movements between different
carriers that involve revenue split will impact how each carrier prices its services. If one
carrier raises its price, the other carrier has to do so or in the risk of losing business, so it
is a high price elasticity market. This will result in airline movement by using two
different truckline carriers or trunkline/commuter combinations. Another case involve
interline agreements between railroad for track usage. The shipment will have to use the
tracks of more than one railroad because of no single transcontinental railroad. If cost
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increase, customer will pay higher price. Rail carriers might reduce their operating
margin or in risk of losing tonnage for this move.
Competitors will impact the carrier-pricing strategies also. History has shown that
even in transportation oligopolies such as airline and less-than-truckload (LTL) motor
carrier, price leaders offer discount to customers, the competitors will follow even at the
risk of reducing industry profits. It will be a symptom of continual pressure carrier
customers to reduce transportation costs. The major competitors also impact in the
increasing price of the across-the-board price in the particular mode. This situation will
not occur if the competitors do not follow the price leader actions. By simplify its pricing
structure, airline reduce the number of special fares was not matched by its competitors.
That airline was forced to abandon its original simplification strategy and back to normal
pricing tactics.
Carriers must respond in changes and directions from their operating
environment. These might not favor the carriers with the government regulations involve
to force the carriers to make a change that reduces efficiency. However, these
environmental will force to exert pressure on carrier-pricing strategies and price levels.
Major Pricing Decisions
Every firm involved in major pricing decisions either delivery a product or
service. The decision can range from very simple to extremely complex. Pricing
Decisions can be group into three categories. First, a carrier focuses a decision when
setting the price for new service. For example, Federal Express has no experience before
for setting the price on overnight delivery service. It could be difficult because only based
on little knowledge concerning the elastically of the price of market and the actual cost to
provide the service. If the price is set high enough to generate substantial profit,
competitors will fight with a lower price to get the business. Otherwise, if set the price
too low, it will get this new service, but not in maximizing its profit.
Second, the carriers must make a decision to modify prices frequently. Changes in
market, operating and service, the price will change also.
This decision is important for how and when to announce the changes to the
market. For example, a major price increase by a carrier after announcing company profit
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in a marketing and retailing environment, announce in advance for price increase, so that
customer will offset the higher price by increase in purchases. However, in transportation
service cannot be inventoried, so prior notification of a price increase does not
accomplish the same objective, yet prior notification does allow for customer to seek
alternative sources of supply.
Finally, carriers will initiate and respond to price changes when making decision.
The price leader concept is not new in the industry. If you are the price leader, you
initiate the changes, otherwise, you respond to the changes. There are many markets are
oligopolistic in transportation. Downward price changes are dangerous because of the
potential to decrease industry revenue. Upward price changes can make a carrier sole
high-price service provider if competition does not follow, so how this decision is made
can have a substantial impact on market share and profits.
There may be have other type of price decision, those are the major one that a
carrier will make. These considered strategic decisions because of the carrier market
position within the industry. For example, Peoples Express offer low cost airline service
and did not expect their competitors will follow. However, some major truck lines offer
lower price than Peoples Express, even though in a loss. In this high dept and stiff
competition, Peoples Express went out of business. In this case, pricing decision is a
major marketing decision for every carrier.
Establishing the Price Objective
Pricing objectives for a carrier should reflect overall company objectives and how
they compete in the market. Pricing objectives might change for a certain service offering
as it progress through its product life cycle. Carriers with multiple markets might
establish differences in the pricing objectives. For example, passenger airlines have
separate pricing objectives for first class and coach market as well as business and
travelers.
Survival-Based Pricing
In ailing passenger airlines, survival-based pricing is aimed at increasing cash
flow through the use of low prices. The carrier increase volume encourages higher
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utilization of equipment. Because airline seat cannot be inventoried and lost at takeoff,
marginal cost of filling seat is small. Survival pricing tries to take advantage on this
concept. It is related to unit volume pricing objectives. For utilize a carrier existing
capacity to the fullest, so the price is set to encourage the market to fill the capacity. In
the less-than-truckload (LTL) industry, space available price (freight airline industry) and
multiple-car prices (railroad industry) are examples of this type of pricing objectives.
Profit Maximization Pricing
Profit maximization is the other type of pricing objective. It is occur in the short
run or long run. This type of pricing objective used by the carrier usually is concerned
with measures such as return on investment. It is called a skimming price also. It is a high
price intended to attract a market which is more concerned on quality, uniqueness, or
status and is insensitive to price. For example, the maiden flight of the Concorde is high,
they aimed to those customers willing to pay higher price because of limited seats. This
strategy works if competition can be kept out of market.
Skimming Price Strategy
A skimming price strategy is also followed by a penetration price strategy. It leads
to a sales-based pricing objective and can be an effective strategy. It has several reasons
listed below:
a) A high price can be charged until competition starts to enter.
b) A high price can help offset initial outlays for advertising and development.
c) A high price portrays a high-quality service.
d) If price changes need to be made, it is more favorable to reduce a price than to
raise it.
e) After market saturation is achieved, a lower price can appeal to a mass market
with objective of increasing sales.
Sales-Based Pricing
A sales-based pricing objective follows the life cycle of using skimming during
the introduction, growth stages, and penetration during the maturation stages.
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Reintroduction of the luxury passenger railroad service might be a good example for this
strategy. This strategy is more successful with passenger movement in transportation. It is
because of reliance it places on the price-value relationship.
Market Share Pricing
A market share pricing objectives used in an industry which revenues are stagnant
and declining. This objective tries to take market share from the competitors through
lower price. This strategy is normally used in passenger airlines and less-than-truckload
(LTL) motor carrier industries. In some cases, competitors offerings are substitutes are
not in a position to match the lower price; if it is not a substitute services, a lower price
would not be a competitive advantage. For example, an airline lowers its fares for
business travelers to gain more of this market. It is not offer for the numbers of departure
and arrivals as there is no gaining in market share for the competitors.
Social Responsibility Pricing
A social responsibility pricing objective forgoes sales and profits. This pricing
objective put the welfare of society and customers come first. For example, after the 911
incident in New York City, many carriers offered to carry items such as food, clothing,
building supplies, and medical supplies into devastated area at very low price or for free.
Since the carriers serve multiple markets in the transportation industries, it is
possible to employ several pricing objectives at one time. The carriers must be very
careful in setting the companys pricing objective strategy. It is because these multiple
pricing objectives are complementary, not conflicting.
Estimating Demand
Estimating demand is the most difficult tasks associated with pricing. In this
competitive markets, unit demand will decrease, price increase. It is shown in the
traditional demand-and-supply curve offered in basic economic theory. However, carriers
do not function in perfectly competitive markets. Estimating demand can become tedious
and difficult. There are still have certain concepts and procedures can be used in this
process. The concept of the price elasticity can be used. Price elasticity refer to change in
demand because change in price. In this establish market, this relationship well develop
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where demand implication from the price change should be easy to estimate. For
example, business travelers in airline industry are relatively price inelastic because
demand does not fluctuate with increase in price. It is a different case for leisure travelers.
They are more price elastic and might delay travel or seek for another alternative mode if
increase in airfares. In a new market, estimating price elasticity can be made by
comparing the new market with existing market.
For determining demand under a new pricing structure, a direct attitude survey
can be used. For example, asking customers and/or potential customers how much
business they would provide at certain price levels might produce some feel of how
sensitive demand is to price. Be careful when asking this question because customers will
usually tend to the lower price.
When testing market is feasible, it is a possible way to determine potential
demand. The carriers might introduce a new service at a high price in one area and other
area to see how sensitive demand to price. This method is useful when choose the correct
market which is applicable.
Demand estimation is the critical part of pricing strategy. It results in potential
revenue estimation. With revenue estimated, the next is the cost established.
Estimating Costs
Pricing decision making must include costs in the total cost analysis. For example,
the fuel expense and driver wages generated on a backhaul can considered as fixed cost
and need not be included in the backhaul pricing decision.
The next cost relationship must be examined is how costs behave at different
output or capacity level. The existence or nonexistence of scale economies will affect the
costs behave at different capacity level. It can be used to determine such concepts as
break-even point. The cost of providing a service must be calculated to determine the
attractiveness of a market for a carrier.
Price Level and Price Adjustment
After generating the demand and cost estimation, the actual price can be set.
There are many methods for doing this exist, including demand-based methods, costPage | 14

based methods, profit-based methods, and competition-based methods. However, price

adjustment discussion might be warranted as federal government regulations over such
concepts as rebates.
The suppliers give some discounts from a published price to rewards a buyer for
doing something that beneficial the supplier. In transportation, less-than-truckload (LTL)
versus truckload (TL) prices reflect carrier saving from larger shipments. This is called
quality discount. Many airlines used seasonal discounts to encourage vacation passengers
to travel during off-peak periods. Cash discounts are new in the transportation industry. It
is reward customers who pay their bills within a stated period of time. For example,
2/10, net 30 means that customer can get two-percent discount if pay the bills within
ten days, otherwise pay the full amount within thirty days. This can speed up the cash
flow for carriers, which is important for financial stability.
Geographic adjustments are common in transportation industry. There are used by
the shippers and receivers to compensate the transportation costs to the customer in the
final price. For example, common geographic price is Free On Board (FOB) origin or
Free On Board (FOB) destination pricing. In Free On Board (FOB) origin pricing, the
buyer is responsible in the transportation costs; the shippers is responsible for the
transportation costs in the destination pricing.
Uniform-delivered pricing means that customer is responsible the final price
include the transportation costs. Zone pricing means every customer within a certain zone
pays exactly same price for a product based on average transportation costs within the
zone.
By using discounts or allowances, important thing is make sure discounts or
allowances passed to a customer. This must be the reduction in carrier costs because of an
action by the customer. This may not exceed the cost saving for the carrier.
Most Common Mistake in Pricing
Carriers may not have enough experience setting and managing prices on a
strategic level. They have a big opportunity to make mistake in price calculation. The
most common mistake is to make the pricing too reliant on costs. Although the costs are
important to provide a service, there are still many other factors in setting the appropriate
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price for a market. Competitive factors, customers preferences and values, and
government regulations are the factors will affect the price which most beneficial to
carrier.
The next common mistake is that the price is not frequently to market changes. It
was difficult to the carriers to change the prices because requirement of public notice and
burden of proof on the carrier. Now, the environment has allowed tremendous freedom
and flexibility for carriers to change prices. Within the traditional mentality remains and
prevent a carrier from entering a market or creating a new market.
The third common mistake is setting the price independently at the marketing
mix. The marketing mix also known as 4Ps. It consists of product, price, promotion,
and place. Product refers to transportation; price refers to changes for its product or
output; promotion refers to how it creates demand or advertises itself to customers; place
refers to delivers its service to customers. All 4Ps must interact closely to provide access
and success in current and potential markets. Managing 4Ps independently will result in a
sub optimization of the carriers resources and profits.
Sometimes, the price is not varied for different service offerings and market
segments. A one price for all does not work in transportation industry. Carriers service
multiple markets with different service or price re3quirements. The yield management
pricing is used by the airlines. It is a form of value-of-service pricing. It is related to the
availability of capacity and the willingness of passengers to pay or address this situation.
A one price for all is not maximizing the profits for the carrier.
Pricing is a complex and challenging process that applies to all business entities.
It is also critical to a businesss competitive advantage, position within its market, and
overall profitability. It must be manage closely to each other within the context of the
carriers overall strategic plan.

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Summary
The efficient of outbound logistics is critical to the whole logistics. If the products
are not effectively delivery on time, it will lead to spill-over and friction that the result
will be confusion. So, customer should place an order and assure that they will receive
the goods on time. If not well managed in transportation, it can be a major negative
impact on the total logistics and supply chain costs, as well as, customer service. To
minimize the problem happens, companies and logistics service providers must work
closely hand in hand. There are some reason to consider for cost reduction, such as
number of owned vehicle, labor cost, rented vehicle cost, and distance over which goods
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are carried. This can be achieved by contracting between the companies and the logistics
service providers. From transportation activity to logistics service providers will group
distribution, through vehicle scheduling and routing. As a result, it will usher in
economies of scale and cost reduction.
In

the

last

decade,

there

have

been

extensive

changes

in

the

transportation/distribution arena. Transportation is the largest cost elements in the supply

chain and add value to the effective supply chain functioning from both cost and
customer service perspective. So that decision making is important in this area also. It is
evaluate the importance relationship between transportation cost and overall logistics
cost.
Transportation manager and distribution manager have to understand the inherent
and importance of the components of transportation cost such as number of owned
vehicles, labor cost, rented vehicle cost, and distance over goods are carried. So that good
planning can be done with vehicle routing and scheduling for effective transportation
optimization, to ensure customer satisfaction, as well as, lower transportation cost.

Bibliography
http://www.shipandsave.com/wp-content/uploads/2009/09/capital_brochure.pdf
http://www.vtpi.org/tdm/tdm16.htm
http://www.oracle.com/us/products/applications/ebusiness/scm/021097.pdf
http://www.houstonvippaint.com/pricing.html
http://www.vtpi.org/tdm/tdm132.htm
http://books.google.com.sg/books?
id=emrmcpmy4FUC&pg=PA27&lpg=PA27&dq=estimating+demand+in+transportation
&source=bl&ots=jnbi8j4vGr&sig=9KP0g2UOkd7chWokVmf9P_Rg9E&hl=en&ei=O4ueTui1FsexrAfmr4W4CQ&sa=X&oi=book_result&ct=result&resn
um=10&ved=0CF0Q6AEwCTgK#v=onepage&q=estimating%20demand%20in
%20transportation&f=false

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References
Bardi, Coyle, Gibson, Novack, 2011, 7th Edition, South-Western Cengage Learning,
Management of transportation, Costing and Pricing Issues, Pa. 326 332

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