Freight Transportation

IndustryBy Brandon Lennox,

Timothy Prichard,Roger Allen

Market Structure Demand Elasticity Economies of Scale and Scope News Vendor Problem Conclusion

Overview

Oligopoly United Postal Service Vs. FedEx Vertical Boundaries Suppliers

Market Structure

FedEx Vs. UPS

Air Vs. Ground

High demand Seasonality Recession

Demand

Transportation relies heavily on economies of scale and scope

This comes from shipping many different products from many different customers

This gives the ability to spread out overhead costs over a vast amount of items

Economies of Scale and Scope

How are shipping companies trying to use economies of scale and scope.

Building massive ships to carry more and more containers.

Mergers are also being used in shipping to support economies of scale.

Shipping

International shipping company that uses trucks, planes, and distribution centers.

They take individuals packages and ship them all over the world.

This can not be done with just a few packages, but must be done with thousands of them.

UPS

Exists when inventory or capacity expires Freight Industry – Unsold Capacity

◦ Schedules◦ Deadlines◦ Newsvendor problem for transported goods

Newsvendor Problem

Different common types of contracts◦ Customer pays flat rate for truck

Buys all capacity for that truck Newsvendor problem passed on to customer

◦ Truck waits till either it is filled or must leave to meet schedule Newsvendor problem issue of trucking firm

◦ Selling Capacity by the pallet Risk of newsvendor problem on trucking firm

Trucking

Strict schedule – very rigid Consequently suffers heavily from

newsvendor problem Collective customer needs between hubs

rarely exceeds locomotive capacity

Railroad

Shipper must pay a docking fee to harbor operators

Shipping overseas – no substitute◦ Gives shipper negotiating power◦ Allows shipper to better mitigate newsvendor risk

to customers

Shipping by Boat

Stricter the schedule = More risk of newsvendor problem

Many times shipping company must make schedule without knowing exact customer demand

Other times schedule is made based on contracts won

Strict Schedules

Depends who has negotiating power Negotiation power depends on availability

of alternatives or substitutes◦ Many available substitutes = Customer holds

negotiating power◦ Few available substitutes = Shipper holds

negotiating power

Who Covers Risk?

Oligopoly Subject to seasonality and economic

conditions Price and Income elastic Vertical boundaries The newsvendor problem

Conclusion