Alternate Pricing Model for Transportation Contracts

Abstract

Transportation spend is an increasingly relevant topic of concern for all manufacturing companies. Along with the money spent on transporting goods, service betterment has become an everyday expectation. In a tight market, when contract carriers are unable to fulfill the shipper’s demands, the shipments are tendered to the spot market, where the costs are higher and service levels are lower. Through our study, we developed a dynamic index-based pricing which updates the contract rates on a monthly basis. This not only reduces the auction ratio (percentage of shipments going to the spot market), but also quantifies the incremental line haul savings/costs. We developed an optimization model based on national average line haul rates for contract carriers and spot market published by DAT to maximize the number of shipments moved from spot market to contract carriers, while satisfying various constraints such as cost and monthly variation. Our model shows that 8% of the shipments that had gone to auction would stay with contract carriers for a few, but not all, locations without any additional spend. Shippers can use our model to gather insights and reduce the auction ratio to drive better service levels and reduced costs even in tight markets.