Flexibility in transportation procurement : a real options approach

Abstract

Shippers who use for-hire carriers need a careful estimation of their need for trucking capacity in order to be able to haul products in a timely and cost-effective manner. This thesis outlines a flexible approach to transportation procurement. According to the proposed method, a shipper makes a firm commitment to a carrier to use a guaranteed level of capacity and agrees to pay a penalty for any unutilized equipment. In exchange, the carrier provides the shipper with an option to fulfill the shipper's request for additional capacity above the guaranteed level and up to a predermined limit if needed. The analysis focuses on actual data from a shipper and explores a "what if' scenario--whether it would have been possible to achieve savings and generate value by having such a flexible contract.