The impact of fuel price volatility on transportation mode choice

Abstract

In recent years, the price of oil has driven large fluctuations in the price of diesel fuel, which is an important cost component in freight logistics. This thesis explores the impact of fuel price volatility on supply chains by examining the sensitivity of decisions under various scenarios. Specifically, we analyze the transportation mode choice decision between truckload and intermodal (truck combined with rail) transportation using a model to calculate the total relevant cost, consisting of transportation cost and inventory holding cost. We use input from the North American operations for a global retail company regarding annual demand, product characteristics, load size, lead time, transportation rates, fuel surcharges, inventory policies and holding cost to perform sensitivity analysis of the mode choice decision to fuel price and the value density of the product. For several origin-destination pairs we identify the diesel price at which intermodal offers lower total cost than truckload as well as the magnitude of savings that can be achieved by switching modes. We then generalize the insights from this case by providing an equation to calculate the fuel price for this mode choice tradeoff.