Hardee Transportation (A)

By:
Alif Azadi Taufik (1406565606)
Nadia Aulia (1406611423)

Jim OBrien has realized for quite some time that some of Hardees customers are more
profitable than others. This is also quite true for certain freight lanes. However, Hardee has
traditionally structured its prices around discounts off their published tariff rates. Most of the
discounts have been based on freight volume only. Jim knows that his drivers and dock people
do more for certain customers than move volume; they count freight during loading, sort and
segregate freight on the dock, weigh shipments, and do some labeling.

Jim foresees some of the new service demands from his customers being very difficult to cost
and price because they wont necessarily be based on freight volume. Some of these new
demands will include merge-in-transit, event management, continuous shipment tracking
RFID capability, and dedicated customer service personnel. Traditionally, Hardee has used
average cost pricing for its major customers. Some of his pricing managers have urged Jim
to consider marginal cost pricing. However, Jim has developed a keen interest in value-of-
service pricing methods versus the traditional cost-of-service pricing.

The problem with both approaches for Hardee is that they have no form of activity-based
costing or any other methodology that will allow them to really get a handle on where
their costs are hidden. Jim knows what Hardee pays its drivers, knows the costs of equipment
and fuel, and knows the overall costs of dispatch and dock operations. Hardees average length
of haul is 950 miles and its loaded mile metric is 67 percent.

CASE QUESTIONS

Question 1

What would be the advantages/disadvantages of using cost-of-service versus value-of-service

pricing for Hardees customers? When discussing cost-of-service pricing, what type of cost
(average versus marginal) would make more sense for Hardee?

Solution
 Kelebihan dari cost of service pricing adalah kemampuan perusahaan untuk
mengendalikan penetapan harga berdasarkan biaya produksi yang dikeluarkan untuk
memaksimalkan pendapatan yang diterima. Selain itu, harga yang ditetapkan mudah untuk
ditemukan dan dihitung karena berdasarkan biaya produksi yang sering lebih konkret dalam
pencatatannya. Kekurangan dari cost of service pricing adalah kesulitan menentukan biaya
marginal untuk kuantitas yang sedikit dan hanya efektif jika digunakan untuk satu produk saja.

Kelebihan dari value of service pricing adalah kemampuan perusahaan untuk

menetapkan harga yang berbeda untuk produk/jasa yang memiliki nilai yang dianggap berbeda
oleh pembeli. Hal ini lebih efisien untuk menutup biaya marginal dan dapat menurunkan harga
untuk produk produk yang lain. Kekurangan dari value of service pricing hanya efektif jika
bersifat monopolistik dan bergantung kepada kemampuan untuk memberikan produk yang
berbeda dan mensegmentasi pembeli kedalan kategori kategori yang berbeda.

Question 2

How would you develop a methodology for Hardee to price its existing services? Its evolving
services? Would you use the same or different strategies for each?

Solution

Metodelogi yang dapat dikembangkan untuk Hardee dalam hal penetapan harga.

1. Tetap menggunakan pendekatan harga rata-rata sebagai price floor.

Hardee Transportation tidak memiliki bentuk activity-based costing atau metodologi lain
yang memungkinkan mereka untuk mengetahui di mana biaya mereka tersembunyi (hidden
costs). Hardee Transportation sebaiknya tetap menggunakan pendekatan biaya rata-rata
(average cost approach) karena dapat mencakup basis mereka lebih baik daripada marginal
cost yang akan menyebabkan harga mereka berfluktuasi jika volume barang yang mereka
kirim menurun.

2. Menggunakan penetapan harga value of service sebagai ceiling price

Hardee Transportation dapat mengkategorikan pelanggan baru mereka yang memiliki

permintaan untuk merge-in-transit, event management, pelacakan pengiriman kapabilitas
RFID, dan personil customer service yang berdedikasi sebagai satu grup dan membebani
mereka dengan value of service pricing dan Hardee Transportation dapat menerima
pendapatan yang lebih tinggi.
 Hardee Transportation (B)

One of Jim OBriens customers has presented him with an opportunity for a significant amount
of freight moving into a new market for Hardee. Hardee is a truckload carrier primarily moving
freight in the East/West market in the United States. Although it has some movements in and
out of Canada and Mexico, Hardee has focused on moving freight in eastward and westward
directions. Hardee has dispatch centers located throughout the United States which have some
dock capacity.

The new move would be between Pittsburgh and Miami. Hardee has avoided this market
because of the lack of backhaul opportunities that exist outbound from Florida. However, this
new move offers a significant increase in volume for Hardee. A complicating factor in this
move is the request that Hardee perform sorting and segregation at its dispatch centers. Each
shipment will consist of straight (one product) pallet loads of various types of consumer goods
freight destined for a retailers distribution center in Miami. Sorting and segregation at
Hardees locations would consist of breaking the pallets and sorting the freight by the retailers
store locations, then repalletizing into rainbow (mixed products) pallets for each store.

Hardee has never experienced this type of request before. Jim knows that he needs to put some
type of costs to this move to make sure that the moves are profitable. Because of the large
volume involved, not covering Hardees costs in pricing could result in large losses for Hardee.
The relevant information for costing this move is as follows:

Equipment Cost Data

Equipment Purchase Price

1. Line-haul tractors = $80,000

2. Line-haul trailers = $24,000

Depreciation

1. Tractors = 5-year straight line

2. Trailers = 8-year straight line

Interest

1. Tractors = 10 percent APR for 5 years

2. Trailers = 10 percent APR for 8 years
Fuel

1. $2.10 per gallon for diesel

2. Line-haul tractors = 6.5 miles per gallon

Labor

1. Line-haul drivers = $0.42 per mile

2. Pick-up and delivery (PUD) drivers = $30 (fully loaded) per hour
3. Dock workers = $25 (fully loaded) per hour

Miscellaneous

1. Insurance cost = $0.05 per mile

2. Maintenance cost = $0.15 per mile
3. Billing cost = $5.00 per freight bill
4. Tractors and trailers are available for use 20 hours per day (80 percent uptime), 365
days per year
5. Administrative/overhead cost = 8 percent of total cost of move
6. Dock facility cost = $15 per hour
7. Line-haul vehicle averages 45 mph between origin and destination.

Route and Time of Move

The shipment (40,000 pounds) originates at a customer location in Pittsburgh, located 20 miles
from Hardees dispatch center. A PUD driver is dispatched from the Hardee location at 8:30
a.m. on January 12, 2010, and arrives at destination at 9:00 a.m. the same day. The shipment
is loaded from 9:00 a.m. to 12:00 p.m. The PUD driver departs the customer location at 12:00
p.m. and arrives back at the Hardee dispatch center at 12:30 p.m.

The sort process starts at 12:30 p.m. and ends at 8:30 p.m. on January 12. It requires unloading
the trailer, sorting, and repalletizing the load. This operation requires two dock workers, each
working the same trailer for 8 hours in the dispatch center. The line-haul portion begins with
the vehicle being dispatched from the Pittsburgh location at 8:30 p.m. on January 12 and
traveling to Charlotte, North Carolina, a distance of 481 miles, and arriving at Charlotte at 7:12
a.m. on January 13. The driver rests from 7:12 a.m. until 3:12 p.m. The trip continues with
the vehicle departing Charlotte at 3:12 p.m. on January 13 and traveling to Jacksonville,
Florida, a distance of 399 miles, arriving at Jacksonville at 12:06 a.m. on January 14. The
driver rests from 12:06 a.m. until 10:06 a.m. The line-haul portion concludes with the
vehicle departing Jacksonville at 10:06 a.m. and traveling to the customers location in Miami,
a distance of 369 miles, and arriving at the distribution center at 6:18 p.m. on January 14.

The line-haul driver stays with the vehicle while it is being unloaded (2 hours unload time).
The driver then deadheads at 8:18 p.m. from the customers distribution center and arrives at
a Hardee dispatch center located in Miami at 8:48 p.m., a distance of 15 miles from the
distribution center.

CASE QUESTIONS

Question 1

What are the pick-up, sort, line-haul, and delivery costs to Hardee for this move?

Solution

Pick-up cost Sort Cost

Labor $400
Dock Fee $120
TOTAL COSTS $520
Pickup time 5.5 hours
Pickup distance 40 miles
Depreciation
truck $10.05
trailer $1.88
Interest
truck $12.82
trailer $2.75
Fuel $12.92
Labor $165
Insurance & Maintenance $8
Billing $5
TOTAL $218.42

Line-haul cost
Line-haul time 46 hours
Line-haul distance 1249 miles
Depreciation
truck $84.02
trailer $15.75
Interest
 truck $107.18
trailer $23.00
Fuel $403.52
Labor $525
Insurance & Maintenance $250
TOTAL COSTS $1,407.85

Delivery cost
Delivery time 2.5 hours
Delivery distance 15 miles
Depreciation
truck $4.57
trailer $0.86
Interest
truck $5.83
trailer $1.25
Fuel $4.85
Labor $75
Insurance & Maintenance $3
TOTAL COSTS $95.34

Question 2

What is the total cost of this move? Cost per cwt? Cost per revenue mile?

Solution

Total Pick Up Cost $218.42

Total Sorting Cost $520
Total Line-Haul Cost $1,407.85
Total Delivery Cost $95.34

Total Cost $2,241.62

Administration Cost (8%) $179.33

Total Cost $2,420.94

Per cwt (/400) $6.05
Per revenue mile (/1249) 1.94
Question 4

Assume that Hardee has no loaded backhaul to return the vehicle and driver to Pittsburgh. How
would you account for the empty backhaul costs associated with this move? Would you include
those in the headhaul move? How would this impact your pricing strategy?
Question 3

If Hardee would put two drivers in the tractor for the line-haul move, there would be no rest
required for drivers during the line-haul move. What would happen to total costs?

Solution

Line-haul time

Pittsburgh to Charlotte: 08.30 p.m. 07.12 a.m. (10 hours 42 minutes)

Driver rests 07.12 a.m. 03.12 p.m. (8 hours)

Charlotte to Jacksonville: 03.12 p.m. 12.06 a.m (8 hours 54 minutes)

Driver rests 12.06 a.m. 10.06 a.m. (10 hours)

Jacksonville to Miami distribution center 10.06 a.m. 06.18 p.m. (8 hours 12 minutes)

Miami distribution center to dispatch center 08.18 p.m. 08.48 p.m. (30 minutes)

Total Line-haul time = 46 hours 18 minutes

Line-haul distance

Pittsburgh to Charlotte = 481 miles

Charlotte to Jacksonville = 399 miles

Jacksonville to Miami = 369 miles

Total distance = 1249 miles

Line-haul Cost

Depreciation

Tractor : 46 hr @$1.83/hr = $84.18

Trailer : 46 hr @$0.34/hr = $15.64

Interest

Tractor : 46 hr @ $2.33/hr = $107.18

Trailer : 46 hr @ $0.50= $23.00
Fuel : 1249 @ $0.32/mile =$399.68

Labor : 1249 @ $0.42/mile = $524.58

Maintenance: 1249 @ $0.15 = $187.35

Insurance: 1249 @ $0.05 = $62.45

Total Line-Haul Cost = $1379.08

If Hardee would put two drivers in the tractor for the line-haul move, there would be no rest
required for drivers during the line-haul move.

So, total line-haul time would be 46 hours 18 hours = 28 hours

Depreciation

Tractor : 28 hr @$1.83/hr = $51.24

Trailer : 28 hr @$0.34/hr = $9.52

Interest

Tractor : 28 hr @ $2.33/hr = $65.24

Trailer : 28 hr @ $0.50= $14

Fuel : 1249 @ $0.32/mile =$399.68

Labor : 624.5 @ $0.42/mile = $262.29 2 = $524.58

Maintenance: 1249 @ $0.15 = $187.35

Insurance: 1249 @ $0.05 = $62.45

Total Line-Haul Cost with Additional Driver = $1289.08

Question 4

Assume that Hardee has no loaded backhaul to return the vehicle and driver to Pittsburgh. How
would you account for the empty backhaul costs associated with this move? Would you include
those in the headhaul move? How would this impact your pricing strategy?

Solution

Biaya backhaul yang kosong dapat dihitung dengan menyesuaikan biaya headhaul, atau bisa
dikatakan biaya backhaul merupakan kerugian. Kerugian ini dapat membantu perusahaan
dalam menentukan strategi penetapan harga untuk melihat sebarapa banyak kerugian yang akan
terjadi dengn strategi marjinal versus strategi rata-rata.