Chapter 4, Problem 1.1C

Hardee Transportation (A)

Jim O’Brien has realized for quite some time that some of Hardee’s 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 won’t 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. Hardee’s average length of haul is 950 miles, and its loaded mile metric is 67 percent.

CASE QUESTIONS

What would be the advantages/disadvantages of using cost-of-service versus valueof- service pricing for Hardee’s customers? When discussing cost-of-service pricing, what type of cost (average versus marginal) would make more sense for Hardee?