CASE 4-1

Hardee Transportation (A)

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 dri-

vers 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 diffi-

cult 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. Tradi-

tionally, Hardee has used average cost pricing for its major customers. Some of his pri-

cing 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 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?