Case: Chippy Potato Chip Company

Located in Reno, Nevada, since 1947, the Chippy Potato Chip Company manufactured potato chips and distributed them within a 100-mile radius of Reno. It used its own trucks for delivery in the Reno, Carson City, and Lake Tahoe areas and common carrier trucking for all other outgoing shipments. All its motor carrier shipments were on an LTL basis. The applicable motor carrier freight rating, or classification, for LTL potato chips was 200. This classification was high, although potato chips are often given as textbook examples of bulky freight that will cause a truck to cube out. Even after much of the motor carrier industry was deregulated, Chippy had difficulty finding contract truckers interested in negotiating specific contract rates. This was because potato chipsbecause of their bulkwere not a desirable cargo from the truckers' point of view.

The potato chips were packed in 8-ounce bags. Twenty-four 8-ounce bags were packed in cartons that were 12 inches by 12 inches by 36 inches. The packed carton weighed 14 pounds. The 8-ounce bags of chips wholesaled FOB plant for 40 cents each and retailed for cents.Recently, the Chippy firm acquired rights to produce a new type of chip, made from powdered potatoes, yielding chips of identical shape that could be packed in tubular containers. A 5-ounce paper tube of chips would wholesale (FOB plant) for 40 cents and retail for 59 cents. The new chips were much less bulky: Twenty-four 5-ounce containers could be packed in a carton measuring one cubic foot. The filled carton weighed 10 pounds. (The difference between the weight of chips and that of cartons is due to packaging materials. The carrier is paid based on carton weight.)

Chippy management believed that because the new chips were less bulky, the LTL classification of 200 was too high. Management decided to ask the motor carrier classification bureau for a new, lower classification. (Motor carrier rates for a movement are the classification multiplied by a distance factor. If the classification were lowered, the rate would be lowered proportionally for all shipments.)

Questions

1. If you worked for Chippy, what new classification would you ask for? Give your reasons.

2. Classifications are based on both cost and value of service. From the carrier's standpoint, how has cost of service changed?

3. Given the existing LTL classification of 200, how has value of service to the customer changed?

4. The new tubular containers are much sturdier. If you worked for Chippy, howif at allwould you argue that this factor influences classification?

5. You work for the motor carrier classification bureau and notice that the relationship between the weight of potato chips and the weight of packaging has changed. How, if at all, should this influence changes in the product's classification?