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Container Transportation CompanySubmitted toProf. Arnab BasuQuantative Methods - 2Submitted byTeamAbhishek Kumar - 1311352Ashish Krishnan K A - 1311362Deepak Barhate - 1311364Shahul Hameed - 1311400Shakti Mahapatra - 1311401Vivek Transportation Company (CTC) is based in Taiwan and was founded in early 1980's. CTC is one of the world's largest multi-modal marine transportation companies in the world. The company has foot prints globally with approximately 100 offices and branches all over the world. Resources of CTC:CTC has a fleet of more than 100 ships and employed approximately 5000 personnel. CTC had dedicated a fleet of five container vessels to Korea/China/Middle eastern routes, each with a maximum capacity of 2000 TEU and a weight limit of 24,000 tons. The container is available in standard lengths or 40 feet. Scenario in CTC:CTC's main clients are in Middle East. So the demand for containers for CTC peaked during April and ended in fall since the trade was slowed down during the Ramadan month. During the peak season, CTC loads its vessels to a maximum of 95 percent of weight or capacity and during slack season the load factor fell to 90 percent.Current Problems:CTC's traditional pricing system was coordinated by marketing department in the head offices. But these prices do not take into account the loadability of the container. The company had two optionsLoadability The new pricing strategy should try to incorporate the loadability factor into it. In the past, CTC had insisted that the ratio of 20 foot to 40 foot containers should be between 1.2 and 2.0. So any deviation from the specified loadability should be charged with During the peak season, a price reduction of 3 percent would result in 5 percent increase in the volume of containers and during the low price reduction of 5 percent would increase it by 10 percent. So our pricing strategy should include these kinds of priced. Question 1: The historical RM application businesses are airlines, hotels and rental cars. In what way is container shipping similar different from these application areas?The RM of Hotels is mainly dependent on the time of booking (balancing the demand), reservation scheduling premium hotel rooms, etc. Also in this case the revenue is generated from large number of customers booking small number of rooms.In case of airlines its cargo systems, the revenue model is based on charging different prices for same products based on customer requirements - same day express shipping, etc. Cargo capacity in passenger flights is uncertain as it changes with each departure whereas the numbers of seats remain the same.In container transportation, one of the important factors that distinguish from the other RM is space utilization. Rather the pricing depend upon time of booking, customer requirements in the traditional systems, container transportation is a function of loadability factor, type and size of container needed, etc. Also in container transportation, major chunk of revenue comes from long term contracts (1-3 years). requests are made 14 days prior to the freight becomes available for shipment. If there is insufficient capacity, then shipment is delayed for travel which happens 16 days in the future. If the capacity is not filled then it will delay the transportation till the container is filled to optimum level. In either case, customers can move to different transportation company or can choose to wait for the next travel.Question 2. If CTC continues with fixed origin-destination pricing, how should these prices be set if profitability is to be increased?Assumptions:We have made following assumptions to solve the assignment and they are followed throughout the report.The ratio of 20'-40' given in Exhibit-1 is the ratio of number of containers.The vessel collects containers from all the countries mentioned in Exhibit-1 and delivers them to the middle-east.At present Container Transportation Company is following the fixed pricing model. The same price is charged throughout the year from an origin to destination irrespective of the demand. As given in the case, the elasticity of demand exists and in order to maximize revenues of CTC. In Peak Season, a percent reduction in pricing would result 5 percent increase in volume of container and during slack season, a 5 percent reduction would percent increase in container traffic. Considering this factor, change in demand has to be looked at while calculating prices. The fixed Pricing for each port of Origin can be determined using the following optimization model:Decision Variables: Fixed Pricing for each of the port of OriginObjective Function: Maximize the collective revenue at all the ports which will be calculated as follows,Revenue at a port = Price * (Demand peak season + Demand in Lean season)Constraints:Peak Season Capacity Constraint: In peak season vessel will be loaded 95% providing capacity of TEU.Due to the elasticity of Demand at ports, calculation of new demand vis--vis change in price is,New Peak season Demand = Current Peak Season Demand * (1 + ((Current Price - Old Price)/Old Price) * 5/3)The addition of all these demands at all the ports <= Capacity Constraint: In lean season vessel will be loaded 90% providing capacity of 1800 TEU.Due to the elasticity of Demand at ports, calculation new demand vis--vis change in price is,New Lean season Demand = Current Lean Season Demand * (1 + ((Current Price - Old Price)/Old

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addition of all these demands at all the ports <= 1800 (in Lean Period)Weight Constraint Peak Season: Weight of the vessel should not Weight of the vessel = No. of 20' containers * Average weight of 20' container + No. 40' containers no. of 20' containers we used following method,Number of 20' containers in peak condition = Quantity Demanded * (Ratio of container+2*Ratio of 40' container))Weight Constraint Lean Season: Weight of the vessel should not exceed 20132.Weight of the vessel = No. of containers * Average weight of 20' container + No. 40' containers * Average weight of 40' containerTo calculate following method,Number of 20' containers in peak condition = Quantity Demanded * (Ratio of 20' container/(Ratio of 20' container))On solving the above problem, we got following solution,Price Port of Origin New Port Demand Peak Lean China 67.94 60.94 Malaysia 112.04 95.23 717.66 Singapore earn with the fixed revenue model is $2,621,974.65 Question 3: What makes for container "loadability" and how should CTC include factor into its pricing decisions?Container Loadability is the Weight/Volumeratioforthematerialloadedinto the containers. This can drive the efficiencies/inefficiencies in transportation.If weight/volume is such that maximum available space of container is utilized while keeping the weight within the permissible limit, then container loadability is high.In the given case, the volume of 40 feet container is double that of the volume of the 20 feet container. In spite of having double the storage capacity in terms of space, the weight carrying capacity of the container is just 30 tons as compared to 24 tons for the 20 feet container. Hence, in order to make best use of space by having high space occupying & less dense items should be shipped using 40 feet containers whereas heavy & dense items should be containers.CTC can include a multiplying factor for including loadability into its pricing decisions:Multiplyingfactorforprice= weightofcontainer+weight of cargo)/weight of cargo)*(1/Volume utilization of container)As the relative weight of container with respect to cargo increases or the volume utilization falls, then the loadability is poor and hence the price charged should be higher.Question 4: What are CTC's major shipping constraints? How might revenue management pricing change these constraints?Any transportation system is constrained by the capacity which it can carry; same is the scenario with container transportation company (CTC). CTC is constrained with the capacity of the vessel, which can carry utmost 2000 TEU and is limited to carry a weight load of 24000 tons at max.CTC planned to load the vessel with 95% and 90% capacity in season so that they can accommodate any urgent demand which comes in the last moment. Basic idea was that CTC could earn a premium charge on that This limited the capacity planning till 1900 TEU and 1800 TEU and to 22800 tons and 21600 tons in terms of weight.Now if CTC plans variable pricing model, the earlier constraints like the fixed ratio of 20' to 40' container won't be valid. As the demand will be dynamic, the of containers will be varying with demand. Load factor is going to be crucial and will determine the demand of 20' and 40' container. In the demand of 40' container will go high in comparison to 20'. The earlier weight constraints will not be effective and capacity will be constrained factor. Question 5: Demand curves derived from Thomas' price/volume estimatesAs per Thomas Young's estimate, during high season, when price is reduced by 3%, there shall be an increase of 5% in total TEU of demand and during low season, when price is reduced by 5%, there increase of 10% in total TEU of demand.Hence let us consider, the new price to be p for Japan. The change in high season demand corresponding to the new price is given by (p-940)/p. As per estimate, 3% reduction results in increase in price by 5%, So (p-940)/p, results in increase in price by p-940)/pHence actual demand shall be (1-(5/3)* (p-940)/p) of high season demand for Japan= (1-(5/3)* (p-940)/p) * high season demand For low season the demand corresponding to the new price is given by (p-940)/p, assuming that the new price is constant irrespective of high or low seasonAs per estimate, 5% reduction results in increase in price by 10%, So (940-p)/p, results in increase in price by (10/5)* (p-940)/p, Hence actual shall be (1-(10/5)* (p-940)/p) of high season demand for Japan= (1-(10/5)* (p-940)/p) * low season demandWe can thereby plot the new price versus TEU for fixed price irrespective of high or low season as per the following data table:Orange Line - High Demand Blue Line - Lean What is the revenue gain between a fixed price strategy and a variable price strategy?In the fixed price strategy, the prices remain same for the peak as well as the lean demand. After running the solver to determine the optimum prices at each port so as to maximize the overall revenue, the optimal value comes to be 2,621,975/-If we consider that the prices can be changed based on the season, i.e. the peak and the lean demand, we need to separately optimize the price levels for the peak and lean demand. The sum of the optimum values of revenue of the peak and the lean demand is Peak Demand:Decision Variables: Prices at all portsObjective function: Maximize the revenue for the peak demand = Price (peak) * Demand Constraints: Peak season volume <= 1900 Peak season weight <= 22,800Maximum Revenue for the peak season= 1,391,673/-Lean Prices at all portsObjective function: Maximize the revenue for the lean demand = Price (lean) * Demand (lean)Constraints: Peak season Peak season weight <= 21,600Maximum Revenue for the peak season= 1,276,115/-Total Revenue = 2,667,788/-Therefore Revenue gain= Fixed variable price strategy= 2,667,788 - 2,621,975= 45,813/-Question 7: What might be the next step for CTC if it decides to implementing RM?Ans: Continuing with revenue management, CTC can focus on a few of the below mentioned points to improve the revenue it generates Higher prices for last minute premium traffics that cannot wait till next vesselAs seen from question 2, the binding constraint is the weight and the volume, hence improving loadability to utilize both volume and weight capacitiesPremium prices for highly valued low competitive routes like Korea/China to Dubai routesIntroduce price differentiation on the type of container used, as the cost incurred for shipping through the two containers is different. This can incentivize customers to use CTC serviceIntroduce offers during low demand season, as this can bring in the profit through increased numbers in times of low demand

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