In July 2007, Thomas Young, regional manager of the Container Transportation Com
ID: 450297 • Letter: I
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In July 2007, Thomas Young, regional manager of the Container Transportation Company (CTC), and his colleagues were looking for a new strategy to allocate containers for transportation from Korea and China to the Middle East, Challenged by top management, which had urged all business departments to optimize their revenues and profit, Young wondered whether he could improve pricing or apply other revenue management (RM) techniques to enhance revenues. CONTAINER TRANSPORTATION COMPANY The Container Transportation Company (CTC), based in Taiwan and founded in the early 1980s, had grown to become one of the world's largest multi-modal marine transportation companies, commanding more than 100 ships, as of January 2007The fleet included full container carriers, liquefied natural gas (LNG) carriers, oil tankers and bulk carriers, among others. CTC employed approximately 5,000 personnel: 1,000 domestically, 2,000 shipboard and the others overseas. The company had four headquarters, 20 overseas subsidiaries and approximately 100 offices and branches all over the world CTC overcame the hard times that had struck the shipping industry as a whole from the early to mid-1990s, by diversifying its businesses, investing in new ships and rationalizing its management processes. Most recently, the company had been proactive in meeting customer demands and was dedicated to ensuring customer satisfaction. The customer-oriented management team was committed to high ethical standards and was constantly pursuing innovation and service expansion for customer benefit, CTC embraced the vision of becoming one of the most competent shipping and logistics companies in the world by the year 2020.Explanation / Answer
CTC is currently looking to optimize their revenues and profit during the low demand season by either improving pricing or using other revenue management techniques. The best technique to calculate the optimal revenue is to use an excel model to calculate the optimum quantity and price that would lead to the highest revenue. Only optimal revenue is needed to be calculated and not optimal profit due to the fact that the majority of CTC’s costs are sunk. A sunk cost is a cost which has already been incurred. Since CTC’s costs have already been incurred, by maximizing revenues they will in turn be maximizing profits. When optimizing their revenue it must be done keeping in mind of certain constraints. The maximum container capacity of each vessel is 2000 TEUs and each vessel also has a weight limit of 24,000 tons. CTC plans to load its vessels to 85% of capacity in order to make sure there is room for time-sensitive shipments. Therefore, the maximum quantity of TEUs per ship is 1700 and the maximum weight per ship is 20,400. Another constraint CTC faces is that they would like to have between 1.2 to 2 times the amounts of 40’ containers to 20’ containers, due to the benefits of using 40’ containers mentioned above. These constraints must be factored in when calculating the optimal revenue. Revenue must also be optimized on a per ship basis rather than for each 5 ships. This is because the constraints are also on a per ship basis so in order to optimize revenues while factoring in the constraints it must be done per ship.
In order to calculate the optimal revenue we first must derive the demand curve for each route. Since a 5% reduction in price will always lead to 10% increase in container traffic we can assume that the demand curve is linear. The demand curve is linear because the amount CTC would have to drop their price in order to sell one more is constant over every quantity. This is a necessary assumption because if the demand curve was non-linear and had a constant elasticity then it would not be possible to optimizer revenues. Revenue can only be optimized in the elastic part of the demand curve closest to unit elasticity. If elasticity was constant there could be no optimization of revenue. Once the demand curve is derived we can plug the numbers into the excel model in order to obtain the prices and quantities which lead to highest possible revenue.
Optimum revenue was found both with the constraints and without the constraints. The unconstrained optimum revenue was $1,464,844 while the optimum constrained revenue was $916,287. The lagrange multiplier represents the change in total revenue due to a change in constraint. In this case the lagrange multiplier for the weight constraint was 33.73. This means that for every extra tonne the ship carries the revenue per ship will go up by $33.73. If the cost of increasing the weight capacity of each ship by one tonne is less than $33.73 then it would be very beneficial for CTC to increase its weight capacity.
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