Where supply chain management and data science meet, interesting questions arise. In our Data2Move Research Stories you will find out how students have managed to answer them. This time: Auke Holle’s master thesis, undertaken at Den Hartogh Logistics, an important player in the containerized transportation industry. The focus of this thesis: how to benefit from the demand price elasticities to achieve a better balance of container flows in the transport network?
Where it started – challenges & strategies
Den Hartogh Logistics – and many other logistics service providers – are operating within complex supply chains. One of the important challenges they face is the imbalance in container flows: if more freight flows from location A to B than from B to A, empty containers pile up at location B. Logistics service providers commonly apply two strategies:
- The repositioning of empty containers from surplus to shortage locations.
- Pricing strategies to influence the demand such that less repositioning movements – and thus less costs – are necessary.
Holle’s work focusses on these pricing strategies.
The need for calculating models
Holle developed a simulation model that measures the impact of several pricing strategies on the company’s profit. An important advantage of this model is that it does not only consider imbalances at a single location, but includes the spill-over effects of changes in one location on profit generated in other locations. It thus considers total profit generated throughout the entire transport network.
An important insight is that ‘solving’ an imbalance in one location does not necessarily increase the total profit. Instead, the model considers the entire network to determine the discount levels that should be given to customers that ship from surplus locations, as well as the price increases to charge to customers that ship from shortage locations. While the model does not maximize profit, it ensures increased profit compared to the status quo across many possible demand scenarios – even in extreme cases when, for instance, all customers want to ship from the same location.
Simulation can benefit total supply chain
While Holle’s research focuses on the profit improvements for Den Hartogh, the implementation of the simulation model as a decision support tool will also benefit Den Hartogh’s customers. More balanced container flows reduces the repositioning costs, which, in turn, allows Den Hartogh to charge lower prices while maintaining the same service level – potentially leading to a considerable competitive advantage.
A personal note
According to Holle having insight into the effects of a price setting is of major importance. “Den Hartogh Logistics was aware of the existence of the effects of a demand adjustment. They knew that solving an imbalance is no guarantee for an improvement in profit, but the company had not quantified the impact. In some cases, the effects of solving an imbalance surprised me, as we identified large differences in the effect of solving an imbalance from either an import or export perspective.”