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Carrier Choice Quantified

Carriers are well aware of what they need to do to attract customers in today's competitive shipping environment. They need to provide better on-time reliability at a lower price and make sure their c...

Carriers are well aware of what they need to do to attract customers in today’s competitive shipping environment. They need to provide better on-time reliability at a lower price and make sure their customers’ consignments arrive in good condition. Few, however, could quantify how important the different factors are for attracting shippers. For the first time in Canada, a study by McGill University researchers quantifies the importance of the main factors influencing a shipper’s choice of carrier.

The study is based on a recent cutting edge survey of 400 shippers in the Quebec City-Windsor Corridor. Survey respondents included manufacturers, retailers, wholesalers and freight arrangers, such as 3PLs and freight forwarders. The study quantifies how shipping costs, on-time reliability, damage risk and security risk influence carrier choice. It also reports on how shippers feel about intermodal transportation. Equally as interesting, the research reveals how carrier characteristics are evaluated differently for different types of shipments and by different types of shippers.

The study took the form of a Stated Preference questionnaire. Such questionnaires are used in marketing to better understand consumer preferences. They can be used to understand the degree to which different preselected factors affect consumer choices. They can also be used to understand how consumers will react to new products or services. The approach adopted in these surveys is to ask respondents to choose their favourite option between different hypothetical (but realistic) alternatives presented to them. The resulting data from these questionnaires can then be analyzed to predict the market share of new products, or new product variations. For example, such questionnaires could be used to predict the market share of a new kind of soft drink. They can also be used to predict how the market share of a product might change if its price were to be lowered by 10%.

This study sought to find out about what drove shippers’ preferences for carriers. The target population was shipping decision makers of for-hire manufacturers, wholesalers and large retailers, and freight arrangers, such as 3PLs.

In the end, 11,000 calls to target companies were made. Around 700 people agreed to complete the survey and just under 400 did actually complete the survey. Based on specialized regression techniques used to analyze the response data a “carrier choice model” was estimated. This carrier choice model quantifies the effect of each of the factors found to be relevant in shipper choice of carrier. As the list of factors is long, only a summary of the results is reported here. The factors affecting carrier choice fall into three categories: carrier, shipment and shipper characteristics.

As such, the model predicts how the probability of choosing a particular carrier changes as a result of changes in carrier, shipment or shipper characteristics. For behavioral and modeling reasons, the effect that a given characteristic has on the choice of carrier is largest if the initial probability of choosing a carrier is 50%. This situation is chosen as a point of reference for the rest of the results.

All the carrier characteristics included in the questionnaires were found to be important and to have the expected direction of effect. That is, as cost, damage and security risk increase, the probability of choosing a carrier decreases. At the same time, as on-time reliability increases, so does the probability of choosing a carrier. Interestingly, if a shipper knows a carrier will transport a shipment intermodally, its chance of being chosen decreases. These results are not surprising. The real value of the results lies is in being able to estimate how much a carrier’s chance of being chosen changes for any given change in its characteristics.

Table 1 shows how the probability of choosing a carrier changes for a given change in the carrier attribute. It starts with the assumption that the probability of choosing the carrier is 50%. For example, column “1% Increase” and row “Price” shows that if the price of a carrier were to increase by 1%, its probability of being chosen would decrease to 49%. If its price were to increase by 10%, its new probability of being chosen would be 40%. The effect of the rest of the carrier characteristics is interpreted in the same way. All of the traditional carrier characteristics can be seen to play an important role in attracting shippers. It is noteworthy that if a shipper knows its shipment will be sent intermodally, its probability of being chosen drops to 30%!

The rest of the factors affecting choice (shipment and shipper characteristics) all affect shipper response to these carrier characteristics. For example, the results show that “by-appointment” shipments are more sensitive to on-time reliability than other shipments. The following table summarizes the effect that shipment and shipper characteristics have on shipper response to carrier characteristics. The magnitude of each of these effects was in fact estimated, but is not shown here.

A minus sign means that shippers are less sensitive to the carrier characteristic of interest. For example, the minus in the row “High-value” and column “Cost” means that shippers are less worried about cost if they are shipping a high-value good. Similarly, they are more sensitive to cost as shipments get longer. The most important shipper characteristic relates to whether a shipper organizes its own shipments. If the shipping is delegated to a third-party logistics firm (3PL), they turn out to be less sensitive to cost (in the case of high-value goods) and damage, but more sensitive to intermodal carriage.

This study represents the first stated preference analysis of shippers to be undertaken in this extremely important transportation corridor. It demonstrates and confirms the important role that service plays for carriers hoping to compete for shippers’ business in today’s highly competitive shipping environment. Most interesting of all, it helps to quantify just how important these factors are, and how they vary for different customers and shipments.

How the survey was conducted

Information on Corridor shippers came from the Dun & Bradstreet Million Dollar Database (MDDI) for Ontario and Quebec. This lists companies with more than $1 million in revenues or more than 20 employees. Shippers located in the Corridor were identified and those with more than 50 employees were included in the list of potential respondents. All freight arrangers (even those with fewer than 50 employees) were included. They were included because relatively small 3PLs can organize a substantial amount of shipping. Altogether over 7,000 Corridor businesses were eligible to be included in the list of potential respondent companies.

As a first step shippers were interviewed about the factors that influence their choice of carriers. We interviewed sixty-five shipping managers of businesses in the Corridor by phone. A further seven in-person interviews were conducted to explore these questions in greater detail. One critical conclusion from these interviews was that the shipment is as important as the carrier when selecting a carrier. That is, it was not possible for shippers to choose between carriers unless they had information both about the shipment and the carrier. Once these “pre-interviews” were completed, a Web-based Stated Preference questionnaire was constructed and pre-tested.

In the survey, respondents were asked to choose between hypothetical alternative carriers. Because of the need to include shipment as well as carrier information, each question contained two parts. The first part described the shipment being considered. This description included what was being shipped, the origin and destination of the shipment, and whether the shipment was by appointment or not. Sample goods were used to convey information about the shipments with respect to their value, fragility and perishability. For example, televis
ions were used as high-value, fragile goods. Tomatoes were used as goods that were low-value and perishable. Because only shipments between the major corridor destinations were considered, standard delivery times were associated with the shipments. For example, a shipment between Montreal and Toronto was considered an overnight shipment.

The second part of the question described the alternative carriers. They were distinguished by their performance in terms of cost, on-time reliability, damage and security risk. Another characteristic that distinguished carriers was whether or not the shipment under consideration would be transported intermodally (i.e. by rail on the line-haul section).

Contacting potential respondents was contracted to a telephone-marketing firm. It was responsible for making the initial contact with potential respondents, and for making sure they were suitable for the study. In particular, the firm asked whether the shipper: routinely organized truck shipments in the Corridor, was indeed a for-hire shipper, etc. Once a willing, suitable respondent was found, they were sent a password and the website address for the survey.

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