Project Summary
This research investigates how to model freight transportation flexibility using the theory of real options (Dixit and Pindyck, 1994). In the practice of adopting lean and demand-responsive logistics systems, orders are required to be delivered rapidly, accurately and reliably, even under demand uncertainty. These tougher demands on the industry motivate the need to introduce new instruments to manage transportation service contracts. One possibility, which has begun to attract attention, is to use real options to hedge transportation capacity and cost volatility. To date, no published research has specifically focused on applying real options in the trucking industry even though this is the dominant freight transportation mode. Our research proposes a real option based method of procuring trucking services. Research activities will include: 1) understanding the conditions for the emergence of a market for truckload options based on experiences in other transportation industries; 2) modeling truckload rate dynamics and investigating pricing formulas for truckload options; and 3) collecting data and case studies for selected representative transportation origin-destination pairs.
