Harriet is a lumber analyst for a consulting firm. As part of her responsibiliti

Question

Harriet is a lumber analyst for a consulting firm. As part of her responsibilities she must keep apprised of those factors that influence shipper demands. Recently she developed and estimated a binomial logit model of shipper carrier demands.

a) theoretically Harriet reasoned that a shippers carrier command would depend upon shipment costs, service quality as measured by average transit time and average variability of transit time and mode accessibility.
i) Briefly identify the expected effect that each of these factors would have upon the modes demand all else constant.
ii) Harriet reason that a shipper’s carrier demand would depend upon mean transit time and mean variability in transit time because an increase in each of these would lead to higher interest and storage costs for the shipper. Do you agree with Harriet’s reasoning. If so why and if not why not.

b) for the lumber industry the two primary modes that Harriet considered were (1) private carriage (that is the company shipped its own goods) and (2) rail. The explanatory variables in Harriet's model were,
Shipment size in units of 10,000 pounds.
Commodity value in units of $/pound.
Freight charges in units of 10,000 per unit shipped.
Mean transit time in days
Distance from a rail sighting in miles.
Standard deviation for transit time in days.

Harriet's results are given in table 4.20 below;
Table 4.20 the shipping mode choice for Harriet
Explanatory variable                                                   coefficient estimate    t statistic
Shipment size (2)                                                        2.5                              2.8
Commodity value (2)                                                  7.51                             4.32
Freight charges (1, 2)                                                -14.14                         -8.40
Mean transit time (1, 2)                                              -6.43                            -4.12
Standard deviation of transit time (1, 2)                     -3.48                           -1.73
Distance from a real citing parentheses (2)               -11.21                          -4.83

Number of observation observations equals 120

i) are the results consistent with Harriet's theoretical reasoning.
Does service quality affect shipper Modal demands.
Suppose that the variability of transit time for private carriage increased. Qualitatively, how would this effect the demand for private carriage and the demand for rail.

ii) from the reported results would you expect larger shipments to go by rail or private carriage. How about higher valued shipments (for example furniture versus bulk lumber).

iii) from the reported results does distance to the rail siding matter to a shipper?

iv) how much would a typical shipper be willing to pay to save one day of transit time?
How much would a shipper be willing to pay to reduce transit time variability by one standard deviation?

Explanation / Answer

(a)

ii) Harriet’s reasoning is right as increase in mean & standard deviation of transit time will increase costs for the shipper

(b)

i) The results are not consistent with Harriet's theoretical reasoning.

Both the factors Mean transit time and Standard deviation of transit time are insignificant at 5% level of significance.

So the service quality doesn't affect shipper Modal demands.

If the variability of transit time for private carriage is increased, both the demand for private carriage and the demand for rail will decrease.

iii) The factor distance to the rail siding is insignificant at 5% level of significance.

So distance to the rail siding doesn't matter to a shipper.

iv) To save one day of transit time, a typical shipper needs to pay 6.43 more.

To reduce transit time variability by one standard deviation, a shipper needs to pay 3.48 more

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