Researchers have recommended that U.S. Transportation Command implement variable cost pricing for several business lines that are financed by the Transportation Working Capital Fund (TWCF). In this report, researchers identify next steps toward implementing variable cost pricing for selected TWCF business lines.

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Implementing Variable Cost Pricing in the Transportation Working Capital Fund

by Michael Vasseur, Ellen M. Pint, Laura H. Baldwin, Max Steiner, Liam Regan, Liam McLane

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Research Questions

  1. Are TWCF prices expected to influence customer decisions for the selected business line?
  2. Can fixed costs be distinguished from variable costs for the selected business line?
  3. Are the benefits of variable cost pricing greater than the cost of implementation for the selected business line?

In Independent Evaluation of the Transportation Working Capital Fund, RAND researchers reviewed the Transportation Working Capital Fund (TWCF) to meet the requirements of Section 1716 of the National Defense Authorization Act for Fiscal Year 2020. They recommended that U.S. Transportation Command implement variable cost pricing for several business lines that are financed by the TWCF.

The business and economics literature emphasizes variable cost pricing as the best way to guide customer decisionmaking to support enterprise objectives. In the variable cost pricing model, customers pay for the costs to the defense transportation system associated with their requirements (variable costs); other costs should be recovered separately through appropriations or service-level bills.

In this companion report, researchers identify next steps toward implementing variable cost pricing for selected TWCF business lines. These business lines include Air Mobility Command's Channel Cargo, Channel Passenger, Special Assignment Airlift Mission/Contingency, and Joint Exercise Training Program business lines; U.S. Military Surface Deployment and Distribution Command's Liner Operations and Port Operations business lines; and Military Sealift Command's Army and Air Force Prepositioned Ships business lines.

Key Findings

Business lines have different levels of appropriateness for variable cost pricing

  • All three questions can be answered positively for the Air Mobility Command Channel Cargo and Channel Passenger and U.S. Military Surface Deployment and Distribution Command Liner Operations business lines.
  • Answers are unclear and additional information would be required to assess the Special Assignment Airlift Mission/Contingency, Joint Exercise Training Program, and Port Operations business lines.
  • Activity is driven by requirements that are not fully price sensitive for the Military Sealift Command's Army and Air Force Prepositioned Ships business line.

Recommendations

  • More-detailed analysis of each of USTRANSCOM's business lines is needed to determine whether the benefits of implementing variable cost pricing are likely to outweigh the costs.
  • This type of cost-benefit analysis would include estimations of the elasticity of customer demand for different types of customers and movements.
  • It would also include an examination of USTRANSCOM business processes, information technology systems, and personnel requirements to understand implementation costs.

Research conducted by

This research was sponsored by the Office of the Under Secretary of Defense (Comptroller) and conducted within the Acquisition and Technology Policy Center of the RAND National Defense Research Institute (NSRD).

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