Fuel is a major expense for manufacturing companies. That expense either manifests in the fuel used within their own fleets, or it is embedded in the rising cost of raw materials. One thing is for certain: it is their most volatile expense. Throughout each day, fuel costs can vary roughly five cents per gallon, and that variance can fluctuate as much as 25 cents up or down. Manufacturing companies with fleets whose fuel managers mistimed fuel purchases can inflate an already bloated expense item and directly impact their bottom lines.
This year alone, companies from a variety of different industries have had to lower their earnings expectations due to exorbitant fuel costs. For example, Waste Management Inc., which has the fifth largest private fleet in the country, missed its earnings estimate earlier this year in part due to fuel costs.
The combination of high fuel costs and price volatility is a significant challenge for businesses across the U.S. It comes as no surprise that many manufacturing companies are taking steps to diminish the impact of high fuel costs and simultaneously bring more predictability to their fuel spending.
Buying Smart
When purchasing fuel, timing is everything. Buying the right amount of fuel at the right price and having it delivered just when it is needed is not an easy task. Unfortunately, many companies rely on manual processes, spreadsheets and back-office systems to manage their fuel expenditures in-house. This approach is fine when it is used to purchase products with relatively stable pricing. However, it does not work well in the volatile fuel market. Fuel buyers who adopt industry best practices and employ a combination of strategic sourcing strategies find that they are able to bring costs down and keep them under control.
Strategic sourcing enables fuel suppliers and distributors to more nimbly navigate markets in which prices fluctuate on a daily basis. Negotiating supply contracts based on different terms such as same day vs. prior day, or at different points in the supply chain such as at the rack vs. at the regional level, can move the needle in terms of savings. On certain days, for instance, one set of contract terms may offer lower fuel costs than another, depending on where the market is moving.
Taking advantage of spot market opportunities can provide significant savings as long as such purchases are balanced with contract obligations that carry penalties when those contracts are not met. Suppliers who are long on inventory with new supply arriving shortly will offer lower cost fuel in the spot market to those prepared for such deals.
Buyers that purchase significant volumes of fuel also should consider moving further up the supply chain. Instead of relying on wholesalers or suppliers, they could begin holding positions at fuel terminals or start exploring moving product in the pipeline. By doing so, they remove middlemen who add costs to their fuel purchases. However, this strategy should not be taken lightly because it involves a significant level of complexity as opposed to simply purchasing fuel.
With fuel as expensive as it is and the credit market continuing to be tight, some fuel managers are carefully considering available credit when making their fuel purchases. Even those that do not have credit concerns are driven to employ capital as efficiently as possible. Adopting a just-in-time replenishment model for bulk fuel lowers inventory on hand to safety stock levels that, when combined with leading-edge technology, can be satisfied without risking security of supply. This in turn lowers the working capital requirements for bulk fuel and frees funds for higher return use.
As buyers increase their supply and distribution options, they also take on more complex decisions. A fuel buyer could have thousands of options for purchasing fuel. Fortunately, there are automated technologies they can use to narrow down their choices based on forecasted demand, optimize purchasing and simplify their order management processes. Fuel management automation systems, for example, can help streamline fuel operations and provide real-time visibility and control over fuel spending. The technology provides fuel buyers with the tools they need to deal with the intense volatility of today’s market.
Taking Charge
There also are numerous hedging strategies available to fuel buyers. Employing one or two of them can provide an advantage. The upside of hedging is that it can bring greater predictability to the amount of money a fleet-based company spends on fuel. Hitting fuel budget targets is critical to operations managers, and it is especially important to executives who set earnings expectations with investors and board members. The downside of hedging is that extreme swings in fuel prices can make fuel managers heroes, or zeros. It is for this reason that hedging is typically considered as one potential aspect of a diversified fuel portfolio.
Fleet-based companies also are stretching their fuel dollars by improving fuel efficiency. This is accomplished by adopting tactics such as ensuring properly inflated tires and purchasing new, more fuel-efficient vehicles. They also are installing on-board computers that monitor both driver and vehicle performance. The computers provide data and reports on speeding, idling, engine performance and other factors that can improve gas mileage. The information is received immediately, so drivers and operations managers can initiate changes that have a real impact on fuel savings.
Most fleet managers are convinced that gasoline and diesel prices will stay high into the immediate future. As a result, some are abandoning gasoline and diesel as their preferred fuels and adopting national gas liquid (NGL) fuels such as liquefied petroleum gas (LPG) or compressed natural gas (CNG). To make the switch, these companies are converting their existing fleet engines to use these alternative fuels or buying vehicles that are manufactured to use them. Companies that do a combination of both strategies eventually achieve 100% adoption as the older vehicles are depreciated and replaced.
NGL is an attractive option for companies as natural gas is much lower in cost on a per-gallon basis than gasoline or diesel in today’s market. It does not burn as efficiently as gasoline or diesel in terms of BTUs, but it burns cleaner than gasoline and diesel, which is good for the environment and thus provides companies with a marketing boost. Because NGL prices are forecast to remain low as oil and gas companies continue to find more and more natural gas reserves in the U.S., the return on investment for companies that choose to convert or transition their fleets can be good. However, these companies must determine how long they can rely on this cost advantage and whether it actually justifies their investment.
Not all fleets can rely on their own bulk storage to fuel their vehicles, so the hub-and-spoke model does not work for every company. However, these companies have the option to provide a fleet card to their drivers. A fleet card gives drivers the option to purchase gas at approved, price-negotiated locations. Fleet cards also provide vehicle and driver telemetry that can help improve overall fleet performance. The cards also can provide fleet managers with reports about spending patterns that can be used to achieve strategic savings.
Typically speaking, fuel is not the core business of most fleet-based companies. Therefore, running an internal fuel desk and building expertise in managing fuel is not easy. This is why many fleet-based companies that want to stay focused on their core businesses turn their fuel management responsibilities over to third-party outsourcers. Outsourcing companies take care of such tasks as bidding out supply and distribution contracts, demand forecasting, dispatching, order management, invoice reconciliation and inventory loss monitoring. Outsourcers have the technology, the personnel and the expertise required to help optimize fuel replenishment activities.
It is important to understand that the best outsourcing companies stick to outsourcing. Companies that are supplying fuel and make replenishment decisions for fleet-based companies have a conflict of interest with their clients. When outsourcing fuel management, the best value is achieved by avoiding this scenario.
Finally, automated verification of fuel invoices offers fleet-based companies a hidden treasure trove of savings. Approximately 10% of fuel invoices contain some kind of discrepancy. Two-thirds of the time, the discrepancy is not in favor of the fuel buyer. Automation enables companies to match their invoices to bills of lading and delivery reports. It also enables them to verify taxes and freight charges, which also can yield significant savings for fleet-based companies.
As global demand for fuel continues to rise, fuel prices are expected to remain volatile and high. Unpredictable disruptions to the supply chain such as hurricanes, refinery accidents and more will continue to make purchasing fuel a challenging task. Fortunately, fleet-based companies that embrace fuel management best practices, technology, automation and outsourcing expertise can wield considerable positive influence over one of their biggest budget expenses – fuel.
Ryan Mossman, vice president and general manager of FuelQuest’s Fuel Services, leverages his years of experience applying technology and business process improvements to help energy, retail, commercial and industrial clients. He leads both of FuelQuest’s outsourced fuel services: Fuel Center and Alarm Management Systems (AMS). His experience includes leading large scale supply chain optimization, technology and business process implementations at large fleet and energy companies including UPS and Chevron.
