Wastefleets that adopt optimal supply contracts, properly manage fuel inventories, and use the opportunities that fuel price volatility presents, have a distinct advantage in the market.
Ryan Mossman
For fleet-based waste collection operations, fuel is the second largest single expense, behind only headcount. It often presents the greatest single opportunity for cost savings in fleet-based organizations as well, although it does not always receive the appropriate amount of focus in order to achieve that benefit. Procuring fuel for a sizable fleet presents a number of challenges around fuel contracting, reconciliation of the associated invoices and proper management of inventories. Given the complexity and number of factors involved in procuring and reconciling these purchases, having solid processes and employing the right technology to manage it is a must. Things to consider include optimized fuel contracts, proper inventory management, invoice reconciliation and mitigating fuel price volatility. Proper management of these factors will lead to reduced fuel costs, optimized inventory levels, fuel invoices that properly reflect what was purchased and the ability to turn fuel price volatility into a competitive advantage.
Understanding the Effect of Fuel Price Volatility
The market is now in a period of extended and pervasive fuel price volatility. Since 2004, price swings of .03 cents or more happen nearly 50 percent of the time and swings of .05 cents or more happen nearly 25 percent of the time. This volatility can have a huge impact on fuel costs and by extension, the overall health of businesses dependent upon fuel to run them. Fleets that do not take this into account will realize substantially higher overall fuel costs, which can have negative effects on the bottom line.
Establishing the Right Fuel Contracts
Fixed-price contracts might be a tempting option from a simplicity standpoint, but they don’t provide options to take advantage of market movements and lead to overall higher fuel prices. They should only be used when attempting to achieve budget certainty regardless of cost. Rather, employing a mix of index (i.e. Argus, Platts and OPIS) based contracts and spot supply purchases typically lead to the greatest overall savings in addition to providing security of supply, which is important for those dependent on fuel to run the business.
Having options with regards to contracts is important even with contracted supply. For example, if you have locations in suburban Detroit, the best price might be local or in nearby Toledo, Ohio. Having supply options in adjacent markets helps ensure security of supply and can provide needed supply when localized supply outages occur.
Managing Inventory to Position for Opportunities
Proper management of and visibility into inventory levels is critical for an optimal fuel procurement process. Knowing the level of product in the tank is necessary so scheduled deliveries can be completed. This also ensures that run outs (product shortage before delivery) and retains (not enough room in tank to deliver scheduled load) do not occur, avoiding the associated fees, and possible loss of revenue due to delays.
The other benefit of accurate inventory visibility is the ability to properly implement a load-shifting program (intentionally moving a scheduled load forward or back) to take advantage of price fluctuations. For example, if a load is scheduled to dispatch today but the market is heading down .04 cents tomorrow, you can save approximately $320 per load on an 8,000-gallon load to push the delivery until the next day. Assuming that you have 12 loads scheduled for the next day, and can move 10 of them without causing fuel outage issues, $3,200 can be saved that day. The ability to execute this move is heavily dependent on having the right technology in place to enable the orchestration necessary to delay the targeted deliveries. This includes not only having access to real-time market data, but the corresponding data related to both tanker transport logistics and your fuel inventory positions.
Fuel Invoicing: Tying all the Pieces Together
Even with a typical $30,000 bulk fuel invoice, the invoicing component is the piece that is often forgotten when attempting to maximize savings. All success achieved in saving money through securing the best possible supply, monitoring the market for movements, and making necessary delivery adjustments for price advantages can be lost if the invoice is not correct.
To help illustrate this, we conducted a recent fleet invoicing survey which showed that 99 percent of fleets reported invoicing errors up to 25 percent of the time. In addition to this, 24 percent of those surveyed stated that a business impact was experienced due to invoicing errors including overpayments, increased operational costs and lost trust in suppliers due to these errors. Of those surveyed, 38 percent stated that they planned to implement either an in-house or automated solution to combat this issue.1
Thankfully, with technology and the right processes in place, organizations can mitigate these errors, verify that the proper fuel price and freight rate is being used, and protect hard-won fuel savings, while ensuring that the proper taxes are paid. According to Joe Broski, Senior Sourcing Manager for Fuel with Republic Services, “Fuel invoices are quite complex–including fuel costs, freight, taxes, and accessorial charges. They also can vary considerably from city to county to state.” He elaborates by saying, “It is essential to have a system to validate all of these elements and ensure that you are getting invoiced accurately in relation to the negotiated deals. You also want to be fully compliant with all tax obligations to avoid any overpays, or worse yet, underpays and potential penalties.”
As an example of the importance of verifying fuel invoices, let’s assume that a scheduled delivery is adjusted to take advantage of a price movement and by that action, a fleet stands to save $320 per load. If the supplier makes a mistake related to that invoice and charges the original price rather than the adjusted delivery price, all savings related to that movement could be lost. That is where a robust combination of processes and automation technology come into play to make certain that decisions made to save money on fuel are truly reflected in the bottom line.
Steps to Take, Employing Automation
Waste fleets that adopt optimal supply contracts, properly manage fuel inventories, and use the opportunities that fuel price volatility presents, have a distinct advantage in the market. Today’s highly volatile market demands a combination of technology and expertise that is essential for optimal fuel management. Without automation technology in place, fleets can get the processes correct but will not be able to execute on them properly and therefore unable to take advantage of the opportunities that the market presents. However, there are solutions in the market aimed at the industry to help waste companies gain control of fuel costs. This can be achieved by implementing a software solution to manage in-house, or engage third-party expertise in the market, to have a truly effective and best-in-class fuel management program.
Ryan Mossmanis the Vice President and General Manager of Fuel Services for FuelQuest (Houston, TX). He oversees a team that manages ~$2.4 billion in fuel across all 50 states, Canada, Puerto Rico and Guam. Additionally, Ryan’s FuelQuest experience includes leading large-scale supply chain optimization implementations at large fleet and energy companies including UPS and Chevron. Ryan has been published or quoted in many publications such as Forbes, USA Today and a wide variety of industry information sources. Additionally, he has presented at leading conferences such as SIGMA, IFDA, Waste Expo, OPIS Fleet Fueling and NACS. He can be reached at [email protected].
Note
1. FuelQuest Fuel Invoicing Survey conducted December 2013-January 2014