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Controlling the Uncontrollable.

Supply chain mangement of your fuel costs can help you gain a competitive advantage.

Fuel costs are difficult to forecast and even tougher to control. The price of natural gas climbed 79% last year, while oil was up by 57%. Many economists say these increases affected almost every industry across the board, contributing to a significant fourth quarter slowdown.

Prices are so unpredictable because of a mix of external forces, market fundamentals, and basic economics: OPEC keeps the price of crude oil high by limiting the supply, while strong economic growth creates more demand. Deregulation, industry consolidation, and outside political and nonbusiness pressures impact fuel channels as well. So do environmental compliance efforts.

Fortunately, good supply chain management (which we'll define as seamlessly moving raw materials through production and into the hands of the end user) means that "difficult" doesn't necessarily translate as "impossible." It could, in fact, make for a stronger competitive advantage.

Whether your fuel concerns are as simple as cooling a warehouse, or as complex as those the fuel-intensive transportation industry faces, there are strategies to manage your context and reduce costs in the fuel supply chain. These strategies are as successful for companies in the food and beverage industry as they are for retail service stations.

UNDER CONTROL

Defining and analyzing the supply chain is the best way to start. Pull back, and focus on your objectives (such as efficiency and cost containment) while reviewing and rethinking every element of the process in order to make the most effective impact.

Begin by creating flowcharts for each process that occurs with all fuel transactions. Include all administrative and logistical steps in the procurement and use process, as well as all steps in fuel distribution and data tracking. (See Figure 1 for an example.)

Once you've mapped out the supply chain, evaluate your fuel expenses in order to gain control of them. Consider both direct and indirect costs.

Direct costs include the cost of commodity, the cost of distribution, and perhaps overhead.

Indirect costs include administrative costs of procurement, accounts payable, fuel tracking, theft, and the queuing of vehicles waiting for fuel. They also include the fuel component of inbound and outbound freight, as well as travel expenses such as rental cars and airline tickets. Indirect costs may also pertain to other energy-intensive supplies where fuel surcharges are regularly imposed. On the surface, these indirect costs may not seem to warrant much attention. But in aggregate they can be quite significant.

In most organizations, the evaluation of direct and indirect costs is an unrealized opportunity for savings; few companies even define the magnitude of the opportunity. In fact, many corporations find the task of estimating savings opportunities overwhelming. Many logistics managers and CFOs feel that getting a handle on many of these indirect costs is out of their control.

The fact is that many of these costs can be controlled. For example, a fuel supply chain management company that has relationships with the transportation sector can pre-negotiate your fuel charges on contracted freight or vehicle leases. These contracts, which can cover months or even years, can help you achieve long-term structure and savings.

As a matter of fact, an outside supply chain relationship can minimize virtually every cost associated with both direct and indirect fuel logistics. (See Figure 2 for an example of the entire supply chain.)

Taking the time to search for these savings opportunities can have big payoffs. One major commercial/industrial manufacturer captured competitive advantage by identifying (and hedging its exposure to) fuel costs inherent in its contracted freight rates. By locking in shipping costs well in advance, it could easily manage the overall cost of shipping in the budget process.

But what carrier is going to guarantee freight costs without a fuel surcharge caveat? With the correct supply chain relationships, fuel costs can be benchmarked at known market values without limiting the carrier's margin structure or the shipper's budget process.

Managing the commodity aspects of the fuel supply chain can also be beneficial when negotiating longer-term contracts where fuel or freight costs represent a significant portion of overall costs. In fact, many shippers have found that the fuel management process enhances their core carrier relationships, while carriers have discovered that the process may deliver an extra advantage in the competition for additional contractual business.

THE ONLINE ADVANTAGE

One key to taking control of the fleet fuel supply chain involves using the Internet as an integral force in unifying and coordinating every element of the supply chain. Thanks to Web-enabled applications, even smaller users can purchase commodities directly in the global market.

Whatever the senior financial manager's perception of a certain technology or opportunity may be, the Internet has very likely changed the reality. The decision to properly implement using the Internet helps drive costs out of the fuel supply chain. Companies can accomplish this without significant capital through collaboration with outside organizations experienced in technology and fuel supply chain management.

For example, a working system allows many types of "live" transactional data to be at a customer's fingertips in a Web-enabled format. This type of application helps minimize supply chain costs and provides easy access to information essential to core business operations (such as product allocation, prices, invoices, bill of lading, contract ratability, and other transactional data). This e-business application automates the fuel dispatch process. Functionality provides for electronic confirmation of inventory management, order generation, order receipt, delivery confirmation, and direct electronic funds transfer (EFT) payment processing. These functions optimize time and cost variables associated with each component of the supply chain.

OUTSIDE IN

Yet companies that embrace fuel supply chain management still face a fundamental question: Should the staff implement it, or should managers outsource the task to an experienced team?

As a general rule, internal control of indirect fuel exposure hasn't been approached strategically because many organizations' awareness of indirect risks is vague and fragile. In order to develop and sustain their existing core competencies, companies often find it necessary to concentrate on minimizing resources and management attention to noncore activities.

Handling the fuel supply chain internally requires budgeting for a significant long-term investment of physical and intellectual resources. And considerable time must be allocated to staff training and education. Decentralization and cross-functionality of different divisions increase the degree of difficulty of trying to control even direct fuel costs.

In most situations, obtaining and retaining control of the fuel supply chain without collaboration with outside resources or technology is difficult, inefficient, and can result in the loss of crucial strategic opportunities.

Fuel supply chain management activities should concentrate on three basic components:

1. The commodity,

2. Operations/logistics, and

3. Administration.

Once you have thoroughly analyzed your internal processes and the associated costs, you can begin the search for an outside resource to help manage the supply chain. With so many consultants claiming expertise in supply chain management, choosing the right resource can be difficult. Fortunately, the criteria for choosing the right working relationship to manage a commodity supply chain are clear and straightforward.

Consider these issues when searching for a supply chain management partner:

* What is the company's sphere of influence?

* What are the company's applicable physical assets?

* What is the company's technology base?

* What kind of innovations does the company demonstrate?

* What type of relevant experience does the company have?

Unless the supply chain partner you've chosen has the assets, experience, and technology to manage the economical procurement, transportation, distribution, and administration of your product, it will be very difficult to determine a good value.

It's common for many commercial or industrial firms to have a large overall demand base for product or to have significant exposure to fuel costs in aggregate--but not in any one geographic market. These firms fail to benefit from their size because they don't represent significant volume to any one specific supplier. Success depends on leveraging your partner's skill set and building a competitive technological solution for both your direct and indirect product requirements.

The relationship between your company and the outside resources you choose to work with should combine innovative technologies with core competencies, creating a value-added supply chain that helps drive out costs. Don't fall into the trap of hiring consultants to define opportunities that have little chance of being realized!

Supply chain management of bulk commodities can produce significant savings for many companies, even if the potential for direct cost savings seems to be insignificant. Investigating all direct and indirect ways the commodity's cost could affect the corporation might lead to opportunities that would otherwise be ignored. By selecting the right outside resources to help manage the entire supply chain, companies can reduce costs as well as form relationships that may give them a competitive advantage in their core activities.

When choosing an outside partner to help manage the supply chain, look for a company with physical assets in your area of focus and excellent Web-enabled applications to minimize back-office (administrative) and logistical costs. Select an organization with considerable intellectual resources and excellent relationships with suppliers, retailers, airlines, rental car companies, and major freight carriers. And look for a company whose innovations, technology, and experience fit your needs.

Keeping these guidelines in mind helps you take a comprehensive approach to choosing a supply chain partner. Building a relationship based on a foundation of shared goals and mutual trust is the glue that holds the entire process together.

Harold R. Logan, Jr. is executive vice-president/finance, TransMontaigne Inc. (http://www.transmontaigne.com), an independent provider of supply chain management for fuel in North America.

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COPYRIGHT 2001 Institute of Management Accountants
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Author:LOGAN JR., HAROLD R.
Publication:Strategic Finance
Geographic Code:1USA
Date:Apr 1, 2001
Words:1593
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