Controlling the Uncontrollable

By Logan Jr., Harold R. | Strategic Finance, April 2001 | Go to article overview

Controlling the Uncontrollable


Logan Jr., Harold R., Strategic Finance


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.

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