Rising and volatile fuel prices are applying significant pressure to waste companies' operational plans and budgets. According to Yahoo Finance and CNN Money, fuel prices in early February were 50 cents higher than the same time last year, before rising another 17 cents with the unrest in North Africa. Oil prices breached $100 per barrel in February as well, according to CNN Money. As fuel tends to be one of the largest expense items after headcount, fleet managers are concerned more is to come.
Analysts predict that fuel prices will continue to climb and remain highly volatile — reminiscent of the run-up in 2008. In fact, 2008 provides some key lessons for fleet managers wanting to reign in runaway fuel costs. Many companies that weathered the storm that year centralized and outsourced their fuel management decision making to:
- Mitigate the impact of price volatility
- Regain predictability in costs
- Optimize the deployment of working capital
- Gain competitive advantage
- Reduce costs
These companies saw greater return on investment when they outsourced their fuel operations. Relying on third-party experts, processes and technology provides immediate advantages in a market that rewards those who act swiftly.
Outsourcing fuel management services offers a number of benefits to fleet managers. Third-party providers typically assume any or all forecasting, procurement, inventory management and financial reconciliation duties, enabling "Just-In-Time" delivery of fuel. They also establish advantaged supply contracts that reduce fuel costs without sacrificing security of supply or transactional transparency.
Before making a decision on whether to outsource, it is critical that fleet managers analyze their existing operations and benchmark against industry best practices and metrics. The analysis phase examines fuel spending trends, supplier arrangements, market dynamics and internal business processes. This analysis leads to recommendations for efficiency gains based on established benchmarks. Ultimately, this process provides a baseline from which fleet managers can measure third-party service provider performance.
With an effective outsourced solution, fleet managers can reduce incidences of supply shortages while ensuring the fleet has the fuel it needs at the right time and at a competitive price. Third-party providers establish a strategic procurement plan that weighs various supply options including fixed or index-based pricing using industry information services like OPIS, Argus and Platts. Index-based contracts, for instance, can enable savings by taking advantage of intra-day price changes. Longer-term price volatility is mitigated with fixed-price contracts. Third-party industry experts know when to utilize one versus the other so fleet managers can meet their budget objectives.
A Centralized Fuel Team
Centralizing fuel management decisions provides some immediate opportunities such as access to the outsourcer's market buying power and use of cost-saving tactics like load shifting (moving a load scheduled for today until tomorrow if market prices are falling). Centralized fuel buyers can utilize strategies such as locational arbitrage (changing the sourcing location based on price advantage). As with any operation, centralization is critical to optimization and efficiency gain efforts.
Third-party providers also enable a higher order of financial reconciliation and transparency. Outsourcers compare and verify the accuracy of the quoted price, bill of lading, invoices, delivered gallons, and freight and taxes.
The Limitations of Outsourcing
Outsourcing is not a fit for every company with fleet operations. Smaller operations in which the fleet consumes less than 750,000 gallons of fuel each year may see less savings from outsourcing as their purchase volume falls short of preferential supplier contracts. Companies that do not purchase bulk fuel and rely instead on over-the-road solutions such as fleet cards are also not optimal outsourcing candidates.
In both of these situations, there are still options worth exploring to reduce fuel costs. A consortium of low volume fleet companies will aggregate purchasing power and provide desired savings. Also, over-the-road solution fleets will often see the greatest benefit from a balanced portfolio of fleet card and bulk fuel — a strategy an outsourcer can help a fleet manager adopt.
Headquartered in Paris, Veolia Environnement employs 313,000 people in 74 countries and generated almost $50 billion in annual revenues in 2009. Veolia Environmental Services established itself in North America in 1984 and is a leader in the solid waste, industrial cleaning, hazardous waste and integrated waste services categories.
For a company with a North American truck fleet the size of Veolia's, fuel is a considerable expense. A "keep it full" philosophy coupled with a limited range of local suppliers was limiting the firm's ability to reduce fuel costs. The company identified the need to adopt best practices in fuel management across its vast network of locations.
FuelQuest developed a benchmark study for Veolia and found several opportunities to increase efficiencies and save thousands of dollars. A key strategy for savings included a close examination of Veolia's supply portfolio. Prior to engaging with an outsourced fuel manager, the company relied upon a handful of spot market quotes from local suppliers. In order to mitigate volatility, outsourcing would provide Veolia with the right supply and carrier mix to fit their distinct business model, all the while taking advantage of both index (primarily OPIS and Platt's) and fixed price models to generate savings wherever possible, including purchases from Freight On Board (FOB) rack, major oil companies and distributors.
The right outsourcing solution combined best practices and advanced technology solutions to better manage the fuel supply chain. With this new fuel management strategy in place, Veolia Environmental Services has gained a distinct competitive advantage by realizing cents per gallon savings along with the appropriate fuel inventories to drive its business.
Making a Significant Impact
Fleet managers that outsource fuel management operations gain greater security of supply, lower fuel costs and working capital requirements, and positively impact the company's bottom line. Relying on third-party fuel experts provides a level of control and predictability that are essential in a fuel market characterized by rising costs and volatility.
Outsourcers can typically begin managing fuel operations in as little as 30 days. The first step is to benchmark the fuel operations. The results will dictate whether there are opportunities to gird for what will be a tough 2011.
Ryan Mossman is vice president and general manager of FuelQuest's Fuel Services based in Houston. He leads both of FuelQuest's outsourced fuel services divisions: Fuel Center and Alarm Management Systems. He can be reached at [email protected].