OAKBROOK TERRACE, Ill. – The Greek financial crisis. Regulatory uncertainty. Higher U.S. oil production even with lower rig counts. These factors and more mean volatility remains a major presence in the business of selling fuel. It also provides opportunities that, according to presenters at a recent CSP webinar, require marketers to get disciplined in managing product inventory if they want to take full advantage of them.
“It’s really in the backdrop of the challenges that come from the logistics of increased demand, making sure you’ve got the right inventory and not too much of it, and really capitalizing on the volatility,” said Ryan Mossman, senior director of managed services at Veeder-Root, Simsbury, Conn. “It’s being in the position to turn something that could be a competitive disadvantage into an advantage.”
The key is to take control of not only how you buy fuel—how much on contract, how much not—to get the best price, but also how much you keep on hand at each site to minimize costs.
“Strategically, you need to define what the optimal inventory level is for your location and product type,” said Todd Holt, senior product manager at Veeder-Root. It means appreciating the needs of different types of sites—retail vs. industrial, high-volume vs. low-volume—and their individual dynamics, including daily sales patterns and which types of fuel products move the fastest. In essence, each location should have its own inventory-control plan.
For truenorth, Breckville, Ohio, a joint venture between Shell Oil Products US and the Lyden family that includes more than 100 company-ops and 200 dealer ops in Ohio, Michigan and Illinois, adopting a tailored approach to inventory control helped transform its fuel distribution and retail business. The company uses Veeder-Root’s Insite360 FuelQuest Dispatch and Delivery Forecasting solutions for dispatching and ordering, and Insite360 FuelQuest Inventory Forecasting for monitoring and tweaking its fuel-inventory plan.
“Before we started using the technology, we used blanket terms for how we kept inventory,” said Ben Sunderlin, general manager at truenorth, which has annual fuel volume topping 380 million gallons. “We would say, ‘Let’s keep all tanks 50% full, or no more than 3,000 gallons.’ And that worked for some sites but not all.” For example, it was too much for lower-volume locations, but not nearly enough for high-volume sites.
This blanket approach also was not tailored to the business realities of truenorth’s smallest dealer ops, for whom one truckload in fuel is a huge capital cost.
“You start realizing maybe you’re keeping too much product in some tanks,” said Sunderlin. “Possibly you had sites not moving very well with secondary product, keeping too much product in the ground. … If you’re tying up all that capital in fuel delivery, you get these best-in-class retailers come in, and it was starting to force [the dealers] out of business.”
By adopting the InSite360 FuelQuest tools, truenorth was able to move to a sales-based approach to setting inventories for each site. “For company ops, we like to say let’s keep as much regular gas in the ground as we can,” said Sunderlin. “On secondary product, let’s keep a minimum of three days’ supply.”
For dealers, truenorth was able to lower their inventories to free up cash flow.
Another opportunity, said Holt, is to take a just-in-time (JIT) approach to managing fuel inventory.
“It’s the opposite of keeping the tank full all of the time,” he said. “If the tank constantly needs fuel, it gives you more space to find better deals.” While keeping the tank full makes sense in some situations—for example, if bad weather is imminent—“on a daily basis, without external factors, you don’t want to miss out on opportunities because you had nowhere to put the fuel.”
This means mastering the concept of keeping safety stock—or delivering enough fuel to a site so that it will not run out in between deliveries, but giving enough time to take advantage of buying fuel off contract at a better price and maximizing margins when setting the pump price. It requires more frequent tank readings—Veeder-Root recommends hourly—to stay on top of any potential changes in the site’s sales trends, and to provide enough leeway to change your inventory control plan.
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