Liquid Inventory

If you were watching fuel prices in recent weeks, you could have seen consumer prices jump 7¢ a gallon over a two-hour period. For shoppers who filled their tanks after they ran errands, rather than before, the delayed purchase probably cost an extra dollar. For retailers who are stocking those pumps, or fueling an entire fleet, inefficient fuel procurement makes a much bigger dent in the budget.

Consider the inventory-management dilemma facing fuel retailers, particularly the grocery chains and discount department stores that have recently installed gas pumps in their parking lots. As difficult as it is to manage replenishment of promotional items, or to maintain in-stock positioning of all your best-selling SKUs, these challenges pale in comparison to managing procurement and replenishment of liquid inventory.

FuelQuest, a Houston-based third-party service provider that automates fuel purchasing, logistics and taxation for companies such as Wal-Mart, 7-Eleven, UPS and FedEx, cites a convenience store operator that has more than 3,000 locations and places orders for as many as 2,000 loads of fuel on any given day. It would be far too time-consuming and inefficient to manually evaluate the replenishment needs for fuel pumps at 3,000 stores, identify the best price/delivery option and place the orders.

“Our systems monitor the retailer’s underground storage tanks in real time, which allows the corporate office to know what is on hand at every store throughout the day,” explained Doug Haugh, COO of FuelQuest. “It evaluates what is needed at a truckload level, then the price-optimization engine determines the best solution available at that given time for each location needing replenishment. The retailer could have contractual commitments with suppliers that limit options, but the system can factor those restrictions into the plan. Also, retailers can always override the recommendations.”

Price optimization is exponentially complex, given the dynamic nature of fuel costs. In addition to the base price of the fuel, Haugh explained, there are some 7,000 tax systems across the 50 states as well as environmental fees. Retail buyers, accustomed to negotiating from a fixed-price structure for most CPGs, have to embrace an entirely different mind-set when it comes to purchasing a commodity with prices that may change throughout the day.

“We’re sometimes looking at half a million different prices per day for our various clients,” reported Haugh.

Auditing invoices for accurate billings is also a monumental task. With an average error rate of 5% to 7% throughout the industry, it pays to have an automated system confirming that all charges are legitimate. Although it is virtually impossible to achieve 100% accuracy, given the pricing dynamics, automation typically reduces the error rate to about 2%.

Diesel Trends to Watch in 2007

Despite predictions of high prices and supply shortages, converting to Ultra-Low Sulfur Diesel (ULSD) fuel has not been a big deal for fleet operators. Doug Haugh, COO of FuelQuest, Houston, described the transition to ULSD as “the crisis that wasn’t.”

“Rumors of paying 20¢ to 40¢ premiums for ULSD never played out. Instead, we saw premiums in the range of 4¢ to 8¢ per gallon on ULSD, and in select markets, ULSD was actually cheaper,” he said. “With the exception of some markets in the Midwest where demand was higher than expected, there has also been an adequate supply of ULSD fuel.”

Pros and cons: The environmental impact of ULSD is certainly an improvement, with harmful diesel emissions of about 15 parts per million vs. 400 or 500 parts per million. However, there is potential that diesel engines will suffer from the lower sulfur content because sulfur acts as a lubricant. To avoid excessive wear on engines that are running on ULSD, retailers should include a lubricating additive in their fleet’s maintenance program.

Consumer interest: It’s only a matter of time until U.S. automakers and domestic drivers rally to embrace passenger cars that run on ULSD. According to Haugh, fewer than 1% of the passenger cars cruising U.S. highways are diesel, but as many as 50% of the passenger cars in Europe are diesel. We’re not talking about your daddy’s diesel—those noisy, foul-smelling, difficult-to-service models of the 1970s. Today’s diesel cars are luxury models such as the 2007 Mercedes E320 Bluetec, with an expected 35 miles-per-gallon highway rating.

A recent report on “Emerging Clean Diesel Technology,” published by the U.S. Department of Energy, stated: “Diesel engines are the most realistic technology to achieve a major improvement in fuel economy in the next decade. In the U.S. light truck market (Sport Utility Vehicles, pick-up trucks and mini-vans), diesel engines can more than double the fuel economy of similarly rated spark-ignition gasoline engines currently in these vehicles.”

For convenience stores and other fuel retailers, that assessment means the time has come to consider adding more diesel pumps to serve customers.