Rationalising Fuel Distribution Costs and Processes Theory and Practice

Rationalising Fuel Distribution Costs and Processes: Theory and Practice © TouchStar Technologies 2014

Rationalising Fuel Distribution Costs and Processes: Theory and Practice


Overview - The Fuel Distribution Function

While end user prices across both the USA and EU may vary the allowance for cost of distributing the ‘last leg’ to homes and filling stations, including marketing and advertising, dwarfs both the cost of raw material (crude), refining costs and tax, and is only 5 or 6 pence per litre.

When it comes to final phase fuel delivery to homes and petrol stations the only viable transport is, ironically, by gas guzzling road tanker. Some 40% of delivery cost is made up of vehicle costs, while approximately 40% of vehicle costs is expended on fuel. So for every 10% rise in fuel costs an additional 1.6% is additionally added to the cost of fuel at the pump.

The US petroleum wholesale distribution industry includes about 5,700 companies with annual revenue of about $750 billion, although the industry is concentrated and the 50 largest companies producing 70% of the revenue (Hoovers) many ‘long reach’ independents haul fuel under standards laid down by the refinery owners.

In the UK and Europe the distribution market is far more centralized. For example in the UK DCC GB Oils is the market leader with a 20% market share (750 tankers), with three others taking another large leading market share of over 40%. While most forecourt-dealerships may carry the brand of a major company, they are mostly independent businesses often using road transport companies including Wincanton, Hoyer, DHL, BP, TDG, Sucklings and Turners.

Service Convergence – Filling Station to Supermarket

A good sized filling station would provide some 5 million litres of fuel per year to members of the general public worth approx £7 mil. These distribution points have found that the margin on fuel is so slim that they must provide groceries, newspapers and snack bars to sustain their business models.

The local station with a simple canopy sheltering pumps and a small cash collection point has all but disappeared and in its place a ‘one stop convenience store’ has emerged. These are now usually owned by large chains serving motorists and families on the move, commuters rushing to and from work or busy shoppers.

Destination point supermarkets have harnessed their buying power to negotiate low fuel prices to entice customers, and gain a greater share of wallet. In the UK they have grown retail share from 19% in 1997 to around 40% in 2012 while the overall consumption has increased by only 1%. (source UKPIA). This

dynamic has forced smaller units to close, forced out by price competition driven by unmatchable economies of scale.

The fuel price cost breakdown varies from country to country. Broadly in the US the cost of fuel (at the pump) is 13% taxes, 69% cost of crude, 12% refining, and only 6% marketing and distribution costs (including retail distribution) source Chevron Corp. While in the UK the cost of taxes is approximately half of the at the pump price.

Prices of fuel are broadly aligned across Europe, which is far more expensive than the US as the green agenda is far stronger and deters the use of ‘black fuel’, while there is a higher propensity for governments to raise revenue. So the consumer is far more price fickle, particularly in these austere times, where just a single 1p difference can make the difference between winning and losing a customer.

The Home Fuel Market

The Home fuel market services LPG and heating oil demand in the UK, although in Europe some companies also supply biomass pellets. Fuel for home use does not incur the swinging tax regime applied to motorists, but similarly, margins are very tight.

As a result the UK industry has consolidated over the last 10 years as a plethora of marginal distributors have been absorbed leaving only a few major companies to dominate the market.

Home fuel distribution has become a marginal business, running on tight margins, servicing price sensitive consumers where relatively small changes in exchange rates, refinery costs and crude oil prices are quickly reflected in the retail price, and will encourage fuel saving and a switch to a greener source of power. Therefore every penny saved in distribution costs contributes to gaining a competitive price edge.

Regulations – Duty to Protect All Stakeholders

Fuel distributors not only have to comply with industry standard health and safety, greenhouse gas emission and driver hour legislation, but also with special environmental, emergency planning (particularly for COMAH sites) and storage regulations. These statutory regulations are reinforced with a host of internal procedures, which are to safeguard stakeholders and avoid costly fines by government inspectors.

THE THEORY


Keeping Distribution Costs Under Control

http://www.thepriceoffuel.com/howfuelisdelivered/

Distribution costs will vary depending on a number of factors. The key distribution cost components are broadly:

l Transportation: 35%-45% of which fuel represents 40% of total transportation costs

l Inventory Carryover: 20-24%

l Storage: 18%-22%

l Customer Service and Back Office Administration – 10%

It is the reduction of vehicle costs, minimising the storage and inventory carryover costs, and tactics to gain new customers that is the focus of attention for business managers. Logistically distributors wish to avoid bad debts and storage costs, yet wish to buy at the best possible price in a dynamic wholesale fuel market.

Strategic Planning – Main Functions

Therefore at a regional (refinery or major depot) level, strategic planning models are focused on maximising throughput and holding minimal stock, therefore being able to assign correct volume shipments to appropriate distribution centres and identify the most appropriate depot for allocation is very important. This model is dynamic and will continually asses the most economic delivery options to optimise depot resourcing and transport availability.

Refineries are better able to plan their production runs and synchronise appropriate deliveries and transportation once future demand is accurately calculated. Aligned with demand planning is price planning and inventory planning, in order to ensure both BtoB and BtoC customers do not walk if supplies run out, but also to ensure revenues are maximized.

Management will be able to choose the appropriate fuel-mix formulas to align with depot requirement and seasonal variations, while balancing refining capacity, throughput and demand.

Accurate demand forecasting methods can drastically lower the cost of inventory and allow distributors to buying forward and trade in derivatives (hedging). Transportation can also be pre-booked at best prices and load consolidating can be pre-planned.

Long term transport planning will include the analysis of contractor costs against in house transport resources, the appropriate selection and management of the transport services, and identification of special equipment and operational requirements.

Local Domains

Depot management (on receipt of automated or anticipated tank readings from customers), will action orders taken by phone, internet, email or automated messaging directly from tank sensors. They will analyse and report the anticipated demand for various fuel products, and as accurately as possible, optimise the level of carryover stock yet minimise the required storage capacity via ‘just in time’ deliveries.

Site management will monitor usage planning and particularly monitor tank levels (observing appropriate tank maintenance and changeover processes). However the ability to execute a cost-effective and viable ‘Just in Time’ inventory plan, which ensures minimum stocks are available for delivery can be difficult, and thwarted by sudden changes in the weather, or significant and unexpected disruption to the supply chain.

Transport planning ensures that appropriate transport resources are available, and that schedules and deliveries (and collections)

and driver rotas are appropriately prepared. Transport systems carry driver, vehicle and customer information so that safety standards, including driver hours, licences, operational checks and that driver, depot and site safety standards are observed.

Vehicle management systems receive all driver and routing instructions, including pre-delivery safety checks, and monitor all aspects of the vehicle’s operation including driver behaviour, route, and load status. More advanced systems can also monitor meters and all operational equipment including valves and security, and will build all track and trace and routing services onto a single platform.

Safeguarding Stakeholders - ATEX Approval

Fuel distributors look to deploy ATEX approved devices that minimise the threat of igniting vapour fumes in potentially explosive environments. Only these systems provide a guaranteed safe environment particularly if hardware – such as proof of delivery signature capture devices etc.– need to be taken out of the cab.

New Generation Vehicle Management Systems

Up until now the array of requirements makes it necessary to currently provide several in-cab devices, (one set of equipment providing operational information while another delivering route mapping) as well as printers, often not all available from the same manufacturer an ‘plumbed-in together’ using various cables and interfaces, introducing complex operation, and increasing cost and likelihood of failure.

New generation VMS devices incorporate all in cab equipment into a single unit, navigated by an easy to use touch screen. Yet they maintain there highly ruggedized and ATEX conformant build quality.

Robust Build

In order to deliver business continuity such units are especially tooled to withstand extreme vibration and ultra harsh conditions.

Build quality and the continued working of key data interfaces is of great importance as, simply, the truck is off the road if the IT component fails. It is for this reason that suppliers should be able to reference proven low failure rates and provide ‘easy fix and modular’ service parts so that faulty units can be easily repaired within minutes by site maintenance engineers.

Units have to be especially engineered to support both GPS (Global Positioning Services) for truck positioning via satellite and GPRS (General Packet Radio Service) to facilitate internet access, as well as facilitating secure two way data and voice communication between back office, and depot control services.

Real time security alerts systems should also be built in, to highlight unauthorised use and to monitor the possibility of theft.


Importance of Real Time Visibility.

New generation units are essentially provide both a highly sophisticated middleware service and a front end information processor. The array of communication services will simultaneously monitor all vehicle activity, driver communication and operational data so that information provides a true real-time visibility of all distribution activity, driver behaviour, and vehicle performance. They provide the driver with an invaluable information aide, necessary to perform as a multi-disciplined professional by, not only, displaying route information, and site safety instructions, but also and alerting the driver to any malfunctions that may be affecting vehicle safety, operation or performance.

Cost Rationalisation – The Payoffs and Pitfalls

It is, of course, difficult to estimate efficiency gains, as these can vary case by case. However there are a number of proven technologies that often show almost immediate results such as vehicle management systems (typically 3%-10% fuel cost savings can be expected representing 1.5%-4% of total distribution costs).

Vehicle management systems do help expose poor driving and therefore can extend the lifetime of vehicles, and therefore lower the capital expenditure required to maintain and replace the fleet. Many fleets have extended vehicle lifecycles but up to a year by deploying such devices.

Resource planning systems often quoted savings via reductions in labour costs, although these can be difficult to realize in the short-run. Rather organisations allow natural wastage to occur, leavers jobs are not to be replaced, and re-training from back office to front office roles may be preferred to costly redundancy. Contactor costs are easier to reduce, as contractual penalties may be light or even non existent.

Cost savings from rationalisation of the distribution network by closing and resiting depots can yield high returns, however the planning process can be complex and depot re-location could incur large capital expenditure and a decline in service levels to some locations.

Part of the revenue optimization process demands that scheduled vehicles are available when required, and not subject to systems or mechanical failures. Potential failure of cabin IT systems pose one such risk and effectively make the vehicle inoperable.

Importance of Systems Integration

To obtain the maximum value and reduce overall operational costs, distributors continually review their operations and recommend process change, coupled with the implementation of appropriate information technology.

It is typical for disparate systems to have been built up over time and therefore new IT components have to pass and accept data to and from each other (in real time) in order to maximize supply chain efficiency, and optimize cost transparency and expose areas of operational and risk.

While extensive flow diagrams can be shown, the true benefits lie in the attainment of the strategic objectives of the regional, local, customer and field domains. We have therefore simplified the explanation to show strategic business imperatives, the base-line IT systems, and the data parameters that are exchanged in order to provide an end to end real-time visibility.

The Customer Service Domain

-Choose Best Cost ‘Touch Points’ (Internet Portal, Call Centre, Portable

Device etc). -Optimise the Customer Relationship Management & Sales Order Process

-Observe Credit Risk Policies -Promote Offers & Secure New

Customers

The Regional Planning Domain

- Project Overall Demand for Products -Optimise Appropriate Resources and

Stock Allocation to Meet Demand -Choose Best Cost Distribution Resource Allocation Options

-Implement Policy & Processes to Mitigate Business Disruption

Fuel Distribution Business Imperatives

IT Tools

ERP Systems

Inventory, Demand & Price Planning

Transport Planning

Compliance Monitoring

IT Tools

Customer Relationship Management

Sales Order Processing

Web Portal

IT Tools

ERP Systems

Inventory, Control & Demand Forecasting


Accounting & Invoicing

Cost Forecasting

Demand Forecasts

Financial Reporting

Compliance Reporting

Revenue Position

Sales Demand (Trends)

Invoice Details

The Local Planning Domain

-Ensure Accuracy of Revenue and Cost Reporting

-Optimise ‘Just in Time’ Stock Planning

-Identify Areas of Potential Waste -Optimise Use of Resources -Safeguard Against Business

Disruption

The Customer Service Domain

-Choose Best Cost ‘Touch Points’ (Internet Portal, Call Centre, Portable

Device etc). -Optimise the Customer Relationship Management & Sales Order Process

-Observe Credit Risk Policies -Promote Offers & Secure New

Customers

The Regional Planning Domain

- Project Overall Demand for Products -Optimise Appropriate Resources and

Stock Allocation to Meet Demand -Choose Best Cost Distribution Resource Allocation Options

-Implement Policy & Processes to Mitigate Business Disruption

IT Tools

ERP Systems

Inventory, Demand & Price Planning

Transport Planning


IT Tools

ERP Systems

Inventory, Control & Demand Forecasting


Accounting & Invoicing

Cost Forecasting

Demand Forecasts

Financial Reporting

Compliance Reporting

Revenue Position

Sales Demand (Trends)

Invoice Details

The Local Planning Domain

-Ensure Accuracy of Revenue and Cost Reporting

-Optimise ‘Just in Time’ Stock Planning

-Identify Areas of Potential Waste -Optimise Use of Resources -Safeguard Against Business

Disruption

Fuel Distribution - Business Imperatives Information Technology Tools and Data Integration Touch Points

IT Tools

Customer Relationship Management

Sales Order Processing

Customer Web Portal

Vehicle Cost per Drop

Analysis Job Status

Vehicle Status

Account Status

Delivery Schedules

Job Completion Status

Invoicing Details

All Vehicle Operations

Security Status

IT Tools

Vehicle Resource Management System

Best Route

Late Orders

Site Safety

Vehicle Checks

Job Status Vehicle Status

Field Domain

-Ensure vehicle operational integrity -Fulfill orders at least cost

-Report vehicle operations & running costs

-Ensure accuracy of delivery and verification by customer

-Secure vehicle, driver and load -Ensure all safety policies are

observed

Local Operational Domain

-Ensure adequate resources are available to fulfil orders & retain

customer -Streamline vehicle costs

-Secure ‘least cost’ routing & delivery options

-Observe regulatory compliance and corporate risk and safety policies

- Speed cash flow by avoiding error and reducing cash collection cycle

IT Tools

Scheduling

Vehicle Resource Management System


THE PRACTICE

Background

Total - A global multi-energy provider

With operations in more than 130 countries, Total engages in all aspects of the petroleum industry, including Upstream operations (oil and gas exploration, development and production, LNG) and Downstream operations (refining, marketing and the trading and shipping of crude oil and petroleum products). Total also produces base chemicals (petrochemicals and fertilizers) and specialty chemicals for the industrial and consumer markets (rubber processing, adhesives, resins and electroplating). In addition, Total has interests in the coal mining and power generation sectors. Total is helping to secure the future of energy through its commitment to developing renewable energies, such as photovoltaic power and marine energy, and second-generation biofuels.

Key indicators include;

l Fourth largest publicly-traded integrated international oil and gas company in the world(1)

l 96,400 employees

l Operations in more than 130 countries

l Exploration and production operations in more than 40 countries

l Producer of oil or gas in 30 countries

l Downstream

One of the leading traders of crude oil and refined products worldwide

l Refining capacity: approximately 2.6 million barrels per day

l Retail network: nearly 16,500 service stations

l Sales of petroleum products: approximately 3.9 million barrels per day

l Brands: TOTAL, Elf, Elan, AS 24

TotalGaz is an important downstream marketing subsidiary of the TotalFinaElf LPG organisation. TotalGaz has grown to become one the leading companies in France specialising in the refining and the distribution of LPG gas, Butane and Propane to business and domestic customers. The final distribution of the product may be done by means of bottles or directly to the customer’s tank as bulk product. TotalGaz trades approximately 3000,000 metric tons of LPG-derived product a year.

TotalGaz Fleet Operations

The bulk distribution of TotalGaz LPG is achieved via the use of a combination of small and 330 large ‘bulk’ carrier trucks. These trucks are not owned by the TotalGaz, they are rented to circa 30 contractor organisations throughout France.

Four years ago, TotalGaz identified the need for a greater level of automation of key business processes associated with the LPG distribution vehicles. The main decision to implement a mobile computing solution was to improve efficiency in operations, specifically to eliminate paperwork, reduce billing cycles and to automate stock reconciliation. Secondary benefits were to be sought via the use of GPS technology, which it was thought would aid job planning, vehicle scheduling and routing.

Touchstar Technologies is a leading supplier of mobile data capture systems to the fuel sector and TotalGaz were already well aware of the organisation’s reputation for delivering pragmatic and effective solutions. TotalGaz were particularly interested in obtaining data directly from the on-board meters and were impressed by the range of different meter types with which TouchStar could offer full compatibility. TouchStar’s equipment is also ATEX certified, an important consideration for any company operating in explosive environments. TouchStar also has in-house bespoke software development capability and were able to offer TotalGaz a highly intuitive front-end fuel delivery application, designed to meet their specific operational criteria.

The TouchStar On-Board System

TotalGaz fitted its entire articulated fleet with the ‘TouchPC Raven’. This in-vehicle computer was backwards-compatible with the existing Total systems, ensuring that roll-out could be handled in a staggered fashion. The ‘Raven’ device has a wide range of on-board functions and has allowed TotalGaz to further refine its delivery application. Having GPS, GPRS and Bluetooth on-board a device with a smaller footprint and having dedicated truck connectivity on the cradle has meant that the new system configuration is a far ‘neater’ solution.

The TouchStar devices have provided a critical fleet management data flow between the driver, vehicle and office, specifically;

l The driver received details of his pending route and the additional associated logistical information related to it.

l ‘Quantity delivered’ data was sent back to the dispatcher virtually in ‘real time’.

l Location of the truck was available in real time by means of

Case Study - TotalGaz adoption of TouchStar fuel delivery IT solution


GPS, which brought safety and security advantages

l Accurate location of TotalGaz customers by means of GPS navigation.

l Assistance in navigation by means of GPS. This was particularly useful as the majority of the seasonal drivers were not overly familiar area with the geographical areas within which they were operating.

l Printing of unified documentation, whatever the make of the meter and the trucks.

l Improved fraud control.

System Benefits

The benefits derived from the availability of critical data included;

l a reduction in the administrative resources needed to establish the delivery schedule and route information. Previously, the information flow between the driver and the dispatcher was handled by fax or telephone.

l Optimization of the time spent during the delivery

l Reduction of the mileage of the truck

Big benefits were also realised in the area of ‘proof of delivery’ and customer invoicing. Previously the process relied on manual delivery notes which were easily mislaid and effort was duplicated as information had to be manually re-entered into the back-office system. The whole process was open to human error. The TouchStar solution, allows the driver to print delivery notes on the spot, eliminating the need for a separate in-cab printer and the sometimes lengthy walks to and from the vehicle to produce a printout. A customer’s signature is simply captured on screen for proof of delivery purposes and the document is printed there and then. Benefits were seen immediately from the accuracy of data and time saved in the back office on data re-entry. Subsequently, if there are any discrepancies over what was delivered, an electronic version of the document can simply be raised on the system and automatically sent to the customer, whereby in the past, someone had to go and retrieve the document from the archive. This, in turn, took up valuable time and additional storage space.

System Evaluation : The TotalGaz Experience

Since the launch of the system, more than 450 different drivers have used the equipment successfully. TotalGaz have retained TouchStar as their supplier, through three phases of system development. Vincent Brouard, Logistics Manager for the LPG operation at Total-Gaz, explains some of the principle reasons behind this decision:

“The key factor in our choice of hardware was that the core devices had to be rugged and capable of operating in relatively extreme environments. The systems are mostly operated during the cold winter season, with temperatures below zero. However, the systems remain within the truck for the whole year, so the units are also exposed to harsh sunlight behind the windshield during the summer period. It can also become a very dusty environment. We’ve never received any reports of damage related to these operating conditions.

Aside from the hardware, we were seeking an overall system solution that fitted perfectly with our business model and which required minimal development time. We needed a system that would be intuitive and user-friendly for the drivers and this is one of the biggest areas of success. At first drivers were apprehensive about the new system, but within days they have found it has just automated the process and eliminated the paperwork coming out of the cab. Drivers also like the fact that they are guided sequentially through a series of menus when making deliveries. It serves as a great aid, particularly when there can be up to 15 deliveries in a shift. The software is intuitive and easy to operate.

So far every participant in the process approves the use of on-board computer systems…. drivers, dispatchers, truck owners and our valued customers. Maybe the best proof of the efficiency of the system lies in the driver’s experience. We’ve found that when drivers are asked to use a replacement truck, in which no on-board computer is present, they complain!

Based upon its expertise and knowledge of the fuel and gas business and its reputation for delivering robust systems, TouchStar claim to be the best in the industry. On the basis of our experience of working with the company, we are happy to concur with that opinion.”

TouchStar Technologies Ltd has been supplying mobile computing solutions to the fuel industry for over three decades and provide the hardware, software and expertise for a state-of-the-art turnkey solution. For more information on this white paper or the TouchStar solutions please call TouchStar Technologies (Fuel Logistics IT) on +44 (0) 161 8745050 or visit our website www.fuel-logistics-it.com.

TouchStar Technologies (Fuel Logistics IT)

7 Commerce Way, Trafford Park,

Manchester

M17 1HW

UK

Phone: +44 (0) 161 8745050

Fax: +44 (0) 161 8745088

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Rationalising Fuel Distribution Costs and Processes Theory and Practice