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					Fuel Management:
Methods and Techniques
 Health and Personal Care Logistics
    Conference, 10-June-2009

            Merck & Co., Inc.
      Paul Jancay, Global Logistics
    Julie Pentz, Global Procurement
Price Forecasting
      Fuel Management:
      Methods and Techniques
  This breakout will emphasize initiatives
  undertaken to confront and manage risk
  associated with variability of fuel prices
     Highlight actions taken to develop processes and
      metrics.
     Identify barriers to success
     Discuss lessons learned in the process

Participants should be prepared to discuss the risk
  issues as they relate to their organization.
    Agenda
   Fuel Situation: Past, Present, and
    Future?
   Market Intelligence Process
   Fuel Impact Management
   Barriers to Implementation
   Lessons Learned
           Open Dialogue Encouraged!
       Situation: Fuel Costs have increased
       over 45% in the last three months

   Still well below $4 per gallon…
   …but much higher than the $1.75 we were paying at the
    end of 2008
   Supply is high, demand is down


                 Why is Fuel increasing?

                Should we be concerned?
      Don’t forget the past
   Just because prices are not as high nor as volatile as they
    had been, don’t think we are over that risk
   OPEC has a target of $75 to $80 per barrel
   The economy will recover and demand will increase once
    again

        How much will that demand increase?
       What will we be paying for fuel in 6 months,
                    1 year, 2 years?
        Market Intelligence Process
   There are factors you can control and those you can’t, but
    knowing the influences are critical to responding to change
    and understanding the impact

   Industry Websites, conferences, white papers, supplier
    collaborations
       Energy Information Administration (http://www.eia.doe.gov)
   Merck Specific Initiatives
       Energy Procurement collaboration
       Market Intelligence Center of Expertise
       De-coupling freight costs and understanding fuel impact
Cross-Procurement Collaboration:
Energy Procurement
      Cross-Procurement Collaboration:
      Market Intelligence (MI) Center of Expertise


   Combination of
    internal and external
    resources
   Centralized MI group
    to provide industry
    analysis, market
    insights, and pricing
    data
   Customized alerts,
    forecasts, and data
    sources
                     Calculate the Impact Fuel Cost
                     Fluctuation Has on Freight Cost
                                     Fuel Impact on Total Freight Cost

                       % Fuel Impact (Air)                               $140
Total Freight Cost




                       % Fuel Impact (Trucking)                          $120




                                                                                $/Barrel Crude
                       Crude Price ($/barrel)
   Fuel Cost /




                                                                         $100
       (%)




                                                                         $80
                                                                         $60
                                                                         $40
                                                                         $20
          0%                                                             $0
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         Partner with suppliers to decouple fuel and then
          track/measure
         Ability to model the budget impact associated with
          variations in fuel costs
         Factors That Influence Fuel Prices:
         Just about everything!

    Force
                      Factors Beyond    Factors that can Factors that can
Majeure/Acts of
                          Control        be Influenced    be Controlled
     God
                                        Legislative Policy     Daily Tactical
  Hurricanes/          Infrastructure
                                         Initiatives (e.g.      Processes
Natural Disasters          Issues
                                         HOS, Port Sec.)
                                          Governmental          Creating /
Per Barrel Price of     Geopolitical
                                         Involvement in         Managing
 Oil/ Gas Prices          Events
                                        Global SC Issues         Capacity
                                         Changes Driven      Short Term/Long
    Terrorist
                                         by Allocation of     Term Strategic
 Event/Security
                                             Assets -         Initiatives (e.g.
    Incident
                                          Expenditures           Networks)
     Fuel Prices may not be within our control
     but we can minimize their impact with
     management tools and strategies

What should you do:
   Determine how much risk your company can
    absorb
   Determine the cost to mitigate the risk that it can
    not absorb
   Develop and adopt a strategy


Remember the best time to buy an umbrella is
before it rains
         Merck Risk Mitigation Strategies:
         Fuel Surcharges
   Contractually eliminate fuel surcharges
        Benefits
             Fuel volatility is blended in rate
             Budget remains relatively stable regardless of fuel prices
        Risks
             Potential to result in higher base rate to cover carrier risk
             Overpaying for fuel when prices drop
   Standardize Fuel Surcharges
        Benefits
             Ease of audit
             Minimize variability across providers
             Shared risk
        Risks
             Fuel surcharges may be higher than market conditions across regions
             Low incentive for carriers to manage fuel consumption
   Establish Contractual caps on Fuel Surcharges
        Benefits
             Identified maximum exposure
        Risks
             Carrier absorbs risk for “extreme” price fluctuations
     Merck Risk Mitigation Strategies:
     Daily Tactical Processes

   Efficient transportation management
       Back hauls
       Optimized routes
       Maximized load factors
   Reduce transportation requirements
       Modal shifts
       Consolidations
   Ensure compliance to preferred supplier
    strategy
     Merck Risk Mitigation Strategies:
     Strategic Initiatives

   Utilize Third Party’s expertise
       Transportation Management
       Fuel Management and Consulting Services
       Network Modeling
   Green Initiatives
       EPA’s SmartWay Transport
       Partnering with strategic providers
What Companies Are Doing
To Manage Fuel Impact
 The Logistics Leadership Board conducted a survey in July 2008
 to understand how member organizations respond to rising fuel
 prices.

 Key Findings
    Many companies began to pass fuel costs on to customers (39%)
     and renegotiating fuel surcharges (36%).
    An additional 11% and 14%, respectively, plan to employ these
     practices within the coming year.
    68% of companies report increased involvement of other functions
     in managing fuel spend.
    The most frequently cited functions were procurement and finance.
    On average, companies report absorbing 31% of increased fuel
     costs in lower margins and passing 30% of costs on to customers.
   What Companies Are Doing
   To Manage Fuel Impact
            Pass Cost on to Customers

               Renegotiate Surcharges

                          Modal Switch

                         LTL Reduction

  Shipment Reduction/Higher Inventories

                    Shared Distribution
                                                            What is the
       Implement Fuel Purchase Policies
                                                            appropriate
                Negotiating Base Rates
                                                            strategy for your
Move Manufacturing Closer to Customers
                                                            company?
                               Hedging

                                          0   5   10   15     20   25   30   35   40   45
   What Companies Are Not Doing
   To Manage Fuel Impact
                   Shipers Consortiums

                               Hedging

  Shipment Reduction/Higher Inventories

                    Shared Distribution

       Implement Fuel Purchase Policies

Move Manufacturing Closer to Customers

                         LTL Reduction

            Pass Cost on to Customers                        Is anyone using
                          Modal Switch                       these strategies
              Renegotiating surcharges
                                                             with success?
                                          0   10   20   30    40   50   60   70   80
Managing Fuel Price Impact

         Where does it hurt?
      Avoided by
      Hedges or
      Fixed Price   Reduced
       Contract     Margins      How have you
         11%          31%
                                 managed the
                                 impact of fuel
 Offset by Other                 prices to your
                     Passed to
      Cost
  Reductions
                     Customer    budget?
                       31%
      27%
         Barriers to Success
   Fuel Surcharge Management
        Shippers and Carriers are reluctant to carry all risk
        “All-in” rate is cost prohibitive
        Future price is unknown
        Potential for carriers to walk away or be forced out
   Daily Tactical Processes
        Ensuring supply is more critical than optimizing loads
        Time and temperature sensitive supply chain
        Limited leverage with carriers
        High risk cargo
   Strategic Initiatives
        Internal resistance to relinquishing control
        Cost intensive to change transportation management strategy
        Outside factors limiting ability to move nodes
        Cost vs. Benefit of of Green Initiatives implementation


             How have you overcome these barriers?
     Lessons Learned
   Nobody can accurately predict fuel prices… but
    you can know the inputs AND measure the
    impact
       Account for the effects of fuel fluctuations in your
        budget
   Standardize and share risk with your suppliers
   Don’t accept a direct pass through of costs
   Don’t get lulled into a false sense of security
   Involve other organizations for different
    perspectives
OPEN DISCUSSION

				
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posted:10/28/2011
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