Transcript Penske Logistics Green Commitment

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
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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
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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
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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
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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
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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
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Energy Information Administration (http://www.eia.doe.gov)
Merck Specific Initiatives
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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
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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 (Air)
$140
% Fuel Impact (Trucking)
$120
Crude Price ($/barrel)
0%
$100
$80
$60
$40
$20
$0
7 7
7 7
8
8 8 8
7 7
8 8
7
7 7
7
8 8
7
8
7
-0 b-0 r-0 r-0 y-0 n-0 l-0 g-0 p-0 t-0 v-0 c-0 n-0 b-0 r-0 r-0 y-0 n-0 l-0 g-0 p-0
n
u
u
c
a
a
Ja Fe M Ap Ma Ju J Au Se O No De Ja Fe M Ap Ma Ju J Au Se
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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
$/Barrel Crude
Fuel Cost /
Total Freight Cost
(%)
Fuel Impact on Total Freight Cost
Factors That Influence Fuel Prices:
Just about everything!
Force
Majeure/Acts of
God
Hurricanes/
Natural Disasters
Per Barrel Price of
Oil/ Gas Prices
Terrorist
Event/Security
Incident
Factors Beyond
Control
Factors that can Factors that can
be Influenced
be Controlled
Infrastructure
Issues
Legislative Policy
Initiatives (e.g.
HOS, Port Sec.)
Daily Tactical
Processes
Geopolitical
Events
Governmental
Involvement in
Global SC Issues
Creating /
Managing
Capacity
Changes Driven
by Allocation of
Assets Expenditures
Short Term/Long
Term Strategic
Initiatives (e.g.
Networks)
Fuel Prices may not be within our control
but we can minimize their impact with
management tools and strategies
What should you do:
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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
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Contractually eliminate fuel surcharges
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Benefits
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Risks
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Potential to result in higher base rate to cover carrier risk
Overpaying for fuel when prices drop
Standardize Fuel Surcharges
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Benefits
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Ease of audit
Minimize variability across providers
Shared risk
Risks
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Fuel volatility is blended in rate
Budget remains relatively stable regardless of fuel prices
Fuel surcharges may be higher than market conditions across regions
Low incentive for carriers to manage fuel consumption
Establish Contractual caps on Fuel Surcharges
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Benefits
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Identified maximum exposure
Risks
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Carrier absorbs risk for “extreme” price fluctuations
Merck Risk Mitigation Strategies:
Daily Tactical Processes
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Efficient transportation management
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Reduce transportation requirements
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Back hauls
Optimized routes
Maximized load factors
Modal shifts
Consolidations
Ensure compliance to preferred supplier
strategy
Merck Risk Mitigation Strategies:
Strategic Initiatives
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Utilize Third Party’s expertise
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Transportation Management
Fuel Management and Consulting Services
Network Modeling
Green Initiatives
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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
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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
What is the
appropriate
strategy for your
company?
Shared Distribution
Implement Fuel Purchase Policies
Negotiating Base Rates
Move Manufacturing Closer to Customers
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
Is anyone using
these strategies
with success?
Pass Cost on to Customers
Modal Switch
Renegotiating surcharges
0
10
20
30
40
50
60
70
80
Managing Fuel Price Impact
Where does it hurt?
Avoided by
Hedges or
Fixed Price
Contract
11%
Offset by Other
Cost
Reductions
27%
Reduced
Margins
31%
Passed to
Customer
31%
How have you
managed the
impact of fuel
prices to your
budget?
Barriers to Success
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Fuel Surcharge Management
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Daily Tactical Processes
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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
Ensuring supply is more critical than optimizing loads
Time and temperature sensitive supply chain
Limited leverage with carriers
High risk cargo
Strategic Initiatives
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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
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Nobody can accurately predict fuel prices… but
you can know the inputs AND measure the
impact
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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