Gas and Diesel Prices 2012: My Projections for 2012.

Fuel is a major concern for everyone businesses and consumers alike are affected when the price of fuel increases because this one Super-Commodity drives drives prices up at every stage in the supply chain. Oil prices are very difficult to understand because it is not a normal commodity because Oil is a key component to everything that is produced today in some shape or form. Oil also has two distinct markets Crude Oil(downstream) which impacts the prices of all Petroleum Products, and Refined Oil the largest of which are Gasoline and Diesel which mostly impacts the price at the pump.

A little timeline to why the Price a the pump has increased and will likely continue to do so for the rest of 2012:
Currently the US is exporting more Refined Oil products than we are importing i.e. Gasoline and Diesel. The daily export rate is around 3 Million barrels per day, the US consumes around 8 Million Barrels per day. So we exporting a 38% surplus of REFINED petroleum products( not crude). Were it not for increase in world demand for Fuel then the price at the pump in the US would be substantially lower.
Let's see what has happened recently
- In 2011 the US consumption of fossil fuels decreased dramatically compared the preceding several years. US consumers did a lot of things to prevent those dreaded trips to the gas station.
- While consumption of Fuel in the US has decreased, the demand for Fuel in emerging markets has been on the increase.
-Brazil for example entered the world market in a heavy way late 2011. Brazil has depended on ethanol from sugar for that last several years, but in 2011 there was a major shortfall in the sugar crop and ethanol production, so Brazil had to go out and buy Gasoline, a good portion coming from the US. This added pressure to demand for Fuel and the world  price increases. In late October 2011 the Brazilian government announced that they would lower the taxes on Fuel to help ease the prices at the pump because Brazil was going to the world market to supplement their gasoline needs. After the announcement Fuel Prices in the US surged for the next 4 weeks.
-In mid-February China announced that they would be raising the ceiling for Gas Prices in a response to their need for Refined Fossil Fuels, and the increasing price in the world market. A week later the fuel prices surge to a record high for February.

I am only presenting two small examples about how the world market is affecting the price we pay at the pump. As world consumption has increased due to emerging markets. Fuel prices which were once driven mainly by Crude Oil prices, are now under pressure in both Crude Oil markets and Refined Oil markets. For US consumers the problem is even worse because in the world market the US is competing against countries that have energy policies that help consumers and businesses. The recent energy policies in the US have been punitive in nature towards the consumer and businesses which will only propel our fuel prices even more as other countries enter the market to buy our refined oil. This is not a political statement, but an observation.

For 2012 the price of Fuel is Likely to increase Significantly. 
The price for Diesel has increased in 2012 an average of 12.42%, however from week to week the rate of increase has slowed as Diesel reaches an equilibrium price. The coefficient for the rate increase using the current numbers is 0.0052. Please see the chart below.

The chart above shows the increase in Fuel price this 2012 over 2011, as you can see the rate of increase is declining each week as the price of Diesel approaches an equilibrium price in the world market. Please note the R2 is 66% which means that the Line with a Coefficient of 0.0052 explains 66% of the data. Which important in the next graph below.

The above graph are the projected prices for 2012. This based on the benchmark of how high prices have been over 2012 versus 2011. This is also considering the Regression Line which show a decline in price increases over last year, but the increase in fuel prices over last year seem to have plateaued at this time.

Third Party Logistics; Is it the best Solution for you?

Over the past 20 years or so 3PL’s have been growing and new logistics companies are started every year. Based on the growth in this segment alone,  there is a definite need in the market place for the services that Logistics companies can offer their clients. The problem for many shippers that have decided to take a look at a 3PL is what do they really do for me, and which company best suites my need.  I would like to discuss the more general types of 3PLs and what the customer should look for when considering partnering with a 3PL.

Why?

First I would like to look at the Why. The top reasons that companies consider using a 3PL are as follows:

1)      Cost Savings: As companies grow, supply chains expand, or competition increases companies start considering more innovative ways to drive costs savings without impacting customer service or reducing product quality, so looking at the supply chain is a good place to have a positive impact on the balance sheet without giving up any competitive advantages. At the end of the day logistics is a specialized commodity, but a commodity none the less. Since Logistics is a specialized commodity there is an element of leverage in negotiating prices, so customers many times choose the best two or three providers to get the best price many times at the expense of an optimized logistics network.  Certain 3PL’s bring leverage and a strong understanding that allows the client to realize the best rates and best carrier on a shipment by shipment basis.

2)      Technology: Clients wanting access to a TMS that can sync with their ERP system or act as a standalone system will also go to a 3PL versus spending anywhere from a $100k and up to buy technology that may or may not bring a return on investment.  Access to technology should be a standard offering from any 3PL that you speak with.  The other benefits of TMS are the ability to choose optimal routings based customer requirements and price, so a TMS further improves cost savings by looking at every possible option and presenting those options to the decision maker. Also, with a TMS comes the ability to warehouse and mine data for customer insights and trends which can be used to help in Marketing, Sales, Customer Service, and even Finance. With a 3PL you get a TMS and support at a fraction of the cost of buying your own system.

3)      Financial Settlement: When a client is shipping many items on a daily basis with many carriers, the finance department is getting hundreds of invoices from dozens of carriers, and many times the finance department has to review these invoices for accuracy against the agreement that they have with each carrier. This task is not helped by the fact that a carrier has a Rules tariff that acts as an addendum to the negotiated rates. These rules tariffs can be up to 300 pages long with all kinds of rules that make auditing the bills even more of a burden.  The right 3PL will have a simplified tariff, and an audit department that is able to audit your bills with 100% accuracy and the ability to GL code those invoices so that you can accrue your bills accurately and timely each month. Also, the audit process usually finds another 2% savings by correcting bills that were billed incorrectly in the past and paid.

4)      Service: Because of the leverage that a 3PL has with the carriers, the client gets better service and faster problem resolution than when dealing with the carrier directly.

5)      E-Commerce: Recently I have come across a lot of companies that are trying to maximize their E-Commerce channel. Most companies that I have spoken with are trying to satisfy this market with their existing supply chain, but in order to compete in the E-Commerce space you have to re-think your supply chain for this channel. Using a 3PL can give you instant expertise and optimization allowing you to grow this profitable segment of new business.

In many ways using a 3PL is a lot like shopping at a retail store versus dealing directly with the manufacturer. You get better prices and service buying your Tide from Wal-Mart than if you bought it from P&G directly.

Types of 3PLs

1)      Specialty: This is exactly what it sound like, for some industries there are some logistics networks that are so specific that using a 3PL that specializes in a certain logistics setup network is the best choice.

2)      Rate Re-Sellers: Rate Re-Sellers are not really 3PL’s in my opinion. These are companies that have blanket agreements with Carrier’s typically LTL, and they re-sell those rates to you with a markup. For companies that have relatively small spend, these companies offer better rates than what you would get with the same carrier. The downside is that these blanket agreements are used by the Carriers to fill excess capacity, so the blanket agreements are subject to change at any time. Also getting a problem resolved is very difficult since there is no service agreement between the Re-Seller and the customer. The other problem is that for the customer that typically uses Re-Sellers each shipment is hugely important, but since service is inconsistent you may be making a gamble by engaging a Re-Sellers services.

3)      Out-Sourced Logistics: These companies are handful of the Really Large logistics companies, and they are usually best for large companies that have decided to focus on their core business and outsource their logistics and supply chain completely. While using these companies offers companies to completely outsource their Logistics function, the downside is that it is often so costly to get out of these agreements for whatever reason. These companies are best suited for a company that is very good at marketing and R&D and wants focus its talent on developing those competencies. Also, you will need to have a very significant Supply Chain spend to justify using one of these companies.

4)      Co-Managed Logistics Partner: This type of 3PL allows companies to retain control of their Logistics, realize substantial cost savings, and improve logistics performance by partnering with a 3PL that offers price advantages and a logistics network that is specifically optimized for the client. These types of 3PLs are going to want to get understanding of your business in order to diagnose before prescribing a solution. 3PLs in this space are interested in know your value stream i.e. how is value created across your company, and how can they help reduce waste or create value.

In my opinion the best 3PL to engage first is one with a Co-Managed model, as they will first interview you on your supply chain, and if they have a solution they will suggest talking further. If they don’t they will tell you that they can’t help you, and suggest where you might want to look. As someone that worked for a carrier for many years I can tell you first hand that you will always benefit by using a 3PL versus dealing with the carriers directly. So I hope this little article helps to clear some of the confusion that exists out there and helps you in deciding which route to take.