Fuel Diesel

Situation

A major UK Logistics company had become reliant on a "broker" for the negotiation and monitoring of its fuel purchases (white and red diesel) for vehicles and refrigeration plants. The sourcing of the contract which was normally reviewed annually had become entrenched with one supplier enjoying over 60% of the volume for over 5 years.

Analysis

The client had begun to lose "contact" with the market. Key potential suppliers clearly viewed it as the captive buyer of the incumbent. In addition the client lacked a feel for the key pieces of information necessary for suppliers to construct an effective RFQ response, namely site locations relative to its equity terminals, size of tanks at client sites, average drop size in relation to the capacity of the tankers in the suppliers fleet, degree of access to the client sites and finally the credit terms suppliers are seeking. In addition the RFQs issued by the broker had been insufficiently tailored and allowed the relatively small number of players in the market to control the process from start to finish.

Solution

The broker was eliminated from the RFQ process and subsequent negotiations and the client re-established focused and particular contact with the key suppliers through a series of planned conditioning meetings. The RFQ was the structured into two phases. Suppliers were initially allowed to bid for a maximum of 30% of the sites available. Each site had 3 suppliers competing for it. 

The suppliers bid on those sites that they had identified ahead of the RFQ as being ones which they could offer the most competitive rate because of their proximity to their UK facilities. The suppliers who competed successfully in phase 1, and were allocated sites, then proceeded to bid in the second phase for all unallocated sites.

This phased approached to the negotiation prevented the suppliers from controlling the process and forced them to offer best pricing in phase 1.

In addition the details of the index (Platts / Argus) and conversation factor used in the calculation of the oil price was deliberately left to the suppliers. This latter created a further negotiation opportunity during phase 2 of the negotiations.

Results

The client became more visible and credible  to the supply market resulting in the historic sourcing pattern being broken. The long standing incumbent saw its share fall to approx 20% and two previously minor players became major suppliers. The supply premium (i.e. the suppliers margin covering logistics, admin and financing costs plus profit) which previously stood at 1.8% of total spend was slashed by over 23%.

The clients sites experienced an improvement in service level as its supplier of fuel became the one with a terminal closest to the site.