Lowering Skyrocketing Fuel Costs

You're the executive in charge of supply chain management for a national retail chain, and you have a problem. Your landed cost keeps going up; it's cutting into operating margins and pulling down overall enterprise performance. The reason for this is not a mystery; you know exactly why it's happening. The price of gasoline has more than doubled over the past few years. You're now paying a fuel surcharge that amounts to 36% of your shipping cost, which translates to about 15% of COGS.

You need to do something about that, and you can. You have some price flexibility for some products, so you can make selective price increases. Moreover, for products that incur a smaller landed cost you might even be able to decrease price a little. That way you can ease the bite from the fuel surcharge without damaging - and maybe even improving - your relationships with your customers.

The question is - well. There are several questions. Which prices do you raise? Which do you lower? In both cases, by how much? And what else do you need to do at the same time? You can't bounce prices up and down like a yo-yo. You need to be able to predict the effect of what you're doing, and above all you need to stabilize your cost-structure modeling in a way that meets your distribution needs at a reduced overall cost.

The Need for Visibility
This is not easy to accomplish. Without access to timely, accurate, actionable operations data, it is all but impossible to predict the effect of an isolated point solution (spreading costs to the stores by vendor, for example) on overall profitability. Every solution involves a trade-off, balancing overall fuel cost against considerations such as frequency of delivery, load size, store profitability vs. distance from distribution center, the potential impact of stock-outs on high-profit stores and/or high-profit merchandise, and so on.

Business intelligence can provide the visibility required to manage the problem effectively, i.e. to adjust fuel/shipping expenditures in ways that provide the optimum benefit to operating profits. While there are a number of business intelligence solutions available, the basic process is pretty much the same:

- Identify and measure the multiple components of total cost of goods sold.
- Underneath that, identify and measure the components of total landed cost.
- Set appropriate KPI thresholds for each component.
- Run 'what if' scenarios to determine what combination of actions provides the maximum fuel cost savings with the minimum of deleterious side effects (stock outs).
-Using all the above, monitor performance so as to predict and avert future problems.

Permanent Fact of Life
Unlike earlier spikes (the price of regular gasoline in the US reached $3.44 in today's dollars in 1981 at the beginning of the Iraq-Iran war, but fell off relatively quickly), fuel prices seem likely to remain well above mid-decade levels for the foreseeable future. In addition to a complex and unstable worldwide political situation, crude oil prices 'the root of the problem' will continue to be impacted by the rising cost of extraction, a global shortage of refining capacity, and a continues sharp increase in demand from developing economies such as those of the so-called BRIC countries: Brazil, Russia, India, and China.

Given this reality, the complexity of managing it, and the intractability and duration of the other economic pressures facing the retail industry, retailers will increasingly turn to BI to help them keep their businesses at an acceptable level of operating profit. It's a tool you can't really afford to be without.
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