Supply and demand

Wet stock management art and science

Despite a few localised falls during June, in the main pump prices were still hovering around the 120.9/122.9ppl mark on many forecourts with little, if any, suggestion that they’d be coming down again.

In recent weeks a number of independent retailers have reported anxious phone calls from their banks seeking a copy of their most recent financial reports, or a new business plan, since their account is up for ’review’ in a few weeks time. Even worse is the call from the bank asking when they can expect the next cash deposit because there’s a tanker due for payment that afternoon.

Could these events be connected, or are they just plain coincidence?

The £1 litre

No, that’s not a misprint. Take your ’regular’ pump price of 121.9ppl and knock the VAT out of it to give 103.75ppl net.

Now take off the 3p or so margin that many dealers aim for. There you are, still just over 100ppl as ’cost price’.

Easier still to go back over your last few oil company invoices and look at the supply prices: ’101.045’, or ’99.983’, etc. Just take a minute to let it sink in.

Every single ordinary litre delivered to you is costing at least £1 (before adding on any promotion costs or other surcharges) and, until you’ve sold it, that money is just sitting underground. How much have you got in your tanks today £35,000, £45,000... more?

The £45,000-plus tanker-load of fuel

Look again at those oil company invoices. In general you’re likely to be taking deliveries of between 34,000 and 39,600 litres on each tanker. Given that our ’basic’ fuel price is now over 100ppl, and that many loads are likely to contain at least 5,000 litres of some premium product, it’s not difficult to see how the cost of a single tanker can exceed £40,000 even before adding the VAT.

As far as your bank is concerned you do have to add the VAT, so they could easily be seeing a payment of over £46,000 for each tanker.

Although not yet quite universal, most fuel suppliers actively discourage smaller orders by imposing ’small load surcharges’ typically £150 per part-load.

The surcharges may seem entirely justifiable from the oil company’s perspective, but to dealers struggling to make the required margin at all, the surcharge effectively stops them from managing their orders in the most efficient terms for their own business.

Three days to pay

For the majority of forecourt retailers their payment arrangements with their fuel suppliers are pretty standard direct debit, usually three working days after delivery.

Of course, you do get an extra day (or sometimes two) over a bank holiday. But occasionally the direct debits get delayed and suddenly you have two going out on the same day.

That’s the sort of event that can trigger even the most accommodating bank manager to panic. It sounds pretty straight-forward. You’ve got three days or so before you have to pay for it, so that’s the maximum amount of stock you need to keep, and you can sell it before paying for it. If only life was that simple!

One reason why things aren’t quite so straightforward is that many sites, particularly the smaller independents, have tank-to-pump plumbing that is seriously out of kilter. A casual observer might expect that all pumps selling a particular grade of fuel would be able to draw on all of the tanks holding that grade. However, the underground arrangements on many older sites are far from logical.

Consequently there are hundreds of sites out there where the largest tanks only feed what are now the lowest-volume pumps. The result is that operators have to order ’extra’ loads that they don’t really need, but they do require in order to keep all pumps working all of the time.

Balancing your stock versus your demand

Of course, one of the cardinal rules for retailers is ’never run out of stock’. That does imply a good working knowledge of sales patterns so that you can order just the right amount of product to be delivered at just the right time.

But these days the orders usually have to be placed at least a week (sometimes a month) in advance, and cancellations are discouraged (to put it mildly). Predicting demand isn’t easy, especially in a market that is price-sensitive to as little as a penny per litre, and where competitors are prone to seemingly irrational short-term price movements in either direction.

In stock management terms, a weekend of unexpected ’bumper sales’ because you’ve accidentally forgotten to raise your pump price compared to the other guy around the corner, is as unsettling as the sudden quiet period because the local hypermarket decided to drop 2p for the weekend and you didn’t notice.

Naturally you can’t really rely on ’just in time’ deliveries either. Tanker drivers go sick, accidents and traffic hold-ups happen, deliveries get cancelled.

So the prudent operator keeps another day or two’s volume underground. There’s really no coincidence. The factors discussed here make stock management as much an art as a science.

Unfortunately for many independent retailers, their main practical experience has been gained from oil company-owned, commission-operated sites.

In that environment the sites are generally more modern, arguably the tanker schedules are more favourable, and ultimately it’s the oil company owning the fuel.

When the fuel is your own, it’s time to learn stock management all over again quickly.