How retailers are minimising fuel costs

Energy giant BP is basking in the news of its giant oil discovery in the Gulf of Mexico, while the wider energy industry this year celebrates 150 years since crude oil was first recovered from a drilled well.

But for consumers and the retail supply chain industry, wildly fluctuating fuel prices are giving little cause for celebration. “Energy is more costly and supply more erratic than ever before, and this is likely to be challenging for all participants in the supply chain,” says James Walton, chief economist at food and grocery research company IGD. “Change in the way delivery fleets are operated is critical and it is becoming increasingly clear that, whatever the future holds, the retail industry cannot continue in its current form.”

IGD’s report Rising energy costs: will they break your supply chain? describes how the modern grocery industry evolved in an age of cheap energy, based on abundant fossil fuels. But it states that today the industry is increasingly vulnerable to any shortfall in fossil fuel supplies. Supply uncertainty has caused oil prices to rise by more than 420% in the past decade, gas by 310% and coal by 210%, according to the International Monetary Fund. “Further price rises are likely as reserves are exhausted and demand continues to grow, with no end in sight,” says the report, which advocates improving vehicle utilisation, cross-industry collaboration and efficient route planning.

Pain at the pump

Supply chain departments already work hard to keep transport costs to a minimum, but they are battling a tide of painful hikes just now. At the beginning of 2009, petrol was roughly 85p a litre, but with oil prices forecast to keep increasing this autumn, it’s feared prices at the pump could soon go up to 110p a litre.

What has upset consumers, hauliers and retailers most is the 2p per litre (ppl) increase in fuel duty that came into force on September 1 - the third of its kind in the past nine months, bringing the average price of petrol to 107p a litre. Furthermore, Chancellor Alistair Darling has said duty will rise yet again in April 2010 by 1.84ppl, hitting cash-strapped consumers even harder and landing the UK logistics industry with a £533m tax increase.

The Freight Transport Association (FTA) argues that fuel duty increases could cripple already struggling haulage companies, putting drivers out of work, upsetting the retail supply chain and reducing the chances of freight businesses investing in green technology. “What is needed is a different, lower rate for commercial vehicles than that levied on private motorists,” says an FTA spokesman. “This would allow us to compete more effectively in European road transport markets and allow companies to invest further in their workforce and fleets.”

Retailers know that increased costs are ultimately filtered down to the end user - their recession-hit customers. Countrywide Farmers group operations director Julian Brakes says: “We see part of our job as reducing this impact. Our fuel usage is a large proportion of our overall running cost, so we endeavour to minimise waste by ensuring we are as efficient as possible in our route planning while still providing the required level of service to our various customers [see box]. We constantly measure ourselves against our industry peers, seeking to collaborate and cross-pollinate energy savings ideas.”

Pioneering grocers

Brakes says Countrywide is probably in the “top quartile” of retailers when it comes to driving fuel efficiency in the business. The large supermarket groups tend to lead the way, with a keen focus on astute procurement of fuel, and investment in the latest technology to aid efficiency.

Asda has invested in new software for routing and scheduling its vehicle fleet to reduce the cost of moving goods from 22 depots to its network of 256 supermarkets. Like several other major retailers, it has opted for Paragon’s multi-depot transport optimisation package, meaning it is able to review and model the best routes for its fleet of 1,000 vehicles and 1,600 trailers with the aim of reducing the number of miles covered, saving fuel costs and reducing Asda’s carbon footprint.

On the roads, many retailers have deployed traffic management software to plan routes, identify training opportunities and track fuel usage. For instance, Isotrak’s advanced traffic management system monitors the driving style of lorry and van drivers, which helps retailers spot bad driving practices that often lead to fuel wastage. Asda says that by pinpointing drivers who needed training to tackle harsh breaking and acceleration or idling, it improved fuel efficiency by 3% last year.

Green vehicles are also coming to the fore. Sainsbury’s successfully trialled Clean Air Power’s ‘Genesis’ dual-fuel combustion technology with one vehicle last year, and now has five dual-fuel vehicles in operation. They use a combination of diesel and bio-methane obtained from landfill sites. The benefit has been that 80% of diesel can be substituted by methane depending on the conditions and operating requirements. This gives diesel engine performance efficiency while saving fuel costs and cutting emissions, says Sainsbury’s.

Sainsbury’s environmental affairs manager Alison Austin says: “This is a first for how food is delivered in the UK. Our aim is to now roll this out further.

It makes complete environmental sense and, given escalating fuel costs, economic sense too. The beauty of it is, it doesn’t use any fossil fuel like conventional fuel. This means the methane from rotting rubbish, which is damaging to our climate is put to positive use.”

Of course, immediate savings can be made by buying fuel at exactly the right time. It’s not easy, given the extreme volatility in the energy market, but software is available to help. For instance, FuelQuest’s system allows retailers to monitor their inventory level and prioritise demand, while looking at the likely price changes in fuel in the coming week. “If the market is going up, the system will recommend which supplier to order from, and how much is needed based on the necessary delivery times,” explains FuelQuest director of global business solutions Greg Salverson.

He says retailers such as Wal-Mart or Tesco manage to save 0.1ppl on a large consignment of fuel - the benefits across a wide supply chain add up. ‘Exception processing’ software can also spot costly fuel invoice errors, so is worth investing in for large-scale businesses, says Salverson.

Fuel price volatility is here for the long-term, so managing risk and efficiency must become a priority. With the European road freight market forecast to grow at an annual average rate of 6.6% over the next five years, according to Transport Intelligence, the need for fuel is growing, so retailers must become experts at making it go as far as possible.