[From iSource Business, September 2001] The situation is typical: High gasoline prices across the United States make the Organization of Petroleum Exporting Countries (OPEC) an easy target for consumer and political ire. Oil and gas analysts suggest that high prices at the pump are a combination of growing demand, tight refining capacity and, of course, current oil prices. And despite the most recent respite from those exorbitant fuel prices in the last few weeks, oil and gas prices still constitute a significant concern for retail and wholesale consumers alike. But it's ultimately in the prices where room for savings exists, and that drives Irvin to take on a crusader-like approach to the business.
Up until 1992 Kristen Irvin worked for her father, who ran an independent fuel wholesaler. But, Irvin couldn't help noticing a troubling phenomenon: The oil companies seemed to be getting very wealthy in a downturn or upturn at the expense of customers. Suppliers, she saw, were able to hide price information from end users and, as a result, force them to buy at whatever seemed to be the going rate.
So Irvin decided to start a business to help vehicle fleets, utility power plants, railroads and airlines get better prices. Her company, Kristen Schaffner Petroleum, worked with a handful of companies. Then, in 1998 she changed the company's name to TeamFuel; hired a CEO; and, using a highly sophisticated suite of Web-enabled technology, she turned the company into one that was able to optimize the entire fuel procurement process for clients, from monitoring prices to payment. Her customer base, currently 65 strong, includes Arizona Public Service, Frito-Lay and the Walt Disney Co.
iSource Business talked with Irvin about the analysis of her industry's supply chain and the ways in which technology has helped her and her company assist others.
iSource: Let's start by talking prices. Why do oil and gas prices get so high, and who's responsible? Is it OPEC?
Irvin: I can talk more specifically to my space, which is the supply chain for wholesale refined products. Plus, I'm not an economist. And, I have to add that there are many different opinions on why prices can become so high. With that said, I think OPEC is just one factor. For example, although OPEC has been very stable in price, we've seen some of the highest retail and wholesale prices ever.
The real reason comes down to basic supply and demand. Supply is low and demand is high. Despite this, opportunity exists for price-savings optimization.
iSource: Why is that?
Irvin: Crude inventory at the refinery levels are down because oil companies realize that it doesn't make sense to invest capital in inventories. They used to work with three months worth of inventory, which made prices for refined products, like gasoline and diesel, less volatile. Now, they're holding down capital inventories on crude to three or four weeks. Shorter inventory creates more volatility in the market. Remember: It's a big investment in capital for refineries to have three months worth of product. It's better for their bottom line not to tie up their capital.
iSource: What other factors are at work?
Irvin: There are a lot of other factors shaping oil prices along the chain. One of the biggest is the speculative market for refined products, which is fickle and very influential. Another factor is that there are fewer players out there because of mergers. That's important since, particularly for refined products, reformulated fuels that are environmentally acceptable require tight specs to decrease pollution. With fewer players, there are fewer people with the ability to produce this product.
All of these things are affecting supply and demand.
iSource: But don't the oil companies take a more active role?
Irvin: They play economic games to get prices up, like cutting back production, for example. If one product, like gasoline, is high in price, refineries stop producing diesel and produce a lot of gas because they'll make a lot of money. That creates a glut of gas, however, which then goes down while diesel goes up.
Oil companies know how to play the game. They keep retail prices low, then raise the wholesale market because they don't want consumers to complain. Once consumers complain about gasoline prices, that's when the government comes in and takes a look to make sure nothing illegal is happening. That's the reason wholesale companies pay more for fuel. I'm not saying they're bad; that's just how it works.
The bottom line for refiners is that even if they can reduce costs it doesn't mean they'll cut costs along the supply chain. They're in business to make money. And knowing these guys aren't going to pass these costs on, we decided what we could do is help customers get the best price possible.
iSource: Explain this a bit more.
Irvin: Oil has a very complicated supply chain with many players. TeamFuel is working at the other end of the supply chain, focusing on what the utility or trucking company can do to get a better deal. We can't fix things like OPEC or help environmental concerns, but what we can do for the end user is to buy a little more efficiently, and try to buy before prices go up. We can make incrementally better purchasing decisions for wholesale users by using a set of algorithms that tell us exactly when to buy. Prices rise and fall daily and, by buying smarter, we can use inventories in our favor. In the end, we're able to buy more optimally than if the client bought it themselves. We think we can reduce costs by 12 percent by having experts in charge of the buying.
iSource: Tell us how you came to this business and this end of the supply chain.
Irvin: When I worked for my father, I saw the oil companies making a lot of money at the customers' expense. The jobbers and distributors were the ones making all the money, and customers couldn't control fuel prices, paying for their fuel at whatever the going price was that day. I decided to use all the inside information I had to represent the clients, to try to beat the oil companies at their own game.
iSource: And you decided the best way to do that was with outsourcing?
Irvin: To truly leverage the supply chain I needed to work for more than one company. That's how I developed my business model to be an outside fuel department for big organizations that didn't quite buy enough to have their own people who were expert fuel buyers.
iSource: Tell us about enabling technology both within your company and your industry?
Irvin: In 1996, we started using the Web to communicate with clients and let them know what we're doing as a way of giving them information about market conditions and inventories. It was a big move back then.
But our industry is a little slow when it comes to technology. Small distributors in oil don't even have Web sites. Even though we have streamlined our clients' operations, we communicate with distributors via phone. It's a very traditional industry. You have a lot of people signing for things with paper and a traditional invoice.
iSource: What, in your opinion, are the benefits of enabling technology?
Irvin: First, it's important to realize that technology is an enabler and an integrator. It doesn't take away from human interaction. In our company, we use all different forms of technology, but it takes people to manage the system.
The big benefit, I believe, is that it helps an organization become a lot more scaleable. It makes it easier for a business to add on more clients and grow to where it wants to be. Take our company as an example. We have a tool called the Dynamic Inventory Replenishment System. It uses five factors, like an analysis of current market conditions regionally, nationally and globally; and it determines the best day and time to fill each tank. And it accomplishes it a lot easier than if we were to do it manually. It makes us more efficient and it makes it possible to handle more clients.
iSource: You said that costs wouldn't get passed along the supply chain, even if they were lower. Can you discuss that more?
Irvin: If oil companies reduce their costs, would they pass it on to the consumer, or would they try to get what the market would bear? They might streamline their operations, but I don't think they necessarily pass it on to clients. In other industries, reductions are passed along, but that isn't the case in the oil industry.
iSource: What about oil in general? What improvements can be made so supply and demand won't fluctuate so heavily?
Irvin: We need to balance our environmental concerns with finding ways to increase our domestic crude production and increase our refinery capacities. The answer is to try to produce our own domestic crude without having to rely on OPEC, and also to increase our ability to produce reformulated products. That will alleviate some of the fluctuations. But these are very big issues.
iSource: What do you see happening down the line in the supply chain?
Irvin: I think one day people are going to be so efficient they'll be able to take back tasks they used to outsource. Technology will make corporations smarter. My long-term goal is to make clients so educated they take back the buying process themselves.