Controlling Cost: Understanding Why Helps Understand How

Every distributor and manufacturer today is challenged by the cost to operate their business and remain serviceable for the market place. I am sure each of you, whether you work for a distributor, manufacturer or municipal utility, are experiencing some level of frustration in maintaining service or required levels of stock while operating within established budgets.

By Jim Fuller

Every distributor and manufacturer today is challenged by the cost to operate their business and remain serviceable for the market place. I am sure each of you, whether you work for a distributor, manufacturer or municipal utility, are experiencing some level of frustration in maintaining service or required levels of stock while operating within established budgets.

Having a sound planning hierarchy is a must. It is a step-by-step planning process that starts with the top and encapsulates every function, department, and process. It creates detailed focus on core competency and provides support and leadership to employees, departments and processes, while producing expected levels of service.

To better describe this planning hierarchy process, let’s look at a complex subject that affects every one of us – fuel cost and supply. Analogies between this well known topic and the Waterworks industry are very similar when looking at volatility for cost, government regulations, global demands and attempting to balance raw materials.

Why, Part One – Understand Position

Marketing Strategy – The global fuel marketplace is controlled by forces of supply and demand which determines the price of fuel. If demand grows or if a disruption in supply occurs, there will be upward pressure on prices. By the same token, if demand falls or there is an oversupply of product in the market, there will be downward pressure on prices. Those principles apply at the local levels as well. If a business prices its products too high, and without regard to competition, customers may take their business to another with lower prices. If a business loses enough volume, then it may reduce prices in order to retain its customers. Competition among outlets thus affects pricing. You may notice that sometimes there are price differences between two gasoline stations on a busy street corner and between those outlets and the only station on a long stretch of highway. More choices generally mean more competition for business.

Sound like our water-works markets?

Why, Part Two – Understand Product

Product/Manufacturing Strategy – Crude oil, like agricultural products and precious metals, is traded on the world market. Recently, crude oil prices have risen dramatically, driven by rising global demand and political instability in several oil producing countries. Crude oil prices are important in determining gasoline prices because crude is the primary raw material used to produce gasoline and other petroleum products. In some cases, the price of crude oil may account for up to half the price of a gallon of gasoline.

Example: There are 42 gallons of oil in each barrel of oil. If the price of crude oil is $75 a barrel, the cost of the raw material required to produce a gallon of gasoline is $1.78. This figure does not include costs incurred to transport crude oil to a refinery, refine the oil into gasoline, transport the gasoline to distribution hubs or wholesalers and deliver the gasoline to retail locations or operate service stations.

Sound like our water-works markets?

Why, Part Three – Understand Market Requirements

Engineering Strategy – Gasoline is different because crude oil is traded in a global market and gasoline is part of a regional market. Transitions in supply can also affect the short-term availability of gasoline. Going into the peak summer driving season, refineries are adjusting their gasoline formulas to help protect the air quality in warmer weather. And, because of changes to federal energy legislation passed in 2007, many states are switching to ethanol-blended gasoline. Many states require specific formulations of gasoline — there are currently 18 separate gasoline formulas for different regions of the country, making it difficult to import gasoline supplies from one region to another.

Sound like our water-works markets?

Why, Part Four – Understand All Costs

Financial Strategy – Each gallon of gasoline also is subject to numerous taxes and fees, which vary by state. In California, the price of gasoline includes a federal motor fuel excise tax, a California motor fuel excise tax, state and local sales taxes as well as other state and local fees totaling more than 66 cents a gallon. After the crude oil is processed through the refinery, the finished gasoline product is transported to a terminal, where it may be sold to a wholesaler for distribution to the wholesaler’s retail network or delivered to the retail location. There the retailer sets the “street price,” which includes a margin to account for the retailer’s cost of doing business at that particular location and the retailer’s profit.

Sound like our water-works markets?

Ok, I think you get the point – “Why” reviews each element that affects our business externally…. This does sound like our industry and the idea of the planning hierarchy: Marketing, Product/Manufacturing, Engineering, and Financial Strategies fits into every business model. It starts from the top and includes every element of our business, all of which must interact together. Once your business objectives are clear and annual plans set based on external factors, it is time to develop an S&OP to control, direct, and support a day-to-day, week-to-week, and month-to-month plan.

How, Part One – Create Your S&OP

Sales and Operations Planning – S&OP should utilize both the detail and aggregate levels of the information gathering process listed above and tie into the overall sales and operating business plan. It should be the definitive statement of the plan for the near to intermediate term, covering a horizon sufficient to plan for resources and support the annual business planning process.

Executed properly, the S&OP process links the strategic plans for the business with its execution and reviews performance measures for continuous improvement.

Now you are better positioned to begin the creation of HOW!

Your S&OP plans looks inward and provides the guidelines necessary to stay on track while controlling cost and improving service levels for your customers. Good luck comes from a good planning process!

WW

About the Author: Jim Fuller is VP of Sales and Marketing at Coburn Supply Co. and is a member of the WASDA Marketing Committee.

More WaterWorld Current Issue Articles
More WaterWorld Archives Issue Articles

More in Industrial