Most government fleet managers oversee fuel, as well as vehicles. While fuel is one of the largest fleet operating costs, the volatility of fuel prices over the past few decades has led some government fleet managers to develop a fatalistic attitude regarding fuel costs and a passive approach to managing fuel. Since fuel prices have spiked in the past and are bound to do so again in the future, government budget directors are accustomed to having to supplement the fleet budget when prices go up. Consequently, some fleet managers see managing fuel costs as a lower priority and focus their attention on other issues.
However, savvy fleet managers know there are several steps they can take to reduce fuel use and costs. A well-designed fuel management program controls costs, improves driver productivity by maximizing easy access to fuel, meets regulatory requirements and organizational policy goals, and provides for the collection of essential data and production of management information.
What's the Policy?
Surprisingly, research shows few government fleets have a formal fuel management policy. Such a policy should define:
- Goals of the program (i.e. providing ready access to fuel, ensuring fuel is available during emergencies, cost control, environmental stewardship, etc.).
- Structure of the fuel program (i.e., bulk fuel and/or commercial fuel cards).
- Organizational responsibilities.
- Applicable regulations and how they will be met.
- Driver accountability and responsibilities (e.g. no premium fuel, accurate recording of odometers, etc.).
- Safety and security.
- Any policy goals enacted by elected officials (such as reducing petroleum use and the jurisdiction's carbon footprint).
Once a policy is place, the organization should develop a strategic fuel plan that specifically defines how policy goals will be met. For instance, the policy may include a statement that ensuring sufficient fuel supplies during emergencies is important for the organization. The strategic plan will define precisely how this will be accomplished. The plan should be updated annually, whereas the policy can be reviewed every few years and updated as required.
Most government jurisdictions operate one or more on-site fuel stations. There are pros and cons to this approach. The primary advantage is that fuel is purchased in bulk to provide volume price discounts. The rule of thumb is that an organization should realize savings of three to five cents per gallon from operating an on-site fuel station over comparable retail prices. Note that for a valid cost comparison to be made, all direct and indirect costs associated with operating bulk fuel stations (such as depreciation/replacement of infrastructure, personnel, services and supplies, insurance, etc.) and retail prices based on volume purchase contracts less inapplicable taxes and fees must be included.
Comparing the price an organization pays per gallon through its contract bulk fuel supplier to the posted price per gallon at the local gas station is, of course, not valid. Moreover, a relatively high throughput of gallons each year is required to achieve the benchmark price advantage. Fuel from low volume bulk sites always costs more than fuel purchased through good contracts with retail stations or a commercial fuel card provider.
Bulk fuel stations also provide insurance against short-term supply disruptions due to natural disasters, offer convenience to crews returning to a central yard each evening, and can provide enhanced security if proper measures are put in place. However, operation of fuel sites also comes with environmental liabilities. The cost associated with mitigating a spill from a single fuel site can run into the millions of dollars. Compliance with federal, state, and local regulations is also increasingly burdensome and expensive. Consolidating stations to ensure high volumes is important. Regional partnerships between cities, counties, and school districts are also a good way to spread overhead costs over the largest possible volume of fuel.
Achieving cost savings from operating bulk fuel stations hinges on having a competitive annual fuel contract in place. Such contracts leverage an organization's volume purchasing capabilities and result in the lowest possible per gallon price for fuel. As such, it is important that all of an organization's fuel purchases roll up to a single contract even if multiple agencies operate separate fuel stations (consolidating fuel management is always the best approach). It is normal for fuel contracts to be pegged to a price index. The most commonly used index is OPIS (Oil Price Information Service). This independent organization publishes prices each day that can be used by both sellers and buyers to base/track pricing.
A major misconception among fleet managers is that a single OPIS price exists when in fact the organization publishes several price indices. Broadly, these are spot prices (the commodity price in New York and a few other locations), rack prices (fuel depot prices), and retail prices. To make things more confusing, OPIS tracks the low, average, and high price each day at several hundred racks around the country. The largest and most important customers at a rack, including "branded" retail gas stations (i.e. major gas stations such as Texaco, Shell, and Exxon) pay the lowest prices. Independent ("unbranded") retail stations are next with high volume fleets following in the pricing pecking order. Prices can vary significantly depending on which index and rack location is used to benchmark pricing. Thus, an organization with a fuel contract priced at OPIS minus 5 cents may actually be paying more than another with a contract priced at OPIS plus 2 cents. Therefore, it is important that all invoices are independently verified against the proper index by the buyer, rather than relying on the seller to provide supporting documentation that cannot be verified.
Establishing a contract based on a margin (plus or minus) from the unbranded low price per day at a particular rack is probably the best practice. The margin covers the supplier's overhead costs and profit. The contract should stipulate separate pricing for transportation to each of a fleet's bulk fuel sites to provide transparency and eliminate the risk of a supplier proposing a low margin, only to make it up by charging more for transportation.
Moreover, transportation fees should be clearly defined regarding the rate structure when multiple deliveries are made (such as two fuel products to the same site or split loads to multiple sites). The contract should also differentiate between prices for full tanker loads (generally 8,000 gallons) and "short" loads, which always cost more. A fleet may also want to include a variety of services in its fuel contract, such as tank monitoring, fuel site and equipment maintenance, and even an automated fuel management information system (FMIS). Some suppliers will also provide turnkey fuel management services as part of an annual contract.
With respect to an FMIS, such systems are no longer a luxury but are considered a requirement if an organization operates bulk fuel sites. An FMIS provides security over theft, essential data for reporting fuel use, and accurate odometers that are important for a host of fleet management purposes. Low volume fuel sites that lack an FMIS should either be automated or closed. Systems can be operated with magnetic stripe cards, key fobs, or entirely by keyboard entry. The best systems are "passive" in that a module installed on vehicles communicates with the system, authorizes the transaction, and records all required data.[PAGEBREAK]
Who Holds the Cards?
Even if your organization operates several bulk fuel sites, you should also consider the advantages of supplementing the network with a universal commercial fuel card. Such programs provide access to thousands of retail fuel stations and can enhance the productivity of drivers by making fuel readily available throughout a city, county, or state. Such programs can also save money for remotely located drivers who otherwise would be required to drive miles out of their way to access one of an organization's bulk fuel sites -- thus unnecessarily burning fuel. Volume price discounts may be negotiated and taxes removed by the fuel card company before a fleet is billed.
Given these advantages, some government fleets have moved away from bulk fuel networks in favor of commercial card programs. Corporate and state fleet managers are well acquainted with these programs and can steer you in the right direction. Local government fleets can "piggyback" on state contracts for fuel cards in most cases.
Are You Trainable?
An important, and often overlooked, component of effective fuel management is a program to train drivers on ways they can lower fuel use and costs. For example, driving 65 mph instead of 55 mph can use up to 20-percent more fuel, idling a typical heavy-duty engine burns about 0.8 gallons of fuel per hour, and driving with the engine rpm too high can waste several gallons of fuel each hour. Other common habits that reduce fuel economy are frequent or improper shifting, too-rapid acceleration, too-frequent stops and starts from failing to anticipate traffic flow, and taking circuitous routes. (See resources at the United States Environmental Protection Agency website.) Training should also include how trucks are loaded, as unnecessary weight has a dramatic impact on fuel use. Fuel economy is reduced by around 1 percent for every extra 100 lbs. of weight loaded in a vehicle. Drivers should also be educated on proper tire inflation (which can improve fuel consumption by as much as 10 percent) and timely maintenance (which can improve fuel consumption by 4 percent).
Tips on fuel use can be communicated through a fleet newsletter, on the fleet website, or through live and in-person training sessions. Some organizations make drivers obtain a city/county/state driver's license before they are authorized to drive a government vehicle (a good practice). This entails review of and testing on organization policies related to fleet use, safety, and -- you guessed it -- ways to lower fuel use.
Saving money on fuel starts with decisions on which types of vehicles an organization buys. As mentioned, lighter is better. Work crews often want larger vehicles to cover all possible situations they may face in the field. However, not only do larger vehicles cost more to buy, they also use more fuel. Even when larger vehicles are required, smart specification decisions can lower weight and raise fuel economy. Use of aluminum and composites instead of steel can save several hundred pounds of weight, as can smaller engines (which achieve better mileage as well, providing they fit the application and work to be done). Axle types (super single versus dual), rear-end ratios, and transmission choices also have a material impact on fuel economy.
Government agencies typically must buy from the lowest cost supplier that is responsive to the bid specifications. Consequently, including lifetime projected fuel costs in the cost evaluation process is not only a good idea for driving down fuel use, it is an essential component of lifecycle cost evaluation -- a best practice that all fleet managers should follow.
Even though fuel prices are bound to rise in the future, fleet managers can still save their organizations money on fuel by actively managing this important function. A combination of competitive contracting, driver training, data management and exception reporting, and smart decisions regarding vehicle specifications can cut fuel use and costs by tens and even hundreds of thousands of dollars each year.
About the Author
Randy Owen is senior vice president at Mercury Associates Inc. He can be reached at email@example.com.