Supply as a Profit Center Becomes a Reality With Optistream and C3
The Challenge
Many fuel suppliers, particularly those with a retail or other downstream division, long for a way to integrate supply as a profit center economics to dissect measurement in the business on the supply division. The supply division is responsible for negotiating supply agreements typically on both a formula basis and a fixed price basis. The supply division also oversees and manages product differentials between different locations.
These contracts with their intricate pricing, date differentials, and location differentials become a key component in overall company profitability. Adding the ability to measure profitability of this group is essential in generating success across the company.
The Result
When the supply division is managed as a separate profit center, the business is able to manage supply margins through what is typically a transfer price model between supply and retail. While this brings discomfort and questioning to some, the transfer price model ultimately enables improvement of margins through more careful measurement of supply agreements and their performance.
Supply division profitability is further enhanced with cost optimization strategies that look for alternate sourcing opportunities which generate additional margin for the supply division through finding different supply locations than the typical “closest” location.
The Supply as a Profit Center Journey
Transitioning to a supply as a profit center mindset first requires establishing a transfer price between supply and retail. This transfer price is typically driven from a published index price plus a differential at each retail location. Some organizations will use an “admin fee” to also drive this differential.
If your organization operates an internal freight division, our last article covered the Freight as a Profit Center Journey. We recommend also navigating this journey simultaneously. This will bring an agreed upon freight rate from the freight division into the supply division’s economics.
Once transfer pricing and freight rates are finalized, we have the basis for generating a P&L for the supply division. P&L parameters are simple. We have supply costs that are measured through accrual at time of lifting. We have freight rates that are accrued against common carriers or the internal freight division at time of lifting. Finally, we have a “sales” price to retail based on the transfer economics outlined above.
Key Takeaways
Supply profitability is an area that many fuel suppliers and retailers have long dreamed of separating and measuring. Retailers make considerable investment in building the best supply teams to ensure reliable fuel supply and the best economics. The financial success of these teams can now be measured.
The three metrics outlined above build a simple framework for generating financial reporting for supply division profitability. If the fuel supplier has a freight division, we have now separated profitability for both of these divisions. In the process, we have also separated retail profitability which we will cover in a future article.
With these measurements in place, we can reflect back to our saying – that which can be measured can be improved.
About Optistream
Optistream is a provider of SaaS based software solutions focused on the midstream wholesale and retail fuel sector. Our mission is leverage cutting edge technology to bring quantifiable solutions that maximize profit and minimize risk.
We bring 25+ years of experience in midstream fuel supply with a deep knowledge of commodity marketing, trading, and position management. We also bring a broad understanding of back office processes and ERP systems.