Faster, Cheaper, More Transparent
Technology now exists to streamline the public procurement process for fuel purchases. Anyone still using the same method for buying fuel they used five years ago should take a look at what’s available now. Today’s new platforms are making it easier and cheaper to meet fuel needs, which is good news for buyers, sellers and taxpayers.
If we have learned anything in recent years, it’s that fuel prices are volatile and almost impossible to predict. Whether it’s global events, currency fluctuations, natural disasters, international demands or supply disruptions, it’s getting more challenging to accurately budget fuel costs. When you add increasing budget constraints and greater regulatory oversight, government entities are in a particularly difficult position when it comes to managing their long-term fuel needs.
Cities, counties, school boards, water authorities, transit companies and emergency vehicles all have substantial fuel needs that can be a major expense on their budgets. Public procurement of fuel purchases is further complicated by the preference for long-term contracts, the use of a variety of fuel types, bulk storage facilities and multiple delivery locations with varied servicing requirements. Whether you use 10,000 or 10 million gallons of fuel, the traditional process can be slow, complex and difficult to manage.
Let’s look at ways technology can help.
Reverse auction systems gain favor
Until recently, the sealed bid system was the standard method for awarding public procurement jobs. However, as market or competitive factors change, the sealed bid system does not allow for any revisions to the original bid. The process can be cumbersome with bids taking months to complete. At the end of the day, buyers were never sure they received the best price available in the market and had to contend with voluminous paperwork.
Advances in technology make the process faster, cheaper and more transparent for buyers and suppliers. While federal and state governments have seen significant savings for years by using online auction systems for procurement of commodities and other goods, interest is now growing in the online reverse auction platform for fuel purchases. With municipal budgets under financial stress and scrutiny, governments and agencies are now looking at reverse auctions as an integral part of their public procurement strategy.
Here’s how it works: Agencies specify their fuel needs online, including volumes, delivery locations, length of contract and any special requirements. The job is then open to multiple suppliers to compete for the business. While the identities of the suppliers are kept confidential, they are able to see how their peers are bidding and can readjust their bids instantaneously. A live auction usually is completed within 30 minutes. It’s an easy, efficient, cost-effective way for agencies and a large network of suppliers to find each other. Government entities can get significantly better pricing with competitive bidding and pooling of volumes. And by transitioning from paper to an electronic environment, each step is automatically documented to create an electronic audit trail and greater transparency.
The auction system provides suppliers access to new customers without incurring the time and expense of traditional sales and marketing techniques. Ineffective bid submissions due to lack of market intelligence and competitive pricing are reduced. The system allows instant access to complete bid information; a supplier can choose to bid on only those requests that fit its business model based on fuel type, volumes and fueling method. Transparency on final bids and awards provides better market intelligence and analysis for future bids.
Streamline the purchasing process
Another effective way for government agencies to cut fuel expenses is to reduce internal costs by streamlining the purchasing process. In an optimal process, one person should be able to easily manage all of the different suppliers, contracts, terms and bids across all locations. Online systems can be a tremendous help.
There are several systems available. Look for one that includes:
- An organized process to publish bid requests to multiple suppliers across many locations and fuel types.
- Ability to store information that is used repeatedly such as locations or commonly used files like such as specifications or insurance requirements.
- Access to all historic information including bids received.
Aggregate demand to encourage competition
In the case of fuel as with most purchases; the larger the quantity the lower the price. If you have multiple locations, consider combining the total fuel usage at all locations into one purchase. Many counties are forming co-ops to aggregate volume and attract more competitive bids.
Move to longer-term purchase agreements
For suppliers, a long-term relationship with a buyer is an ideal scenario, and they are willing to bid aggressively to win that business. Governments and other large fuel buyers are increasingly using long-term contracts with index-based pricing.
With index pricing, a supplier commits to providing fuel at a price that is a specified amount above or below a known index. Usually the index is one published by a third-party such as Platts or Oil Price Information Service (OPIS). The buyers define which index they wish to use — typically it’s the price from the fuel rack nearest to your location. Not only does a long-term contract with index-based pricing save money, it also saves time and simplifies the purchasing process.
About the author
Liat Rorer is vice president of marketing for Pricelock, a Redwood City, Calif., company offering online fuel hedging and price protection. By aggregating demand, Pricelock enables small and medium businesses and government entities to control fuel costs in ways previously available only to large fuel buyers.