Oil Procurement Case Study and Global Market Overview

July 22, 2011

There is one area of procurement spend that many schools are extremely wary of – oil.  It’s hardly surprising bearing in  mind the complex and volatile nature of pricing.  Supplier pricing models include Platts daily lagged, Platts weekly lagged, spot, open book and so it goes on.  As a result ensuring you are comparing “like for like” is a challenge in itself and one which many Bursars and Estate Managers simply don’t have the time to do.  In addition security of supply is of paramount importance to schools and, in respect of oil purchases, it seems the phrase “better the devil you know” is adopted by most.  As a result an area which is often a significant spend (sometimes second only to wages) tends to get overlooked.

Minerva has recently completed a project for a consortium of schools which has resulted in reasonable savings (between 3% – 14%) for some, but not all, of them.  The main reason savings were not more significant is down to the fact that the bulk of the price is not determined by the wholesaler or the distributor but by the oil producers.  As a result the only part of the price which can be ‘negotiated’ is the profit margin and load premia.  As wholesalers/distributors work on a high volume/low margin business model there really isn’t that much left for discussion!  That said, several schools made £000′s in savings as a result of the project and it’s still an area which should be actively reviewed especially where it’s a significant annual spend.

In addition to the savings identified in immediate pricing it’s also worth mentioning that contracts have been negotiated for ‘fixed forward’ pricing too.  There is a continuing upward trajectory on pricing and so a strategic decision to fix could well be a good one.  It’s important to choose when you do that though – you’ll note from the graph, which covers only a 12 month period, that small upward spikes or decreases in prices are apparent and could make a significant difference to the fixed price you negotiate.

So, if the bulk of the price is determined by the oil producers what influences their pricing?  I recently had the opportunity to participate in a Webinar run by Platts* which gave an excellent overview of the Global Oil Market.

Oil is obviously being consumed worldwide.  As an idea of consumption the USA (being the largest) uses 18,868m barrels per day, China 8,625m (and rising rapidly) with the UK using 1,611m barrels per day.

Expert opinion is agreed that the peak price of $140 a barrel (July 2008) is very possible again in the foreseeable future.

Annualised world growth is stabilising at 1m barrels a day but OPEC (the oil producing countries cartel) have not increased production which explains the continual rise in prices.

China really is the engine room of economic growth and, therefore, oil demand.  Chinese oil demand is estimated at 10m barrels a day but their own production can only offer 4m barrels a day and is flatlining.  As such for every additional barrel required this is a an additional barrel for the world oil market to cover.  In terms of the ‘winners’ supplying China these include Angola, Oman, Iraq, Kuwait, Kazakhstan and Brazil.

One of the biggest impacts on price volatility comes from uncertainty in the market from world events.  Most recently examples of this would include:

  • violence in North Africa
  • unrest in the Middle East
  • the earthquake in Japan
  • OPEC disunity

The situation in Libya is a prime example.  Production there, since the start of civil unrest, has fallen from 1.4m barrels a day to 200k or less.  They are a major supply of quality oil to Europe (Germany and Italy particularly) and much of the fighting has been in or around the production facilities.  Libya were supplying 2% of the total world oil.  Experts say it will take Libya many, many years to recover.

In fact Saudi Arabia has committed to the replacement of this volume and quality of oil and is filling up storage facilities to prevent such an impact in the future.  However, we’re only at the start of this process.

Overall, the oil market is still in distress and if you look at Saudi they have a “ring of fire” of countries in difficulty all around their borders; Egypt, Oman, Sudan and so on.  Violence in any of those countries could result in disruption in the export channels.

Overall the Libya/Saudi position is keeping the market on edge due to:

  • wariness of the Saudi’s being able to meet the shortfall left by the reduction in Libyan production
  • the removal of high quality crude oil and the concern about the quality of the replacement
  • conflicts in these areas look like they are set to last
  • there are regular attacks and damage to oil production infrastructure
  • some end-users are questioning the long term reliability of supply

Another psychological impact on the oil market was the earthquake, in March 2011, in Japan.  The ‘quake resulted in 1.4m barrels per day of oil refining closed down – this equates to 31% of the national capacity.  The world oil market has a strange relationship with Japan as they’re not sure what the relationship is in terms of supply.  After spiking in the immediate aftermath of the earthquake prices have started to come down due to the Japanese quick recovery.  Longer term, radiation exposure concerns means construction companies are reluctant to send staff and resources there and this could slow down the reconstruction.

If all of this weren’t enough you then have OPEC disunity to content with.  The meeting on June 8th this year was described by the Saudi Oil Minister as “…one of the worst meetings we have ever had”.  The current target and actual production will remain at 28.8m barrels a day and this is likely to remain unchanged in the short-term.  In fact the world oil market needs more than this but OPEC attempts to de-politicise the cartel and make it more about the economics has left the cartel divided.  Countries voting to increase oil production i.e. Saudi, UAE, Kuwait all have additional capacity.  Those voting against increasing production are, unsurprisingly, at full capacity.  As a result there’s a stalemate in the group and so, for the moment, this has resulted in no change in production, demand outstripping supply and an increase, therefore, in price.

Experts predict we are in for a bumpy winter with OPEC estimates that world oil markets will require 30.9m barrels per day in Q3 2011 and 30.5m barrels per day in Q4 2011.  With supply being limited to 28.8m barrels per day this means a 1.6-1.7m barrels per day shortfall.

It would therefore seem sensible to predict that the upward trending red line with continue to do so.  Time to get some fixed pricing in place……?

*Platts is a provider of energy and metals information and a source of benchmark price assessments in the physical energy markets. Platts was founded in Cleveland, Ohio in 1909 by Warren C. Platt (1883-1963) to provide “reliable market-based price information” on the oil industry.  It is widely used today as the baseline for industry pricing

Question: When is a Preferred Supplier List not a Preferred Supplier List?

June 15, 2011

Answer: When your staff choose to ignore it and do their own thing!

Interesting article in Supply Management magazine today around this subject which is something schools are notoriously bad for despite the best efforts of the bursars.

The alarming statistic from this research is that 60% of employees don’t shop around for the best deal when spending company money as opposed to their own personal money.

Many bursars I speak with hold their head in their hands when it comes to trying to keep control on various members of staff ordering goods and services on their credit cards from non-preferred suppliers and then expecting reimbursement from the school.

‘Free’ gifts and resources or long-standing personal relationships, whilst appealing to the academic staff, are unlikely to be appealing to the bursar who discovers that the core supplies ordered have been done so at a premium price.

As well as not necessarily getting the best value for money on an individual item you also miss out on the opportunity to negotiate bulk buyer discounts when putting all of your category spend with one supplier.

It’s also more difficult dealing with staff with an academic mindset who tends to think along the lines that ‘we’re an educational establishment not a business’ whereas, in fact, a school is both.

So what’s the solution?  Well, you’ve probably got a couple of options open to you depending on how brave you feel.

Firstly, you could have a ‘three strikes and you’re out (not reimbursed)’ policy.  Identify the serial offenders and if they continue to order outside of preferred supplier arrangements advise that they will not be reimbursed.  I doubt it will take long for that message to get around.

Secondly, and slightly less draconian, is to start to centralise your spend.  The schools I work with which have a single point of contact for purchasing in certain spend categories get it right more often than not.  It doesn’t have to land at the feet of one individual, the task can be shared by several personnel, but by having one individual monitoring stationery, another to book coach journeys and so on your gain much greater control and insight into the spend in that category.

So why not book a review with Minerva today?  We can start to assess individual categories, negotiate deals with suppliers on your behalf, help implement new supplier arrangements and train staff in the new regime.  As we’re independent we can review the entire market place.  Not only will you most likely make immediate cost savings but, by putting in place more efficient procurement practices, these savings will continue well into the future.

Quarterly Poll Question

April 14, 2011

Default Retirement Age

April 11, 2011

By Kirstie Johnson, Associate Solicitor in the Employment Department, Lamb Brooks, an established legal practice for over 200 years offering a traditional service with a modern touch. www.lambbrooks.com

Employers are no longer able to use the default retirement age to compulsorily retire employees and, unless a retirement procedure was commenced on or before 5 April 2011, retirement can no longer be relied on as a potentially fair reason for dismissal.

For those employers who did give lawful notice of retirement to an employee on or before 5 April 2011, they will be able to continue with the procedure under the transitional provisions and there is some flexibility in these provisions which allows an employer to agree an extension with the employee.

Where an employer gave 12 months notice of retirement, the employer will be able to agree to an extension of up to 6 months under the employee’s ‘right to request’ to carry on working; as long as the latest date of retirement is 5 October 2012. However, where the employer gave 6 months notice of retirement, the employer will still only be able to agree an extension of up to 6 months – even if a longer extension would still result in an earlier retirement date than 5 October 2012. This is because, under the statutory procedures, where an employer agrees an extension of more than six months, it has to issue a fresh notice of intention to retire – which it now cannot do!

If an employer wants to retain a compulsory retirement age in its contract then it will have prove that this is objectively justified as being ‘a proportionate means of achieving a legitimate aim’. It will depend on the circumstances of the employer and the nature of the job in question but the general consensus is that this is unlikely to be an easy test to pass. Otherwise employers who want to dismiss an older employee will have to treat them the same as any other employee and show that they have a potentially fair reason for doing so.

Employers should also bear in mind that they can no longer refuse to recruit an employee aged 64 ½ or more. Job applicants will have to be evaluated equally, regardless of their age, unless a difference in treatment can be objectively justified.

Is Your Website Attracting Parents or Putting Them Off?

April 11, 2011

By Danny Bermant, Director, Brainstorm Design Ltd, an internet consultancy which specialises in converting website visitors to customers.  www.brainstormdesignltd.com

During the current recession, many businesses have abandoned traditional advertising and have focused on their websites instead. They have done this for a number of reasons:

  1. The cost of promoting a business online is significantly less than the cost of traditional advertising.
  2. You can measure how many visitors/enquires you are getting and then see the return on your investment.
  3. Unlike a traditional advertisement, websites are interactive. For example, you can invite people to subscribe to your newsletter or to fill in your enquiry form.

If you’re looking to advertise your school to prospective parents, how do you go about it?

The main piece of advice is: Keep it simple!

  • Your home page is the “shop window” of your school so don’t over-clutter it. If your primary objective is attracting new pupils, this should be the main focus of your home page. Don’t fill it with lots of other messages.
  • Every website needs an effective “call to action” in order to succeed.  A call to action is an objective for users to complete whether it is filling in an enquiry form or signing up for a newsletter. Your call to action needs to be compelling. Make sure you have a hook e.g. “80% of our A-level pupils received places at the University of their choice – Click here to find out more”.
  • Keep the message simple – website visitors have a short attention span. Limit the text to a couple of sentences and use visual imagery to help interpret the message.
  • 80% of website visitors only view the area of the home page above the fold (i.e. they won’t scroll beyond the bottom of the screen), so make sure that the key messages are at the top of the page.
  • For those visitors who do scroll below the fold of this page, this area can be more focused towards reinforcing your credibility as well as promoting return visits to the site e.g. a brief summary of the school, a link to a news item, information about extra curricular activities.
  • If visitors can’t find what they want on the homepage make it easy for them to find what they’re looking for elsewhere on the site. The top right hand side of the home page (and all pages) is where you should put the most commonly required information: your phone number, email address, and a search box (users will often go directly to the search box before clicking on any links).

Remember that first impressions count. If you’re looking to attract new pupils to your school, your home page may be the first (and last) opportunity you get to sell your school to the parents of those pupils.

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