Delivery Management
Technology & Services
for
Retail Petroleum
Propane, Fuel Oil Delivery
The Value Proposition
Driving your Bottom Line
This document describes how Vertrax’s current customers are realizing the real value of SmartDrops and actually recognizing true return on their investment
No
March 2006
Table of Content
1. Vertrax 3
1.1 Our Focused Industry: Retail Petroleum 3
1.2 The Benefits We Offer 3
2. An Industry in Change 5
3. Driving the Bottom Line 6
4. Increased Profits through Improved Delivery Efficiencies 7
4.1 Reduction in Delivery Costs due to Reduced Miles and Reduced Driving Time 7
4.2 Increased Gross Margin from Increased Gallons Delivered to the Same Account Base 7
5. Increased Profits through Improved Operations 9
5.1 Increased Gross Margin due to Increased Gallons Delivered to an Expanded Account Base 9
5.2 Reduced Delivery Costs due to Delivering to the Account Base with a Reduced Fleet 10
6. Incremental Value Driven by Other Benefits 11
7. Case Study 12
7.1 Summary 12
7.2 Reduction in Delivery Costs due to Reduced Miles and Reduced Driving Time 13
7.3 Increased Gross Margin from Increased Gallons delivered to the same account base 14
1. Vertrax
Vertrax, headquartered in New Haven, CT, is the leading provider of unique Delivery Management solutions to the Retail Petroleum industry (marketers of propane & home heating oil). Vertrax’s customers report significant incremental bottom line profits ($5,000 to $10,000+ per delivery vehicle per year) as a result of reducing the costs per delivery by more than 30%. This customer proven and compelling Value Proposition is derived by:
1 Operational savings largely from less miles driven (reduced gas/diesel, maintenance & repair) and reduced driver hours (reducing regular and overtime hourly pay); and
2. Increasing the number of deliveries and their volume (driving increased gross profit).
Delivery Management is the logistical planning, intelligent sequencing, optimal routing, scheduling and monitoring of propane and heating oil residential deliveries. SmartDrops is our flagship product for propane and heating oil residential delivery, and soon for service technicians. Orders are automatically downloaded from the back office ERP system and visually displayed on digital maps. These maps allow the end-user to manipulate the views by order characteristics (volume, urgency, delivery date, type, etc) and geography (street level, certain locations, zoom, etc). SmartDrops automatically creates optimized, editable routes for a set of drivers, providing printed manifests and interfaces to cab-based computers. Integrated Live Tracking provides SmartDrops users with location based services and up-to-minute analysis of actual location providing planned versus actual route analysis. At a macro-level, Vertrax’s efforts are directed toward the short haul or "last mile" of the logistics supply chain, where delivery and pick-up routes are dynamic, urgency-driven and contain many stops.
1.1 Our Focused Industry: Retail Petroleum
Vertrax focuses exclusively on U.S-based Retail Petroleum marketers who deliver home heating oil and propane to homes and businesses. This group has been behind in logistical and fleet productivity applications due to the expense of installing and operating these systems and the specialized requirements of the Retail Petroleum delivery fleets. Without Vertrax’s Delivery Management products, current methods of resource planning, dispatching, sequencing of deliveries and route development are manual and paper based, with decision making on deliveries left to the branch dispatcher and drivers. The resulting delivery schedules and routes are rarely optimal and accountability of delivery management is low. Bottom line profitability is left at the mercy of branch delivery personnel!
Because our unique industry-specific Delivery Management solutions integrate into back office general ledger system and low up front systems costs, Retail Petroleum marketers have begun to embrace Vertrax’s technology. Industry dynamics such as volatile commodity prices (e.g. heating oil and propane) causing variable margins, higher delivery costs (vehicle fuel, etc) and rising insurance and health care costs are also driving strong interest in Vertrax’s products.
1.2 The Benefits We Offer
Vertrax’s customers find a variety of compelling benefits: 1) fewer miles driven resulting in reduced maintenance and repair, decreased fuel costs and decreased driver overtime; 2) increased gallons delivered and incremental gross profit with zero additional delivery costs; 3) improved efficiency of operations through “paperless” process and internal communications and 4) improved responsiveness and service to their own customers. Vertrax's Delivery Management solutions allow our customers, who normally operate on relatively thin margins and suffer from inefficiencies in managing their mobile delivery resources, to dramatically decrease their Costs per Delivery, increase their Gallons Delivered per Mile driven and improve their bottom line profits.
Vertrax has successfully launched a “Value Sharing” business model further illustrating our proven commitment to the industry and to the success of our customers. Value Sharing comprises Vertrax receiving up to 1/3rd of the proven uplift in profits directly resulting from the deployment of Vertrax’s products. In addition to recurring product license fees, one-time implementation and training fees are also charged at $1,200 per vehicle. We sell directly to major national and regional Retail Petroleum fleets and directly or through reseller partners to smaller regional fleets.
Expansion into Commercial Petroleum is targeted for the end of 2006.
The illustration below describes the major drivers behind SmartDrops’ Value Proposition.
2. An Industry in Change
The retail propane and oil industry is undergoing considerable change due to volatile commodity pricing leading to unpredictable gross margin and increased complexities in running the business. These new challenges are coupled with the historical issues that have plagued the industry for many years, namely low productivity and efficiency and escalating delivery costs. The general lack of technology to improve efficiency has caused an unfavorable environment in which:
§ Far too many assets are used to complete daily work resulting in very low ROAE (Return on Assets Employed). Due to inefficiencies, most companies are forced to over-forecast their vehicle capacity to deal with seasonal “worst case” scenarios, thereby “over building” fixed expenses against variable revenues.
§ It is difficult to hold specific employees accountable for productivity.
§ Measuring performance benchmarks on assets or employees is nonexistent.
§ Vehicles drive far too many miles in the context of actual deliveries.
§ There is an overabundance of paper being pushed by clerical staffers and an overabundance of back office work being done to migrate field data to the host ERP system.
§ Communication between the vehicles and the dispatcher is unreliable.
§ There is no “real time” monitoring or control of delivery and service vehicles.
§ Theft of time is a major concern.
This remainder of this document describes how Vertrax’s current customers are realizing the real value of SmartDrops and actually recognizing true return on their investment
3. Driving the Bottom Line
The Value Proposition of Vertrax’s Delivery Management products is derived in two primary ways, namely:
1. Increased Profits through Improved Delivery Efficiencies, namely:
§ Reduction in Delivery Costs due to reduced miles and driving time, driven by reduced Truck Costs such as diesel, gas, maintenance & repair and reduced Driver Costs with reduced overtime hours.
§ Increased Gross Margin from increased gallons delivered to the same account base; realizing increased delivery capacity closer to the maximum capacity within the existing account base.
AND
2. Increased Profits through Improved Operations, through:
EITHER
§ Increased Gross Margin due to increased gallons delivered to an expanded account base.
AND/OR
§ Reduced Delivery Costs due to delivering to the account base with a reduced fleet.
In industry generally accepted performance measurements, Vertrax’s Value Proposition translates to:
§ Delivery Cost (Truck + Driver) per Drop will decrease by more than 20%.
§ Gallons Delivered per Mile Driven will increase by more than 7%.
These savings flow directly to the bottom line, boosting bottom line profits (EBITDA) significantly.
4. Increased Profits through Improved Delivery Efficiencies
4.1 Reduction in Delivery Costs due to Reduced Miles and Reduced Driving Time
Logically by driving tighter routes, drivers should drive less miles and, all being equal, will spend less time behind the wheel. Drivers will also spend less time (approximately 30 minutes a day) by being provided pre-built SmartDrops routes rather than spending time building their own route from a non-sequenced set of tickets simply pulled from the back office / degree day system and divided into driver ticket piles by the dispatcher. In this case, the cost of delivery would decrease since there is less fuel & diesel truck costs and less maintenance & repair costs, and less driver hours cost, etc.
Clearly, the industry accepted productivity metric of Gallons per Mile will increase and the industry accepted cost metrics of Cost per Drop, Cost per Gallon Delivered or Cost per Mile Driven will decrease.
The actual reporting of the mileage and hours driven numbers may not show an overall decrease if as a result of more time, drivers are being asked to do extra drops per day meaning additional gallons are being delivered. In fact this is more likely a scenario and the benefit of this is detailed below. Another way of saying it is that depending on what management does with reduced driving time will actually dictate actual reported miles and driver hours. If incremental drops are given to the drivers, miles and hours driven many increase, but these costs would be more than offset by the margin on the additional gallons delivered.
4.2 Increased Gross Margin from Increased Gallons Delivered to the Same Account Base
SmartDrops can greatly improve Deliveries per Day by providing more efficient and intelligent routing. As described above, this leads to less “windshield” time and less miles driven. By logical extension, more deliveries can be made in the same time interval. The more deliveries that are made per mile, the lower the relative cost per delivery.
By focusing on urgency, geography, truck inventory, and mapping/routing logistics, a dispatcher can build significantly more efficient routes. SmartDrops uses street level mapping which optimizes the driving time between delivery stops, eliminates vehicles crossing paths during the delivery day, and breaks down the imaginary boundaries imposed by “zone” routing. All of this leads to improved stops per hour, a recognized productivity benchmark in the petroleum industry. Ultimately this leads to significantly reduced delivery costs.
With SmartDrops being used correctly, drivers will be able to do several more deliveries a day, with an increase in gallons delivered per mile and a decrease in cost per gallon delivered or overall cost per drop. Drivers should be able to spend more time delivering gallons, increasing the daily gallons delivered. This increased delivery capacity can be absorbed by the existing account base by better meeting 100% of the demand throughout the account base.
In any given period of time, with or without SmartDrops, the demand from the existing account base is constant largely driven by weather conditions. In many cases SmartDrops, by enabling extra deliveries per day, will help the fleet deliver closer to this 100% demand than otherwise possible. This will be the case where the branch is unable to meet the demand from the existing account base or can only get closer to full demand by increasing miles and overtime hours. In those that feel as though they are already meeting 100% of the demand without SmartDrops, then they must either reduce the hourly time of the drivers and/or reduce the fleet to see real pay back (see below).
SmartDrops may increases the Average Drop Size since a company now has the ability to perform true “on-time” fuel delivery. Historically, most companies attempted to alleviate the impact of poor delivery productivity and efficiency by pulling orders “ahead of the degree day clock”. Simply put, these companies force the system to order a customer’s fuel prior to the day that an optimal drop could be made. This increases the number of times that a company delivers to a particular customer in a given year and reduces the size of the drop. Both of these negative impacts drive up delivery costs and reduce profitability. The efficiency improvements brought about by utilizing SmartDrops (including visual display of delivery information, k-factors, tank sizes, gallons to be delivered, etc) free up assets and time therefore allowing a dispatcher to make more confident delivery timing decisions and stick closer to “the clock”. The end result of a larger drop size maximizes delivery capacity and drives down overall costs. One of our clients told us that a 10 gallon per drop improvement yields $1MM in annual profit. Vertrax has seen an average of 8 gallons per drop increase.
High percentage will call fleets may be able to satisfy more will calls if there is more time to make deliveries, therefore possibly raising overall volume delivered.
Reducing run outs is also a factor, if there is more time to make deliveries, again possibly raising overall volume delivered.
5. Increased Profits through Improved Operations
5.1 Increased Gross Margin due to Increased Gallons Delivered to an Expanded Account Base
The Value Proposition model shows that the average customer deploying Vertrax’s Delivery Management products will increase delivery capacity (i.e. volume of product delivered) by at least 3%. This expectation is based on the historical experience of our customer base related to emergency calls, will-call management, targeted marketing, and customer service.
Retail Propane and Heating Oil distributors seek to grow by 3% to 5% per year. This is accomplished through marketing to new customers and servicing new customer prospects that are converted to long-term customers. The primary barriers to this strategy are usually through a retailer distributor’s inability to stretch their existing capacity to accommodate incremental customers and their inability to provide a level of customer service that mitigates account attrition. Aside from the problems resulting from integrating new customers, retailers have historically suffered significant customer attrition during the peak season due to inept handling of run-outs, early/late deliveries, and emergency service calls. Approximately 70% of this attrition results from poor service quality. At a customer acquisition cost of $400, retailers strive to find ways to keep their customers.
Vertrax’s Delivery Management products enable our customers to grow their business and retain customers as follows: