Marketing Business Processes
Lesson Overview
The Marketing Business Processes Lesson consists of the following topics
- Managing Fuel Inventories
- Managing Fuel Inventories (POS)
- Managing C-store Merchandise Inventories
- Managing Accounts Receivable
- Health Safety & Environment
- Transfer Pricing
- Marketing Organization
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Managing Fuel Inventories
Retailers must segregate and keep track of the various fuel products that are sold through their network of service stations. This is essential to ensure there is no lost inventory and that the mandated state and federals taxes are accurately recorded.
In the US and many countries there is a different tax structure for gasoline and diesel. Some European countries impose a compulsory stock or supply obligation (CSO) on retailers, where they must hold a specific number of days of supply of stock – either at the retail sites or the marketing terminals.
The inventories must be captured and routinely reported to the associated government agency. More sophisticated refiners track inventory information directly from the retail site into their stock management and tanker scheduling systems. So in many cases, the tanker truck shows up automatically when the site inventory begins to run low, without the station dealer having to order a refill.
Point-of-Sale (POS)
Today, most retail sales of transportation fuels are recorded in electronic point-of-sale (POS) computer terminals which receive sales data automatically from the dispensing pumps. Usually on a daily basis, the POS information is uploaded to a central billing facility. Daily reconciliation processes are in place to match the sales receipts with the gallons (or liters) sold to ensure losses are discovered immediately.
Underground fuel inventories are routinely dipped or measured by using a hand-held stick which indicates the actual level of fluid in the tank. POS-recorded sales are then reconciled against actual underground inventories. Periodically, e.g., monthly, the dealer and refiner accounts are reconciled and settled.
C-Store Merchandise Inventories
With the rapid increase in C-store formats, inventories for most retail marketing entities generally include both fuel products and merchandise. Merchandise inventories present very different control issues from fuel. Merchandise suppliers often have their own sophisticated electronic data systems to help the dealer manage inventory and replenishment on the hundreds of different items carried in a convenience store.
Like fuel deliveries and sales, merchandise transactions are recorded in the station’s POS system using bar code scanning technology. Electronic price books are used to automatically keep the item prices current and feed accurate prices directly into the POS system.
Merchandise inventories are physically counted periodically to verify computer system data, and to detect any issues of theft or inventory shrinkage. These inventories typically are valued on a first-in, first-out (FIFO) basis – i.e., a weighted moving average price. In the US, tobacco continues to generate more sales for the retail gasoline station convenience store than any other merchandise category – 35% of total merchandise sales.
Tobacco is also one of the most complicated inventories to manage because of special taxes that must be carefully recorded. The explosion of C-store items may have made it convenient for the shopper – but they are a difficult management problem for oil companies where their core competency is in commodity, bulk, fuel products.
Managing Accounts Receivable
To manage accounts receivable, the fuel supplier calculates a station’s daily revenues based on recorded product sales and station street prices. This amount is directly collected from the dealer’s bank account. For credit card sales, the credit card operator credits the dealer’s bank account directly.
In the past, refiners encouraged retail customers to use their branded credit cards, which were an integral part of the marketing program. Today, more than 75% of US credit sales of gasoline are processed through third-party credit card companies – e.g., Visa, MasterCard, American Express – rather than the refiner’s branded credit card. Those retailers that continue to use a branded card utilize an independent organization to administer their proprietary credit card operations. These service companies are then paid a fee for managing all aspects of the credit card operations.
Credit cards have streamlined the invoice and receivable management process for the refiner-supplier. However, this comes at a cost to the dealer. Third party credit card charges to the dealers are reaching 10 cents/gallon in the US with the gasoline prices in the $3.50/gallon range.
In developing economies, it is common for the government to control and dictate pump prices and subsidize the refiner suppliers. In this case there is a completely different reporting and receivable tracking system needed to manage the government receivable.
Health, Safety, and Environment
Close attention must be paid to safety and environmental issues associated with handling, storing and dispensing flammable fuels. Provisions for environmental cleanup costs vary by country – and by state governments in the US.
The biggest liability in the US is related to compliance with standards for underground storage tanks. In accordance with the US Resource Conservation and Recovery Act of 1984, an Environmental Protection Agency (EPA) office developed the Leaking Underground Storage Tanks (LUST) program. It requires retailers to upgrade, replace and maintain underground tanks in compliance with LUST standards.
The program is funded by a tax on retailers of 1/10 of a cent per gallon sold. As part of their overall process for upgrading US service station sites retailers have spent hundreds of millions of dollars upgrading, replacing and maintaining underground tanks in compliance with the EPA requirements.
Additionally, selling grocery items alongside gasoline presents unique merchandising challenges. For one thing, gasoline fumes usually do not make food particularly appealing, which requires careful attention to site ventilation design.
Transfer Pricing
Transfer pricing formulas are used by some refiners to represent the purchase price for refined products transferred from the refinery to marketing, for subsequent sale to wholesale or retail customers. Transfer price formulas are as varied as the companies that use them, and include:
- Market price, adjusted for location
- Cost plus a designated profit margin
- Another negotiated contract price
Though there is no impact at the consolidated level, transfer pricing causes endless internal debates in most companies because they can shift the profit resulting from downstream operations to either refining or marketing. They also can affect tax liabilities, particularly when they involve transfers between functions in different countries.
So transfer-pricing formulas should have a reasonable basis and be consistently applied.
The Marketing Organization
Every refiner is different, but Marketing Departments are usually organized by channels wholesale and retail, as is shown on the chart. Wholesale is then divided according to class-of-trade, including end user sales like:
- national accounts
- domestic heating oil
- industrial and commercial
- international aviation & marine
Note that lubes and specialties are usually organized by product. Though not the largest part of the refiners sales volume, the leading edge of the business is retail. In the US, the largest part is automotive.
There are a number of functions needed to support the dealer network, listed on the chart. Additionally, effective retail marketing usually requires a geographic sales force for local and regional management of the dealer franchise system.
Finally, planning, strategy, pricing and other functions needed across the wholesale and retail channels are also an integral part of the Marketing Department.
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