How ServiceMaster Developed a Cost-Effective Fuel Purchasing System
With one of the largest vehicle fleets in the United States and a 2002 fuel spend of approximately $50 million, fuel procurement was a key priority of ServiceMaster’s 2002 strategic sourcing initiative. Rather than incrementally improving its existing systems, the company designed and implemented a state-of-the-art fuel purchasing system that would generate significant in-period and end-state savings.
Faced with an aggressive timeline, ServiceMaster’s Strategic Sourcing Group (SSG) led the project, assisted by the Boston Consulting Group. Realizing the importance of understanding the company’s spend pattern, the team spent six weeks at the project’s beginning compiling a spend database and identifying the key savings levers. Based on its findings, the team designed and implemented a company-wide fuel purchasing system, which by the year’s end had generated savings of 7 percent and promised a significantly higher end-state run rate.
Uncovering Key Savings Levers
The initial analysis indicated that to reduce its fuel spend, ServiceMaster needed to purchase fuel from the lowest-cost gasoline stations, eliminate cash purchases, and obtain volume discounts. Purchasing fuel from the lowest-cost, local gasoline stations was the biggest challenge ServiceMaster faced. Analyzing fuel-pricing variations in local markets, the team estimated this opportunity to be worth approximately 5-8 percent per annum. Realizing this savings, however, required not only a behavioral shift across the ServiceMaster organization, but also continuous monitoring.
The team further estimated that ServiceMaster could trim its fuel spend by 5-10 percent by eliminating cash purchases. In the past, the company had been unable to stop cash purchases of unauthorized items. At the same time, cash purchases usually weren’t properly documented, preventing ServiceMaster from claiming state or federal tax credits for off-road fuel usage.
Finally, by leveraging its purchase volume, ServiceMaster could negotiate additional local or national discounts. At the local level, branch managers could negotiate reduced prices with low-cost local gasoline stations in exchange for an annual volume commitment. At a national level, a centralized fuel purchasing system would enable ServiceMaster to negotiate a volume rebate with its fuel card provider. Overall, the team estimated this opportunity would save approximately 1-2 percent per annum.
Designing the System
To capture the identified savings opportunities, ServiceMaster needed to consolidate fuel purchases to a single fuel card. With a single fuel card, ServiceMaster’s fleet department could obtain a detailed record for each transaction to use for benchmarking purposes. Compiling this information in local and regional scorecards, the department could easily identify branches or regions requiring help and work with them to develop tailor-made follow-up plans. In addition, with minor modifications, the information could be used by ServiceMaster to apply for state and federal tax credits.
A fuel card would also enable ServiceMaster to further reduce the use of cash and minimize the purchase of unauthorized items at the local gasoline station level. Questionable purchases would be highlighted in exception reports, allowing branch managers to identify and address potential issues. Finally, by consolidating its spend to a single fuel card, ServiceMaster could negotiate a volume discount from its fuel card vendor.
To evaluate potential fuel card vendors, the team started by overlaying the geographical footprint of each network to the branch locations of ServiceMaster. In addition, team members probed each vendor’s ability to restrict purchases at the gasoline station level and to generate exception reports based on specific decision rules. Understanding the data processing capabilities of each vendor was essential, as detailed electronic data was necessary to drive company-wide compliance.
A small number of qualified vendors was identified, and their implementation capabilities were assessed. A company-wide ServiceMaster roll-out required creating more than 1,000 branch accounts and issuing approximately 30,000 cards within a two-month period. Of the vendors capable of meeting the company’s deadlines, volume rebates became the final decision criterion.
Driving Organizational Change
Unlike some procurement categories where centralized purchasing guarantees compliance, fuel compliance relies on thousands of drivers making the right choice every day. This obstacle was complicated further by ServiceMaster’s multiple business units operations located in nearly all 50 states.
Tight deadlines prevented team visits to each branch to present its findings. Instead, the group worked with the COO of each business unit to develop consistent corporate communications that explained the savings opportunity for each branch. At the same time, a set of scorecards was developed that enabled branch managers to track performance on a historical basis and compare progress against other branches in their region.
The branch scorecards are extremely detailed, including savings estimates the branch generates if fuel is purchased from the lowest-cost gasoline stations in its area. To assist branch managers in steering drivers towards these stations, scorecards include a list of the lowest-cost stations for the previous month, as well as an Internet link containing a customized, continuously updated list of low-cost stations. In addition, branch managers received customized exception reports to identify and address compliance issues.
Trying to insulate historical performance comparisons from the inherent volatility of fuel pricing, the team included within each scorecard an additional metric measuring the retail margin paid per gallon of fuel. Assuming that branch managers succeeded in shifting fuel purchases to the lowest-cost gasoline stations, sourcing savings could be generated even if retail prices increased.
Branch scorecards were supplemented by regional and business unit scorecards allowing each business unit to track monthly progress against plan. If a branch failed to meet its target, ServiceMaster’s corporate fleet department worked with the regional and branch manager to develop a set of specific follow-up actions to address the problem.
Reducing Fuel Costs Significantly
Two years later, the program has succeeded in reducing ServiceMaster’s fuel costs significantly. The process identified key factors for the successful implementation of a fuel sourcing system.
Understand the company’s spend pattern and develop a customized sourcing system.
Use identified savings opportunities to generate momentum for the fuel program.
Gain essential operational support at the branch level.
Finally, institute a strong compliance mechanism.