There is a poignant scene in Back to the Future where Marty notices a photo of his family starting to fade and ultimately the family disappears entirely, almost eliminating Marty himself! One small butterfly effect with space-time causes the problem and another separate butterfly effect not only fixes the disappearing family member issue, but creates an optimized future. Therein lies the key to perfecting the time machine for the fuel industry; it must consider all family members (market participants) and their essentiality to avoid losing crucial components such as volume allocation, cash, customers and wreaking havoc on the supply chain.
Let’s start with volume allocation, which is assigned by the refiner based on the financials of their wholesale customer and then extrapolated based on the price of fuel and the associated pay terms. Now consider the present context of rising crude oil prices, increasing demand, and the onset of winter weather. Reducing wholesaler volume allocation at precisely the time they need more is not in the best interest of the refiner nor the end-customer. If the time machine can somehow turn the nine days of credit risk to one day for instance, that component stays intact and even thrives at precisely the best time for the refiner, i.e., higher volume at higher margin.
Next, let’s look at cash, which is the heartbeat of the wholesale customer. Generating more cash is not easy in this environment, let alone in an industry with notoriously small margins and undergoing a structural transition. A time machine that can somehow enable the wholesale customer to preserve cash on-hand to match their own receivables is like developing the heart stamina for a marathon. This type of newfound stamina at the wholesaler level is not only ideal for the refiner, but also for the market participant sitting at the last leg of the supply chain, the end-consumer.
The end-consumer fleet, retailer or other commercial user, utilizes the fuel. Rising demand means that end-consumers need to know the optimal times to purchase because the wholesale supplier or refiner is implementing constraints. There is no doubt that the end-consumer will inevitably have to pay the tab as prices rise. However, the ideal time machine can offset the sticker shock of rising prices if the consumer can stretch payment terms out to two or three times the traditional scenario of 10 days or less. In summary, the time machine MUST consider the well-being of the entire family to keep them in the picture. The time machine functionally needs to be able to accelerate time and cashflow for some, slow it down and preserve cashflow for others, all the while keeping the supply chain moving. Now that we’ve established WHAT the time machine must do, we’ll conclude our series with the HOW in the final installment!
