The Oil Price Rollercoaster

This year has without a doubt, seen the most volitile oil prices for several decades.  After reaching new record high prices earlier this spring, we close the year with one of the lowest oil prices for many years.

The question that springs to mind is why the price went so high in the first place.

Traditional Economics states that the markets set a price at the point where supply equals demand, if supply falls or demand increases then the price rises, and vice versa.

So what really happened in the early summer of this year, what were the real true physical factors driving the price increases, or was it purely an example of investor speculation.

It we get back in out time machines and travel back a year, then what the forecasters saw for oil consumption was a continued growing demand, both nothing particularly out of the ordinary.

What really happened in 2008? 

There were no invasions of oil producing countries, China continued at the begining of the year to increase it’s demand, but again, nothing that wasn’t particularly unforseeable, the US dollar was strong, but again, it had been for most of the year before.  There was continued political and military uncertainty in Nigeria, but again, nothing drastically different from that of previous years, or what was anticipated.

 All in all, in was expected that global oil production would increase by 2% to cope with 2008’s anticipated demand.

So, if we take the hard and fast, true physical reasons for oil price volatility, with hindsight, there doesn’t seem to be a great deal there.  Which leaves us with the intangilbe reasons, the suspicions & worries of the analysts, and the financial market traders, the doom & gloom dramatic predictions of the world’s media, desperate to find something to grab headlines and viewers, and then speculators, the forward traders & the short traders who place their bets and see where the dice fall.

Hindsight is a wonderfull thing, but sitting here at the end of a turbulent year, I really wonder just how much of the whole “oil crisis” was down to speculators making money, and how long the rest of the world will be paying for it.

DHL Ceo says Retail Companies are in de-stocking panic

John Mullen, the CEO of DHL, in an interview with the Times, likened the High Street Retail Stores panic destocking as the equivalent to a run on the banks.

A quick walk around the High Street will tell you that they have all given way.  And that even the hardest nosed of the retailers, those that target the upper end of the market and resist the urge to cut prices before Christmas, are now brandishing “20% off everything” signs all over their stores.

Even the ultimate January Sale – Harrods,  are going early this this year.  Harrolds, who have never in their history started their January Sales until the first working day after the new year, start their Sale on December 27th, as well has having 30% off various departments and seasonal reductions already.

The retailers seem to be dumping stocks as quickly as possible, in fear that there will simply be no future demand by shoppers, (even those companies who are generating profits and whose books are sound) and this creates the risk that this has become a self fullfilling prophesy. 

We saw in the last weeks of November and the First week of December a standoff between the retailers and the shoppers.  Retailers were holding off cutting prices in the hope that the shoppers would start buying, and the shoppers were holding off waiting for the retailers to drop the prices.  The shoppers won, and now all retailers are dropping prices further and further desperate to grab a bit of that Christmas spend.

The problem with such a large reduction in inventory levels is that it is likely to hinder the recovery, which will eventually come.  When companies have low invetory levels it prevents them from reacting quickly and flexibly to any upswing in demand.

Citylink Results show hope for Rentokills Parcel Division

Citylinks Q3 results recently published show that although the company is still a major loss making company, it is reversing some of the trends that have contributed to its previously stuggling history.

Citylink states that it still on course to make a £45 million loss for the 2008 year, however it is pleased to say that the losses are reducing by £1m per month due to cost reducing strategies including reducing the vehicle fleet by 10% and employee numbers by around 1000 during the last year.

A major turnaround as far as Citylink is concerned is concerning customer service.  In the year to April 2008 Citylink made £20m worth of credits to its customers, for late or non deliveries, breakages, losses etc.  Improving customer service has been a major target for Citylink, and recent results indicate that Citylink is now providing a 99% on time service, which is operational excellence as far as the parcel industry is concerned, as a result credits to customers for the next twelve months are expected to be 75% lower at only £5m.

All of this has been acheived in what Alan Brown (CEO of Rentokill) describes as a “rawly flat” market, with a worsening revenue trend.

The challenge for Citylink, and all of the parcel networks, will be delivering the Christmas parcels. 

Traditionally the spending for Christmas starts in November, and November’s parcel volumes show the start of the Christmas rush.  This year however, it looks as if November’s parcel numbers will show little or no increase on Octobers.  Alan Brown voices concern that there could be a “huge surge” in the last two weeks of December, and that the logistics and distribution industries are on “tenderhooks” waiting for the seasonal uplift to start.

The overall statement that sums up the entire industry very well is that it is in a “complicated situation”.  And that is a fair summary.

New Thinking for Home Deliveries

For Couriers, the home delivery market is always one of the most troublesome.   When a company delivers to a business address, you know that during normal office hours you’ve got a 99.9% chance of someone being there to accept the consignment.

 

The home delivery market is different, most households have one if not both adults working full time, and necessary tasks such as school runs mean that even if someone is at home all day to receive the parcel, there will still be times when there is no-one in.

 

Some of the large parcel carriers have effectively “opted-out” of this market place, leaving companies such as DHL to take up the baton.  But this still causes problems, and DHL probably have one of the larger incidences of re-deliveries, simply because they are delivering to empty houses.

 

Why is this a problem?  Some might argue that if you are not going to be in to receive a parcel then you should make alternative delivery arrangements.  However it’s not always that simple.  Many merchants can’t ship to addresses other than the one on authorised with the credit card payment, if they do so they invalidate all fraud protection from their payment processor.  And Saturday morning deliveries are still prohibitively expensive.

 

Parcelforce have recently introduced a PM service, which does guarantee you delivery of your item in the afternoon, as opposed to the morning, meaning that the customer only has to wait in for half of the day.  DHL have also launched the “at home” service meaning that deliveries can be made as late as 9pm

 

It is a problem because online retail is one of the fastest growing, irreverseable trends.  And delivering to consumers who got to work is a problem that the parcel and distribution networks need to solve.

 

One company is looking at things differently, the ByBox distribution revolution – a new convenient, flexible and green delivery service for consumers .  Bybox is offering consumers a new system that lets them choose a convenient time and place to collect their parcels.

 

Boybox has operated a similar delivery system for the business world, for customers such as Sky, who have large numbers of field operatives needing supplies, but not in the quantities that justify regular trips to a distribution centre, and for operatives that have no premises or storage other than their vehicle.   The company has a network of secure lockers, in garages and other easily accessible premises, Bybox deliver to the locker and the engineers collect when convenient.

 

The key to the new ByBox consumer service is its UK-wide network of box banks, which are served by a central hub and a number of regional distribution centres. When a consumer orders goods and selects the ByBox delivery option they nominate the box bank most convenient to their location.

 

Once picked and packed, ByBox collects the goods from the retailer, transports them through its network and delivers them into the selected box.  Customers receive notification that the goods are ready for collection by email or text message, along with the security code they will need to open the box. They travel to the location, perhaps on their way to or from work, enter the access code and retrieve their goods.

 

Bybox intend on developing their network of lockers to include premises such as supermarkets, railway stations, airports, etc.  How keen these partners may be is still unknown.  Yes, Supermarkets would definitely benefit from the additional visit by their regular customers, who will undoubtedly pop in for a few groceries whilst they are there.  But will these partners be willing to take on the risk.  A whole bank of lockers, a few weeks before Christmas, full of high value electronic items would be a prime target for thieves.  Particularly if such items are being delivered at night when the store is shut.

 

Potentially Bybox could reduce or maybe even eliminate the issues of redeliveries, but conversely, what happens when the consumer doesn’t collect their parcel, will the parcel remain there for a couple of days or a couple of weeks.

 

It will be interesting to see if a concept that has worked well for field engineers can be successfully rolled out to meet the needs of probably the least flexible and most demanding market, that of the private consumer.  One to watch.

 

Van Running Costs – How much does it cost per mile?

Same day and next day couriers price their jobs usually based on a set price per mile.  At present in the UK, this price is around £1 to £1.50 per mile, depending on the company that you use, and the load in question.

Many customers look at this and think that this is an extortionate rate, particularly when you  consider that many customers are comparing the courier price with the price of a next day parcel service.

So what makes up this price, apart from the obvious fuel etc, what other costs do couriers need to consider when setting their prices.

1. Fuel.  We’ll start with the obvious one.  This works out at around 102p per litre, for diesel vehicles with engine capacities over 2000cc.  If you have a well maintained van, the 30 mpg should be achievable.   Making the cost per mile around 15-16p per mile.
2. Depreciation.  Say a new van costs around £25,000, and in 3 years it has a resale value of around £10,000 then that’s £15,000 of depreciation that needs to be included in the costings.
3. Financing Charges.  Very few van drivers or couriers can afford to pay for a new van in cash, and so that means that there is either bank interest, loan interest, or HP/Finance costs to be borne.  These will average around £4,500 depending obviously on the deals and rates around at the time.  Currently, these are very thin on the ground.
4. Tyres, Parts, Servicing.  If you’ve got a brand new van, then you should be lucky and get away with around £600 a year on servicing and tyres.  If the vehicle is older then these costs are going to be increased.
5. Insurance.  Van insurance is not cheap.  Van drivers often pay higher premiums due to the “higher risk” they are exposed to by the number of miles that they drive every year.  The average car driver drives 12,000 miles per year, a normal courier will be looking at least quadruple that, maybe even upwards of 90,000 miles per year.  Couriers van insurance also carrier premiums for goods in transit insurance, to ensure that the products that they carry for their customers are properly insured against loss or damage.
6. RFT & Breakdown insurances.  A necessary, unavoidable expense for all road users.  And if you earn your living by driving, you need to ensure that you have cover to keep your vehicle on the road.

If you add up all of these expenses, and work out a cost per mile, it comes in around 83p.  But there are two  very important cost that isn’t included in the list.  And that’s time.  The time of the driver, ie his wages, and the margin that the company/business requires to contribute towards the businesses fixed costs and overheads (for example telephone, office staff, premises, bank charges etc).

So, when the courier is asking £1 a mile, it isn’t really that expensive, it’s simply a fair reflection of the costs involved, and unfortunatley many people (couriers as well as customers) have a tendencey to underestimate those costs.