Banking on the future

McDowall Company forward-purchases fuel and other commodities to maintain cost control

By Clair Urbain

This summer was a wild ride when it came to fuel and commodity prices. Hurricanes in the Gulf destroyed any stability in the market and worldwide demand continued to tick upward. Result: little price relief is likely.

Similarly, building materials are going for a rocket ride because demand from developing countries as well as efforts to rebuild the Gulf Coast have dramatically increased consumption.

Fuel costs factored into bids a year or two ago likely fall at least 40 percent short of today’s prices. Those higher prices eat into already thin profit margins.

But for McDowall Co., a commercial HVAC and roofing contractor and maintenance service provider in St. Cloud, Minnesota, the fuel bite hasn’t been as deep, thanks to its involvement in a unique fuel bank.

Throughout the summer of 2005, John McDowall, company president, says the contracting firm paid no more than $1.95 per gal. for fuel. He purchased six month’s worth of fuel for his company in June 2005, locking in under the $2/gal. price.

Since 1983, McDowall has forward-purchased fuel for his fleet of 60 vehicles through First Fuel Banks, a local business that truly acts as a bank for fuel for customers in central Minnesota.

“Over the years, I can conservatively say that I have saved 10 percent of the cost of fuel by purchasing it ahead,” says McDowall, a fourth-generation contractor operated by himself and two brothers, with fifth-generation members working in the business. They employ approximately 100 workers.

“The cost savings are attractive, but the real benefit is having such complete control over fuel costs. I know which vehicle used how much fuel and by which driver. We can get very accurate transportation costs this way, which helps us bid more accurately. When school and hospital projects are bid they can sometimes take one or two years to complete, and locking in our costs at that time helps us maintain our cost structure,” he says.

Once a vehicle comes into the fleet, the vehicle’s information is put into First Fuel Bank’s system. The person responsible for the vehicle is issued a credit-card sized access card. When an employee needs fuel in a company vehicle, that individual inserts the card into a pump’s card reader at one of First Fuel Bank’s five locations in the greater St. Cloud area. After entering a PIN number and vehicle mileage, the employee can dispense fuel. The system prevents any user from putting the wrong fuel type in a vehicle and won’t allow pumping if the entered PIN number or mileage don’t match.

All fuel pumped is tracked against McDowall’s inventory of pre-purchased fuel, and McDowall gets a detailed online report at the end of every month.

“The report shares where the vehicle was fueled, the mileage traveled and the fuel economy. If fuel economy takes a dip, we alert our maintenance personnel to check out the vehicle to make sure there’s nothing wrong mechanically. The control is phenomenal. It helps us verify and keep track of our costs on every project,” he says.

The program works especially well for the firm because workers almost always come back to St. Cloud every day. “Occasionally, we’ll get a project farther way from here and workers have to fill up away from St. Cloud. That is rare, so we have good ongoing feedback on fuel costs,” says McDowall.

Timing is everything
First Fuel Banks is a private company with more than 8,000 customers on its books, each owning as little as $2 worth of fuel to more than $375,000.

“We run this just like a bank. The fuel is our asset that must be handled correctly,” says First Fuel Banks CEO Jim Feneis. “Customers must realize that this is an unsecured deposit, but after 23 years of business, we have a track record that eases most concerns.”

Feneis says the business model works on hedging contracts on the New York Mercantile Exchange. With futures contracts, he locks in fuel prices and adjusts the customer price accordingly.

“Each of the five stations can hold at least 50,000 gal. of each of the types of fuel the First Fuel Banks sells,” says Feneis, “Most convenience store gas stations have only 8,000 to 10,000 gal. of storage for all the grades they sell.”

With that much storage at five locations, the First Fuel Banks can weather price swings and, if customers buy right, save them money.

“It’s not rocket science. Anyone can do this by retrofitting a gas station and locking in on a price. It’s all economics and logistics. It’s my customers’ job to decide when they want to buy and it’s my job to make sure the fuel is there when they want to use it. It’s a unique system for the savvy buyer to lock in a fuel cost for a certain amount of fuel. It is a great service for fleets. They can lock in their costs for fuel,” he says.

Because McDowall’s forte is construction, he will rely on Feneis’ advice when to consider fuel purchases. “I follow the market, but I also ask Jim his opinion. Jim can offer great insight because he has a direct link to the New York Mercantile Exchange and watches changes in the market minute by minute. As our company works through the fuel we purchased before it went over $2/gal., we need to decide when we’ll purchase again and how much. I have flexibility – I can buy enough to go from month to month until the price settles down, or purchase enough for several months to lock in a price. With this program, I have bought up to a year’s worth of fuel ahead.

“It’s my decision and if the price turns the wrong way, it is still my fuel and I have to live with that purchasing decision. There is a risk. I was able to save as much as $3,000 a month before the market went nuts. After Hurricanes Katrina and Rita, it’s closer to $4,000 per month. But even with the market swings, I like the amount of control this offers our company. Even if there were no cost savings, I would use it because of the control it offers. It’s very convenient for employees,” McDowall says.

McDowall has learned that watching the price on local gas station marquees is not the best indicator of what the market is doing. “The posted street price, on occasion, can be under cost, based on competition down the road. The marquee may say it’s $2.69, but the replacement price per gal. is $2.72. That’s why it’s good to get to know someone who watches the market closely. I know of many people who talk with their stockbroker every day. I talk with Jim Feneis every few days to get a better read on fuel prices, based on what I follow.”

Buying ahead other materials
As markets heat up and building material availability tightens, McDowall has taken his buying-ahead strategy into his shop. The company equipped the shop with an Iowa Precision automated coil line that takes an 11-step process of making ductwork into one automated step. It can be loaded with five types of 60"-wide coil, ranging from 18 to 26 gauge.

McDowall purchased three truckloads of coil just as Hurricane Katrina began whooping it up in the Gulf. “That move saved us close to $20,000,” he says.

While the raw material savings impress Pete Holmgren, McDowall Co. shop foreman, he says the coil line itself saved time and, in turn, money.

“The coil line can knock out a piece of ductwork in a minute that would take 10 minutes to construct by hand,” he says.

The line requires more technical expertise than tin-fitting layout expertise to operate. “You need craftsman expertise to set up the unit in the first place, but after set up is finished, more technical skills are needed,” he says. The same is true for the variety of CNC-controlled brakes and other metal-forming equipment brought into the shop over the past five years.

With increased throughput in the shop, material handling becomes the No. 1 bottleneck. “We have made production as straight-through as possible with our layout. We put as much of our work on rolling tables as we can so we can move it easily from station to station,” Holmgren says.

Flat sheet metal storage in the shop was moved to cantilevered shelves near each metal brake or workstation. “We can load the shelves with our forklift, then feed off the sheets one at a time right onto the work area,” Holmgren says.

Like buying fuel ahead of time, purchasing raw materials in bulk offers McDowall Co. greater control over costs. With high energy costs and escalating building material prices, any amount of savings brings welcome relief.

Published in the November/December 2005 issue of Contractor Tools and Supplies magazine.

back to top