Fuel Management: Methods and Techniques Health and Personal Care Logistics Conference, 10-June-2009 Merck & Co., Inc. Paul Jancay, Global Logistics Julie Pentz, Global Procurement

Price Forecasting

Fuel Management: Methods and Techniques This breakout will emphasize initiatives undertaken to confront and manage risk associated with variability of fuel prices Highlight actions taken to develop processes and metrics. Identify barriers to success Discuss lessons learned in the process Participants should be prepared to discuss the risk issues as they relate to their organization.

Agenda Fuel Situation: Past, Present, and Future? Market Intelligence Process Fuel Impact Management Barriers to Implementation Lessons Learned Open Dialogue Encouraged!

Situation: Fuel Costs have increased over 45% in the last three months Still well below $4 per gallon… …but much higher than the $1.75 we were paying at the end of 2008 Supply is high, demand is down Why is Fuel increasing? Should we be concerned?

Don’t forget the past Just because prices are not as high nor as volatile as they had been, don’t think we are over that risk OPEC has a target of $75 to $80 per barrel The economy will recover and demand will increase once again How much will that demand increase? What will we be paying for fuel in 6 months, 1 year, 2 years?

Market Intelligence Process There are factors you can control and those you can’t, but knowing the influences are critical to responding to change and understanding the impact Industry Websites, conferences, white papers, supplier collaborations Energy Information Administration ( Merck Specific Initiatives Energy Procurement collaboration Market Intelligence Center of Expertise De-coupling freight costs and understanding fuel impact

Cross-Procurement Collaboration: Energy Procurement

Cross-Procurement Collaboration: Market Intelligence (MI) Center of Expertise Combination of internal and external resources Centralized MI group to provide industry analysis, market insights, and pricing data Customized alerts, forecasts, and data sources

Calculate the Impact Fuel Cost Fluctuation Has on Freight Cost Partner with suppliers to decouple fuel and then track/measure Ability to model the budget impact associated with variations in fuel costs

Factors That Influence Fuel Prices: Just about everything! Force Majeure/Acts of God Factors Beyond Control Factors that can be Influenced Factors that can be Controlled Hurricanes/ Natural Disasters Infrastructure Issues Legislative Policy Initiatives (e.g. HOS, Port Sec.) Daily Tactical Processes Per Barrel Price of Oil/ Gas Prices Geopolitical Events Governmental Involvement in Global SC Issues Creating / Managing Capacity Terrorist Event/Security Incident Changes Driven by Allocation of Assets - Expenditures Short Term/Long Term Strategic Initiatives (e.g. Networks)

Fuel Prices may not be within our control but we can minimize their impact with management tools and strategies What should you do: Determine how much risk your company can absorb Determine the cost to mitigate the risk that it can not absorb Develop and adopt a strategy Remember the best time to buy an umbrella is before it rains

Merck Risk Mitigation Strategies: Fuel Surcharges Contractually eliminate fuel surcharges Benefits Fuel volatility is blended in rate Budget remains relatively stable regardless of fuel prices Risks Potential to result in higher base rate to cover carrier risk Overpaying for fuel when prices drop Standardize Fuel Surcharges Benefits Ease of audit Minimize variability across providers Shared risk Risks Fuel surcharges may be higher than market conditions across regions Low incentive for carriers to manage fuel consumption Establish Contractual caps on Fuel Surcharges Benefits Identified maximum exposure Risks Carrier absorbs risk for “extreme” price fluctuations

Merck Risk Mitigation Strategies: Daily Tactical Processes Efficient transportation management Back hauls Optimized routes Maximized load factors Reduce transportation requirements Modal shifts Consolidations Ensure compliance to preferred supplier strategy

Merck Risk Mitigation Strategies: Strategic Initiatives Utilize Third Party’s expertise Transportation Management Fuel Management and Consulting Services Network Modeling Green Initiatives EPA’s SmartWay Transport Partnering with strategic providers

What Companies Are Doing To Manage Fuel Impact The Logistics Leadership Board conducted a survey in July 2008 to understand how member organizations respond to rising fuel prices. Key Findings Many companies began to pass fuel costs on to customers (39%) and renegotiating fuel surcharges (36%). An additional 11% and 14%, respectively, plan to employ these practices within the coming year. 68% of companies report increased involvement of other functions in managing fuel spend. The most frequently cited functions were procurement and finance. On average, companies report absorbing 31% of increased fuel costs in lower margins and passing 30% of costs on to customers.

What Companies Are Doing To Manage Fuel Impact What is the appropriate strategy for your company?

What Companies Are Not Doing To Manage Fuel Impact Is anyone using these strategies with success?

Managing Fuel Price Impact How have you managed the impact of fuel prices to your budget? Where does it hurt?

Barriers to Success Fuel Surcharge Management Shippers and Carriers are reluctant to carry all risk “All-in” rate is cost prohibitive Future price is unknown Potential for carriers to walk away or be forced out Daily Tactical Processes Ensuring supply is more critical than optimizing loads Time and temperature sensitive supply chain Limited leverage with carriers High risk cargo Strategic Initiatives Internal resistance to relinquishing control Cost intensive to change transportation management strategy Outside factors limiting ability to move nodes Cost vs. Benefit of of Green Initiatives implementation How have you overcome these barriers?

Lessons Learned Nobody can accurately predict fuel prices… but you can know the inputs AND measure the impact Account for the effects of fuel fluctuations in your budget Standardize and share risk with your suppliers Don’t accept a direct pass through of costs Don’t get lulled into a false sense of security Involve other organizations for different perspectives

OPEN DISCUSSION