June 27, 2019
Inventory management is one of the most difficult aspects of owning a small business — especially for gas station owners.
Whether the gas station or convenience store is a small business, or a massive corporation like Shell and Exxon Mobil, all of them have to manage their gas inventory. Knowing how much gas to order, timing delivery for peak times, and adjusting thereafter are vital aspects of day-to-day operations.
In this article, we’ll discuss how gas stations throughout the United States manage their inventory and how seasonal patterns impact gas usage. Then, we’ll cover a few useful tools that your gas station can take advantage of for managing gas supply and gas deliveries.
Gas usage fluctuates frequently throughout the year in line with holidays and seasons. The summer months are by far one of the most popular times to fill up in the United States. Long road trips, traveling to and from activities, and people enjoying the weather in general lead to an increased demand for gas.
Other popular times are holiday weekends, like Memorial Day and Labor Day, which bookend the summer months, since Americans tend to travel during these extended weekends.
Obviously, the demand for gas will vary from gas station to gas station based on location, local tendencies, and more; however, by studying gas consumption graphs from the US Energy Information Administration (EIA), you can get a good idea of what you should expect.
At the end of the day, inventory volume is very much centered on individual businesses, so as time progresses, your business will become more and more precise with its ordering techniques.
Like most other petroleum products, the biggest impact on the average prices of gas is derived from crude oil prices. However, season also impacts gasoline prices, which is something to consider as you look at the volume you’ll be ordering and selling at different times of the year. In the summer, the United States Environmental Protection Agency (EPA) has higher standards for gas, including a regulation that requires gas to have a lower Reid Vapor Pressure (RVP). Winter-blend gas, as the term is coined, has a higher RVP, because the gas needs to be able to evaporate at lower temperatures in order for cars to function properly.
Keeping in contact with your gasoline provider and building a good relationship with representatives is the best way to manage inventory and stay ahead of price information. Good representatives who have been working in the industry a long time will have a good idea of what to expect for seasonal fluctuations and price changes, and can communicate those expectations to you.
It is important to order gasoline shipments for the proper volume because of how long gas lasts. Gas lasts anywhere from 3 to 6 months, however, gas stations should typically be selling their gas prior to the one month mark.
Not only can gas that sits around too long go bad, but gas stations that either order too much gas or have light traffic can end up with gas that has water in it on account of a condensation process that can occur within tanks. This is not good, since it inhibits the combustion process of vehicles, causing vehicles to run poorly until the contaminated gas is completely run through the system. You definitely would not want to lose customers because of a problem like this.
The inventory turnover ratio shows how effectively you manage your business’s inventory. It measures how many times inventory is sold on average.
You calculate the ITR by comparing the costs of products sold with the average inventory for a period of time. This ratio depends on two main components: sales and stock purchasing. In terms of stock purchasing, for larger amounts of inventory (gasoline) purchased, obviously, the business needs to sell larger amounts to improve its turnover. Otherwise, it will incur storage costs and other holding costs. In terms of gasoline stations, gas is not a durable good. If a gas station orders too much inventory, the product may expire and will no longer be useful.
The formula for inventory turnover is as follows: (cost of goods sold)/(average inventory) = inventory turnover ratio.
Cost of Goods Sold (COGS) – This is the total amount spent on production or acquisition of goods. So if you sell $2,000,000 of gas in a year, and that gas cost your business $1,000,000, then $1,000,000 will be your cost of goods sold.
Average Inventory – Average inventory is the average value of your business’s inventory over a certain time interval. This can be calculated by the following formula: (value of inventory at the beginning of the period + value of the inventory at the end of the period)/2.
Using an inventory turn time calculator, you can easily enter the cost of goods sold and average inventory investment. The calculator mentions average inventory over the last 12 months, however, you may use whatever period you would like.
If your inventory fluctuates, it will be helpful to calculate the inventory on the first and 15th of each month. Because gas prices and shipments will change throughout the summer and through holidays, it will be helpful to calculate with more specific inventory data. Shortening the time period can help you narrow down the specific fluctuations your business experiences.
Once you have your inventory ratio, it is time to make sense of the value. Essentially, the value is simply the number of times over you sold and replaced your inventory. A high ratio implies either strong sales or insufficient inventory. Your goal should always be to have an inventory ratio of 1 or higher.
Dividing the number of days in the calculated period by the inventory turnover ratio will give you how many days it takes you to move each round of inventory purchases within the time interval. The formula is as follows: (inventory turnover ratio)/(number of days in the inventory turnover ratio’s time period) = number of days required to turn over each round of inventory purchases.
Calculating your inventory turn ratio for each month and then calculating the number of days it takes you to move each round of inventory (gasoline) can help you schedule gasoline deliveries on a set interval each month. Recurring, consistent shipments will bring consistency to your business’ operations.
Gas station ordering can be tricky. Much it comes down to how long your station has been in business, since you’ll need to rely heavily on past sales to forecast future ones. When a gas station is starting out, it is best to take a conservative approach. Better to have to call for an extra refill on gas during the month, even if it may cost extra, than to end up with a large amount of wasted gasoline (dead stock).
By continually refining your calculations, you can make sure your system, from delivery by tanker trucks to customers who fill up at the gas pump, is seamless and, most importantly, profitable.
The COVID-19 pandemic is causing disruption for business owners in gas stations industry.
