Economics of Technology; Remote Tank MonitoringNPGA International Expo 2016 – Nashville, TN

April 8, 2016

We thank the NPGA Convention Committee, Mike Hopsicker, Chairman, Kristen White and Katie Hathaway for doing an outstanding job in putting this Expo together. Attendance is up over all recent years and exhibitors responded to give you a premier Trade Show. We hope you take full advantage of this networking opportunity. You will have an exciting time. We also would like thank NPGA Members who dedicated their time and resources to make this Convention what it is destined to become.

It really is a pleasure to be part of the 2016 NPGA/Southeast Expo hosted for the first time in Music City. Davidson County did well, Nashville becoming the new Atlanta. As a resident here since 1998, I can assure you this is a unique city; though very liberal in ideology so keep that in mind as you move around town. Looking to the future, we will be here in 2017, then back to Atlanta in 2018 and back in Nashville the year following and so on and so forth. We are taking this show, for a CHANGE, on the road!

It is fitting that we hold this educational seminar in this new facility because the propane industry has gone through considerable CHANGE recently. More CHANGE is on the way. New technologies will lead it: Our industry not the only business seeing CHANGE.

Certainly, technology has CHANGED the world. In the propane industry, the last ten years has seen the most CHANGE since the advent of the mechanical float gauge 50+ years ago. The next

10 years will see even more CHANGE ...... In short, .......

Tom Jaenicke, of ATomiK Creative Solutions, PERC and other affiliations, asked me last summer if we had a word or two of knowledge we could impart to you today. Without any hesitation whatsoever, I told Tom that we did. Then I thought, “What are we going to tell you?”

Well, the first thought that came to mind was to tell you that a picture is worth a thousand words and that I intend to use both, pictures and words! The first picture is how we get things done here in Tennessee. You might use some of this technology in your town, too.

The next thought was to provide you with ideas on some.... NEWER .... technologies that might be just as good as these older, reliable techniques we have used to solve problems in the past. To do so, I have asked Brian Humphrey, COO of InSite Platform Partners, Inc./North American Satellite to provide you with .... ECONOMICS ..... you need to consider when deploying these new technologies. In respect to the technology itself, he can speak on the new CHANGES in one type of machine. Together, they will drive the ECONOMICS OF TECHNOLGY.

To help set the stage on how we may have to .... CHANGE .... to become more efficient and profitable, let’s watch some TV................

Well, we better conduct some business so we don’t get into trouble with management, but this makes a solid point. Some folks resist CHANGE; sometimes with valid reason. Not all CHANGE is good.

But, as we are not from the government, we are here to help, not just “CHANGE you can Believe In,” but CHANGE we can demonstrate and prove!

Let’s talk about Economics of Technology as it relates to Delivery Optimization, Customer Profitability and how your company is viewed locally. One technology that is easy to deploy and delivers all of the above is Remote Tank Monitoring.”

Today, you have a number of remote tank monitoring choices. PERC issued a report a few years ago and Randy Doyle, inside an NPGA Benchmark Committee, followed-up. Basically, tank monitoring companies purport to do one thing, monitor the liquid levels at your bulk plants and in your customer’s tanks. Some do more. They offer income streams for monitoring other events such as CO Levels, propane leaks, inside and out, out-of-ordinary-events and etc.

In doing so, all remote tank monitoring companies have .........

...............

First is radio frequency or RF. RF transmission is limited to a distance between the length of a football field up to a mile or so, depending upon how much interference you want to tolerate from foliage, cell towers, and the daughter’s stereo. You either have to drive your truck within range of the signal (which is counter-productive) or you need to install a controller inside the customer’s home to receive the RF signal, which then is re-transmitted by one of the other data transport methods, such as the .......

Second method, which is hard-wired phone. Of course, a lot of people today no longer have land-line telephones. They use their cell phone, which is method number ................

Three. Of course, this is mobile or cellular networks that can be utilized to transmit data through.

Fourth is the use of broadband, which usually relies on other data transport technologies, such as RF, cellular, etc.

Fifth, and newest, is satellite transmitters, which may operate as stand-alone from the tank to orbital satellites, or are connected in relay of RF or cellular signals over to a satellite transmitter hard wired to the customer’s home. Satellite remote-tank monitors work much like DIRECTV, XM/Sirius Satellite Radios, and DISH Network, but off of a different fleet of satellites. Instead of bouncing signals off of high orbit geo-synchronous satellites around the globe at the equator, these systems use the Low Earth Orbital (LEO) satellites. These birds eliminate rain-fade that can be experienced with your satellite television. They also eliminate having to install controllers in trucks or in your customer’s home, which connect to your customer’s power and telephone lines.

The bottom line, all of these systems work. It is the dealer’s choice of transmission method used. All deliver, in different formats, tank levels and other information. So, the real question is what are the economics behind tank monitoring in general? Accordingly, this session is entitled “Economics of Technology: Remote Tank Monitoring.”

.................

This session offers something for everyone, the owners, delivery persons, office personnel and the bean counters of any organization. Managers/Bankers particularly like this part.

As hundreds of dealers have adopted one or more remote tank monitoring technologies with varying degrees of success, timing is right for us to be here today. In your business, effective scheduling and routing requires reliable data each day to schedule maximum gallon deliveries in the fewest stops and with the fewest miles driven. Dispatchers use technology to prevent a bobtail from being driven to keep people busy or looking for delivery drops. Bobtails driven into the same area(s) repeatedly and/or returning to the plant with product still on-board, wastes time, manpower and fuel, not to mention wear and tear on vehicles and roadways. So economics demand Performance Management and the development of a “business culture.” which seeks new ways to improve gallons per stop and reduce miles driven.

This evolves into Delivery Management (DM), which is a system that provides reliable customer use data. Delivery Management should include remote tank gauge technology in any instance where a customer’s use cannot be accurately predicted and where a “milk-man” route is occurring in fear a customer might run out. This includes sizing of the tank with a customer’s usage to minimize the number of stops per year (Customer Profitability Analysis, or CPA).

Tank monitoring can fulfill all of these requirements. Monitoring provides the hard data so the dealer can intelligently select the most cost-effective vehicle combination (cab, chassis and barrel for the most efficient delivery of gas), evaluate the delivery itself, and size service fleets in order to have no more trucks than necessary. A recent CHANGE is tank monitoring is the ability to now turn customer storage into tertiary storage, which would have been a great thing to have had two years ago ..... when we went into winter with 40% of customer tanks on the bottom half. The idea is to keep boundaries between drivers, fleets, tanks, end-users and branches sharp and clean. A formidable task by itself, but Remote-Tank Monitoring can easily bring all of these business necessities together in one application.

Having been a propane marketer myself for 30 years and struggling with the same issues then that still face you today, I might have something to share with you. Over two dozen independent propane dealers joined with me ten years ago --- and before that Milfford Therrell of Squibb-Taylor ---to help develop a new technology. Today we have seen hundreds of dealers not only adopt remote tank

monitoring technology, but deploy the technology successfully. So, timing is right for your business and our industry.

As always, marketers are trying to achieve and sustain efficiency in bobtail routing, gallons per stop, gallons per mile, customer retention, customer growth, sizing of customer storage, etc. It is the nature of this industry, but competition, increasing costs and a CHANGING environment of new technology now makes it strategically imperative that you be able to effectively manage performance, technology and to implement CHANGE.

.................... dollar justifications ......To begin, we used a former State of the Industry Survey, as collected from propane distributors by LP-Gas Magazine. This year we update it. We sent new surveys to over 1,500 propane and refined fuel dealers nationwide.

While the numbers used in this report are in US dollars and standard gallons, they can be applied to markets in other countries using typical monetary exchange rates or metric conversion(s). We do recognize that hydro-carbon prices in most countries generally exceed US retail charges, on BTU equivalence, but the concept is overall the same for Remote Tank Monitoring technology applications.

What our survey said:

First, let’s look at where the industry is today. According to our survey dealers still said “Quick Response to Problems” topped the list of customer concerns. Dealers interpreted this, according to the survey as “Customer Loyalty.” Dependable Tank Monitoring and Refilling” was second.

Loyalty comes from great relationships based on areas truly valuable to your customers. Dependable tank monitoring and refilling means a seamless, transparent service of your company’s tank fill operations.

Now let’s look at some general numbers from your businesseses’ demographics before considering

economic justification for a technology investment. So, ...........

Next, how important are those customers ….. (Percent of retailer’s revenue)

In short, your Residential Business is Vital!! Your Retail Customer Loyalty is Crucial!

Interestingly enough, low price was at the bottom of the survey and, while 74% of the survey’s respondents believed that they lost customers due to price, the average loss was less than 1.0%. So, in theory, the price you charge is controllable. You can set your price as you see fit. But,

being practical, the floor is determined by your cost, and the ceiling is dictated by your competition, unless you offer value added or other ancillary services that you can charge for, like tank monitoring.

Simple enough, but not cheap, so let’s look at how to give the customer what the customer wants, but do it efficiently and effectively for you. Let’s evaluate your delivery costs ………..

Several different methods are being used today to calculate delivery costs. The most common is the “Cost Per Stop.” The lowest “Per Stop” rate we have heard from dealers is around $75.00 USD. Frankly, I believe this is what we used years ago, but for the sake of comparison, let’s look at a “PICTURE” of it anyway. So, using $75.00 as your Cost Per-Stop and applying that rate against varying per gallon margins, your profits would be:

Notes: i) Nothing is left for you with a 100 gallon minimum delivery. A 300 gallon deliver is better but only with a $.60 margin can you clear $100.00+, 300 gallon deliveries are still the target.

To make a profit, you must know real-time tank levels before you go. Remember, not running out of gas is your customer’s number two concern. It is also yours and your insurance companies’ as, according to the carriers, 85% of the industries’ accidents have occurred in out-of-gas situations.

Note: This is a little better with a $.60 margin, but 100-gallon stops are still out. Even at a minimum average fill of 200 gallons, you only made $75.00.

As you can see, as cost of delivery goes up (COGS), your margin and gallons per stop must follow.In short, we cannot afford to make small drops or wasted stops; particularly any delivery under 200 gallons, In fact, under any of these scenarios, 200 gallon deliveries are far from profitable. ..........

SO STOP IT! You must find new ways to make less stops per customer while delivering more gallons.

.............

He is right. Let’s look at that statement a little closer. This is the history of one of our dealers whose tank we monitor for their end-user. I have this dealer’s permission to use this data, so long as the customer or location is not revealed. So meet the fictitious Claude Frickard of Buck Snort, TN, a dubious character at best, but a good propane user nonetheless.

As you can see, Claude’s use is erratic. He is a 24/7 end-user, but a number of factors dictate sporadic consumption. In the past, Claude’s propane dealer delivered to his tank every third day because there was enough instances during each month that Claude’s consumption required a delivery every three days. This was not consistent though. There were as many instances each and every month that consumption was a fourth, half or none of the above. That resulted in wasted trips and inefficient use of drivers, trucks and back-office personnel to process those extra short-gallon stops. This dealer ultimately discovered that if you eliminate short-fills, you will cut miles and deliver more gallons per stop? This should be your goal today!

For the bean counters - - - let’s dissect these per-stop costs. First, they seem to run higher, according to the industry survey”, for independents and majors than for mid-size or regional companies. To begin, let’s look at the average gallons the Survey reported were sold per bobtail annually. We will use an average 1,000MM to 1,999MM gallon per year/per distributor (plant/district) as shown below for all remaining calculations.

With the average size marketer being 1 million to 2 million gallons per year: requiring three to four bobtails on average .................. Your peers say that you average 33.0 miles driven per year, per customer. (Not per trip but over the course of the year to service a particular customer, including ancillary miles).

The industry survey said that you average 787 gallons per customer per year, or the bobtail is driven about 24 miles per gallon sold (787 ÷ 33 miles per year).

Let’s start with Vehicle Costs:

Overall benefits have gone down, but maybe it is because wages have gone up: According to industry reports, the average pay for drivers is $16.26 USD p/hr. Add to this payroll taxes and benefits, and the average driver cost is $45,928.28 per year. Divide that figure by the Average Customers Serviced per Service Vehicle (according to the survey it is 900), and your driver cost is $51.03 p/year per/ customer.

Back-office support, your executive salary and a ROI on customer tank assets, bulk-plant and service vehicles must still be added. A Customer Service Representative, at a rate of $10.00 USD per hour, with taxes and some benefits will cost you $23,800.00 USD per year, or $26.44 USD per year/per customer.

For yourself, you should add at least double your driver’s cost to your business then divide that sum by all of your customers. For the average dealership, that is 2,467 end-users according to NPGA, or $36.74

per year, per customer.

Investment in Bulk Plant, customer storage with blocks, regulators and pigtails and inventory, A/R, tools, office furnishings and technology deployment totals $3,215,500.00. ROI over a five-year term and for 2,500 customers would be $235.24 USD per customer. It took two slides to get to this figure. Please follow:

This means that each customer costs you each year:

No matter how you cut this, for a residential customer, your cost per stop is well over $75.00. In fact, it is over $100.00 per stop ………. So, Lets look at our “PICTURES of Profit” on Delivery charts once again, only this time we will use a $110.00 USD per stop cost of delivery with a higher, $.95 per/gal., average margin. This is:

The “PICTURE” changes once you include all of your real Operating Costs of doing business. Over 240 gallons per stop are required to clear a $100.00 Gross Margin, so 100 gallon deliveries are definitely out;

we don’t go there! ……. So, the task today is to increase gallons per stop, which will automatically reduce the number of stops per year. The question is how to accomplish that end:

• It means no more wasted stops....... STOP IT!.

• It means knowing what the propane level is in your customer’s tank before your truck leaves the plant yard! You can no longer guess and hope for the best ..... STOP IT!

• And, it means changing the way you do business .......... STOP IT OR I WILL BURY YOU ALIVE IN A BOX!

Your propane operation requires that a lot of data be managed with imperfect tools, seasonality of business, vastly different resources and that you assemble a motivated, focused and competent workforce. It also includes efficient deployment of all of these but, the most important requirement is LEADERSHIP BY YOU!

In short, bobtail efficiency challenges are pretty much the same. Industry Consultant, Randall Doyle, has defined efficient bobtail operations as:

1. Effective Scheduling and Routing requires reliable data each day to plan schedules to maximize gallons delivered in the fewest stops and with the fewest miles driven. Daily schedules use technology to prevent a bobtail from being driven to keep people busy, driven into the same area(s) repeatedly and returning to the plant with gas. Consumption billing is an option available to marketers and can be used in conjunction with some remote tank monitors. Consumption billing offers the most economical delivery method and the most control over your delivery costs, so consider it if it is available for use by your state’s or province’s Division of Weights and Measures.

2. Performance Management includes employee incentives to promote bobtail efficiency and create a “business improvement” culture where your team is continually seeking ways to improve gallons per stop and reduce miles driven.

3. Effective Customer Order Management uses a system that provides reliable customer use data. This should include remote tank gauge technology in any instance where a customer’s use cannot be accurately predicted and where you are running the “milk-man” route in fear that the customer might run out. Set the customer’s tank refill point as low as possible to maximize gallons per stop, but with each customer’s demand managed to prevent out-of-gas calls. Again, consumption billing is a possibility in most areas.

4. Customer Relations & Proper Tank Sizing is finding the right combination in coupling the size of the tank with a customer to minimize the number of stops per year. It is called Customer Profitability Analysis, of CPA for short. It also includes managing closely fall-fill top-off programs and will-call customers. In certain instances, tank monitoring fulfills these requirements.

5. Efficient Resource Deployment selects the most cost-effective vehicle combination; cab and chassis and barrel for the most efficient delivery of gas. Have no more trucks than necessary. Of course, this also includes monitoring customer tanks and using remote tank monitors to turn your customer storage into tertiary storage under Consumption Billing.

6. Efficient Operating Model – Keep boundaries between driver territories and branches sharp and clean.

...................

Proven solutions that work are:

As always, marketers are trying to achieve and sustain efficiency in bobtail routing, gallons per stop, gallons per mile, customer retention, customer growth, sizing of customer storage, etc. It is the nature of this industry, but competition, increasing costs and a CHANGING environment of new technology now makes it strategically imperative that a propane dealer be able to effectively manage performance and implement CHANGE. CHANGE starts with:

1) Effective Leadership; it is a “business” culture. A dealer should allocate time, resources and attention to this detail when deploying technology. The benefits include positive options to customers, additional revenues for the company and the assistance that technology will be to employees. This all starts with you, the owner/manager.

2) Information Technology. IT use is increasing. Over one-half of all marketers today use on-board computing. Dealers are incorporating remote tank monitoring into those business

models.as well as with accounting and routing software and the inclusion of a monitoring company’s Application Programming Interfaces (API).

3) Increase Gallons per Bobtail. Operating cost-per-gallon can be driven down easiest by increasing gallons per bobtail. Reducing fleet size is only part. Dealers need to rifle in on profitable stops and not make wasted trips. This means knowing what is in the customer’s tank before sending the driver out and not just “driving by” to see what is in customer tanks. A dealer must maximize his existing assets, including the companies’ premier capital investment and infrastructure, its customer tanks.

4) Perfect the Predictive Demand. Reliable customer use data is the key. Diligent marketers understand that each incremental gallon delivered per stop is one gallon sold at zero operating cost.

5) Manage the Will-Call Customer. The will-call customer should never dictate how a dealer runs his, her or its business, but will-calls can add bonus profits if managed correctly. Tank monitoring is one way. Place the will-call customer on a remote tank monitoring contract. Controlling the will-call customer through a remote-tank monitoring contract adds both profits today and resale value to a dealer’s business tomorrow; the dealer having the end-user under contract. Offer tank monitoring as a convenience to them, but get a contract.

6) Attract and Retain Quality Drivers. It takes a nose for talent, but a dealer can create a culture based on performance. The improved productivity offsets the higher costs.

7) Product Pricing. Know your costs before you set your price. Calculate your operating costs just like we did here. If you want this formula, just call and we will get it to you. Though this is fictitious, because of your peer’s assistance, we are close. You need to rifle in on your business model. When you do, be sure to include the cost of technology.

8) Performance Management. Your P & L should tell an interesting story about your operations, your use of technology and how you control your business. Use it to set benchmarks, then, inspect what you expect.

9) Choose Vendors That are Seamless. Find vendors that work well with other vendors i.e.; through Application Programming Interfaces (API), routing software, accounting, merger of one-screen customer data and etc. Your vendors should complement each other and one another.

10) Train and Change; the number one failure in deployment of new technology is for a dealer to buy it, but to not change the way his or her company goes about its daily tasks. In short, one cannot expect to keep doing the same things the same way and expect different results. I believe Einstein called that insanity!

As a propane market, and having bought and sold many companies over my years, I always like to add on more consideration, Number 11, below. I always like to remind marketers that in the end they are creating a legacy, building for their retirement, and making a lasting contribution to their communities. Number 11 is .........

11) Build Value. A quick and profitable way to build a companies’ value is through remote-tank monitoring. From that, operational efficiencies can be realized, which translates to Operating Cash Flow, or EBITDA. The future value of a dealer’s business is not so much in its assets, though that is important too, but is through a higher business multiplier/ That determines most of the businesses’ value, whether by your banker, to grow your business, but from a buyer at the time you decide to sell your business. All will demand to see how you managed prior value actions.

In summary, marketers always try to achieve efficiency in bobtail routing, gallons per stop, gallons per mile, attract new customer growth, retain existing customers, evaluate customer storage, etc., but competition, increasing costs and a changing environment of new technology now makes it imperative that a dealer be able to effectively manage technology and implement CHANGE!

So ………………………………..

A question to be asked is ........

The windshield method – cost is about $4.00 per mile!

VS

Last consider that a technology base today positions you to take on additional benefits tomorrow. It eases the “shock” process for your employees, your customers, and on your P & L and Balance Sheet. It also adds to more than your bottom-line through market advantage, image, and customer and employee perception, so consider the soft-benefits (the intangibles), which are just as real as the tangible elements.

In summary, the costs of lost opportunities to not make a decision is simply too high. To wait for the cost to come down will mean that you will pay the same as if you had the technology (through

inefficient operations) and still not have the technology. Costs will not come down enough to offset the current value of operating savings that you can enjoy today!

Well, this is the Question/Answer time. So I will start. I have

a question. Can You STOP IT?

Thank you for this opportunity to be here today. It has been both a pleasure and a joy.

Speaker Credentials:

R. L. (Rick) Humphrey

NPGA Director & Services Section Chairman

Qualifications: 

Humphrey, a 40+ year veteran of the propane industry served 13 years on the Missouri Propane Gas Association’s governing Board of Directors; becoming its Chairman.  In that capacity Humphrey was the first marketer to pursue industry check-off legislation. He authored the Missouri Propane Education and Research Council Act (MO-PERC) and oversaw passage by Congress.  From MO-PERC other PERCs were derived.  As MO-PERC’s first Chairman, Humphrey enacted collections on odorized propane, allocated funds distributions and authored MO-PERC’s Policies & Procedures. 

Humphrey, a member of NPGA since 1986, serves as a Director to the Board and is third term Chairman of NPGA’s Service Section Committee, representing companies that provide insurance, accounting, routing, consulting, monitoring and other benefits propane dealers utilize daily. Humphrey is active on NPGA’s Conventions Committee.  He co-chaired NPGA’s Consumer Focus Study Group and was a past Director to the Illinois Propane Gas Association (IPGA). He has been a presenter at state and regional conferences as well as for the Annual Conference of the Canadian Propane Association.

As Chairman of the Board and Chief Executive Officer of InSite Platform Partners, Inc. d/b/a North American Satellite (NASCorp), Humphrey conceived and engineered SkyTracker™ direct-to-Low-Earth-Orbital-satellite remote-tank and SmartHome™ monitoring systems, a product with 282 patent claims granted (other patents pending) in the US, Canada, Australia, Israel, Japan, China and all countries of Western Europe. Patented technology includes on-site degree day recording, Julian Day logs and temperature compensation

for Consumption Billing. 

Brian Humphrey

"Brian Humphrey is a graduate of Missouri Baptist University with a double major in Business and Religion. He was brought up in independent propane gas plant operations. Other employments have included remodel/construction, SkyTrackerTM direct-to-earth-orbital-satellite remote-tank monitor technical support, assembly and testing, and in operations at Ritz-Carlton. Today Brian is Chief Operating Officer of InSite Platform Partners, Inc., d/b/a North American Satellite based in St. Charles, MO. InSite holds exclusive distribution rights to SkyTrackerTM remote-tank and SmartHomeTM monitoring systems."