When I was asked to write this article, I thought to myself, “Have the market participants gotten too complacent over the last three warm winters to even read it?” However, after thinking about it, I decided that is in fact a good reason to write it, in case the industry has gotten too complacent.
Everyone knows that you need to have a strong relationship with your supplier. But what does that really mean? In order to answer this thoroughly, I want to discuss a few things that I believe make a strong relationship between a supplier and a marketer.
First, how experienced is your sales representative? Have they been through a tough winter like 2013-2014? If not, do they have a strong team behind them that they feel comfortable contacting for advice and guidance? Everyone can be a “good supplier” during warm winters, but very few are “good suppliers” when we experience long periods of cold weather.
Second, what sources of propane does your supplier have? Will they bring gas from other supply points if your supply point has supply issues? Where does the gas come from? Is it piped, trucked or railed to the supply point?
These all matter! You can have railcars sitting across the street, but if there is ice or snow on the tracks, it may not be delivered. What happens then? Is your supplier handling the trucking to your plant? Is it reliable? How many trucks do they have? If a transportation carrier only has a handful of trucks and there are lines at the racks, how will your gas get delivered? If you own your own transports and haul all your gas in the summer, do you have backup for additional trucks if you need them in the winter?
Third, what kind of ratio does your supplier receive at the supply points you purchase from? Is the gas available ratably throughout the month? What if you need a larger summer/winter ratio? What is available to you? These are questions you want to ask any prospective supplier that walks in your front door. Ask them to put it in writing. If you decide to buy from this supplier, my recommendation is to sign a contract with them.
It is a trend for suppliers to contract directly with producers at the wellhead. That gas is sold on a 1:1 summer/winter ratio. Beware of suppliers that promise you large ratios if they are buying on a 1:1 ratio. Be sure you understand how they will supply you a 3:1 ratio. Will they contract it and stay true to their word?
In my opinion, a good supplier is someone you trust to have your back when times get tough. Your supplier should get to know your business, look at your sales in gallons for the last five years and come up with a supply plan for you. It is then up to you to decide if you want to do business with them, if you want to contract and what percentage of your business you wish to contract.
This really depends on three things: how far you are from a major hub, how many different supply points are available to you and how much storage you have. The National Propane Gas Association (NPGA) did a white paper called “Propane Supply Planning” after the cold winter of 2013-2014. NPGA’s current chairman, Tom Van Buren, did the heavy lifting on this, along with several supply professionals in the industry — myself being one of them. This paper is located on ngpa.org, and even with the shale revolution, much of it holds true today.
When looking at how much to contract, obviously if you are located close to Conway, Kansas (for example), have 14 days of storage, and have multiple supply points to pull from, you may want to contract less than someone who is at the end of the pipeline (for example, Selkirk, New York) and only has five days of storage and few available supply points to pull from.
When trying to forecast your supply needs, I always suggest you look at the last five years. If we only looked at three years, we would have distorted outcomes in years like this one. Currently, with three warm winters, you really don’t know what you might need, especially if you have been setting a lot of tanks in the field. A five-year average gives a better starting average before building in your growth of new tanks set.
After you decide what you want to contract, it is important to ask your suppliers what penalties may be involved if you don’t pull your monthly volume. Will they let you roll the volume into the next month? What charges may be involved? Or, in drastic cases, will they cancel your contract?
With any relationship, it needs to be two-sided. Meaning, if you want to build a strong relationship with your propane supplier, you need to do your part in the agreement. You need to purchase the monthly volume you agreed to buy. If you find out you will need more or less in a particular month, the sooner you relay this to your supplier, the better. It is also extremely important to stay in communication with your supplier in the good times, but especially when things get tight.
Lastly, you need to pay your bill on time. In our office, our goal is to treat our vendors and customers like we would want to be treated. We have been in business for 35 years and have almost all of the same vendors we started with, with the exception of mergers. Being loyal to your vendors, just like your customers, gets you a long way in the business world.
My dad used to say, “You get what you pay for in computers.” The same can be said for propane suppliers. The cheapest might not be the best in the long run. Look for a supplier you trust to have your back, live up to your part of the agreement and stay in communication. If you do these things, and your supplier lets you down in a tight market, it is time to start interviewing your supplier’s potential replacement. Now you have the important questions for your interviews.
