A Lesson In Supply And Demand

How the supply of parts for mechanical computers brought an industry to its knees.

The rise of gas prices toward $4.00 a gallon during the past year set off what some insiders called a “tsunami effect” throughout the industry, especially at stations where mechanical pumps are still in use. These pumps, estimated to be about 17,000 in number at stations across the United States and more across the globe where gas is measured in U.S. gallons, contain a mechanical analog computer that goes no higher than $3.99 a gallon, registering a total cost no higher than $99.99. For many small, rural stations and other locations where dispensers with electronic computers are not the best choice (i.e., marinas, upper Alaska where temperatures get down to -60 degrees), there were two choices: upgrade to pumps using electronic computers or re-gear the dials.

The cost of option one is prohibitive for many station owners, so replacing the mechanical computer was the only option that made sense. As fuel prices rose throughout the spring and summer, the demand for parts to re-gear these pumps shot up. According to Kevin Jensen, sales manager for petroleum products at Veeder-Root, the only OEM of such pumps, bookings increased very quickly because the price of fuel jumped up so fast. Says Jensen, “We went from booking 30 to 60 computers a day to hundreds of order entries a day, a 500 percent increase in sales over a couple of months.” For the companies ordering parts to retrofit customers' pumps, the lead time went from 15 days in January 2008 to 22 weeks in July.

To deal with the depleted stock in the supply chain, Veeder-Root added factory workers (who all needed to be trained), upped production capacity from one eight-hour shift to two ten-hour shifts seven days a week, and prioritized shipments. The company decided that after investing in equipment and personnel, it could not compromise the production of complete products for individual parts orders. Jensen realizes that this decision may have looked like Veeder-Root shut down its parts supply because it didn't want to supply the industry. “That wasn't the case at all,” he says. “It literally was a supply and demand issue related to parts availability across the board, including for Veeder-Root.”

Three Different Responses From the Field
Davis Airtech was running three months behind in the summer, and by late September was around two months behind. “For many of our customers with mechanical dispensers and pumps, their sales volumes didn't justify the expense of an electronic one,” says Operations Manager J.T. Celani. So to offer his customers a reasonable fix for the challenge, Davis Airtech began replacing the mechanical computers, a job which stopped when the parts ran out. “Our production stopped cold.” But rather than sit and wait, Davis Airtech took a different route. “We saw this situation as an opportunity,” says Celani. It took about 60 days for the company to develop an alternative product to meet customers' needs.

When the availability of parts became limited and the backlog went from three days in March to 22 weeks in August, Tom McGee, president, PMP, did not panic. “Our ability to produce as much as we'd like was squeezed,” he says, and he jumped right in to find a solution. PMP would make its own parts for the pumps. McGee acknowledges that there was a lot of investment in the tooling to make the parts, but “we have to take care of our customers the best we can.”

“We've been telling customers for almost three years that this problem was going to happen,” says Doug Duncan, president of Meters Inc., “but they chose to wait and see.” Some oil jobbers still have not put in orders for the new computers to retrofit their pumps. “They say they're going to wait until they get fined before they place an order.” Duncan also points out that as gas prices went down again, some customers cancelled their orders. “They said they'd risk it and take their chances, and now they have to go to the end of the line.” Duncan tells customers the best thing they can do is put in an order and get in the line, “because if you don't, someone else is going to get in front of you.” He also advises patience. “It's all going to work out.”

More Trouble
There is more to the problem than the inability of the dispenser to register higher than $3.99, and two companies are responding to that issue. Ted Warn, president of Progressive International Electronics, says, “The mechanical pump is only half the problem. The console of this older equipment is not equipped to move fast enough.” Warn notes that the consoles reading the mechanical computers are looking at the dollar wheel and not counting the volume. As the price-per-gallon goes up, the speed of the dollar wheels also goes up. “Drastically,” says Warn. “They're reading a pulse per penny and if they're running 7 gallons a minute at 3 dollars per gallon, there are 2,100 pulses per second. If they go to 7 gallons at 10 dollars, there are 7,000 pulses. Now there is an exponential, very large number of pulses that have to be read fast.” Warn points out that as the computers are upgraded, the console equipment must also be upgraded to handle the high speed of the pulses.

George King, president of Triangle MicroSystems, agrees. “Those mechanical heads spin like a son of a gun, and they can't keep up with the pulse rates required by the higher gasoline prices.” As the mechanical heads are replaced, King points out yet another challenge: “When fuel prices drop again, those heads that were upgraded because of higher prices won't really work anymore.”

Where Are We Now?
Because of the backlog for parts to upgrade the readings on the mechanical computers, many states are allowing owners to show half-gallon pricing at the pump, then double the price at the register to reflect the actual cost. Other states allow station owners to cover up the price display on the pumps and show only the gallons, settling the transaction with a calculator. Until the problem is completely resolved, most stations are finding whatever ways they can to sell fuel, while still complying with the regulations. At the same time, some remanufacturers are developing their own products to deal with the situation.

By the end of October, Veeder-Root's projected delivery time was reduced to seven weeks, and Kevin Jensen says demand has fallen off. “By fall, the bulk of the dispensers throughout the industry have either been upgraded or replaced by brand-new dispensers.” Asked if he has any advice for those still in need of parts, he replies, “No one had the data or orders to suggest that Veeder-Root should quadruple its production overnight in order to supply this kind of demand. But there is a key component of distribution that stocking product, including for a rainy day, is important. Suppliers and distributors don't stock many items now. While keeping more product in stock wouldn't have eliminated this situation, at least it would have helped. We all have to look at how we contributed to this problem.”

2008 will go down as a year of lessons. Will remanufacturers stock additional inventory for that rainy-day scenario? Will providers of parts be ready for the worst? Will customers reach into their pockets and purchase the electronic pumps to avoid future challenges of this sort? Three questions, no easy answers.

But there is a bright side, albeit a bit nerve-wracking. And it centers on the economy. As one remanufacturer put it, “The worse the economy is, the better our business is, because we're in remanufacturing and that's where people go when things get tight.”

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The PEI Journal • Fourth Quarter 2008 • Volume 2, No. 4 • Contents are Copyright © Data Key Communications, Inc.
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