My Fleet Purchasing Philosophy

Over the years, I've been asked many times to give my purchasing philosophy as it pertains to corporate fleet vehicles. Simply stated, I guess you could say it goes something like this: To provide safe, modern transportation to our field representatives at an economical cost, and, in such a manner that the dealer body with whom we conduct business, can realize a fair and reasonable profit, in line with industry practices.

Now, that's quite a statement. And ideally, I attempt to follow the philosophy behind it in my day-to-day negotiations with dealers, although it's not the easiest policy to follow. For example, just what is a good deal? What may be for one dealer could be a mile off base for another.

Fleet Size

As a matter of background, my specific fleet covers the Continental United States from coast to coast. My company has numerous district headquarters offices in most of the major cities, in which the daily sales direction of our field representatives is maintained. In addition, we have five strategically located plant areas which also control the use of automobiles as well as a limited number of trucks. Corporate fleet policy and administration is handled on a centralized basis out of our general office. We feel that this approach leads to a much more successful operation than one which is decentralized into many component parts that may not have the coordination and general direction necessary to evaluate operations on a "big picture" basis.

The fleet size of my company is in excess of 1,400 vehicles and represents a capital investment of $4 million dollars. These vehicles are financed-leased through outside agencies, but full administrative control is maintained by the company. Each year, we replace approximately 800 units, representing a cash outlay in the neighborhood of $1 million dollars. While no one dealer even begins to see this magnitude of orders, it does represent a healthy chunk of business.

 

Equipment Specifications

In past years my company's basic fleet car was pretty much the more conservative, stripped-down model. However, fleet buyers by and large today are purchasing a more elaborate automobile, due to the better return on their investment. So, too, have we upgraded our fleet operation over the years. When I started in this business, back in 1952 we were supplying a standard two door, 6 cylinder sedan equipped with a regular transmission, costing about $1,500. Today, this has evolved into a Deluxe Model, 4-door sedan, eight cylinder, equipped with automatic transmission, power steering, radio, and, in some cases, hardtops. In line with this upgrading, the cost has also risen to an average of about $2,700 for this equipment. Annual depreciation expense has, in turn, increased on these cars. It was running about $415 in '52 which compares to $550 last year. This 33% increase in the cost of depreciation, while notable, would have been much higher had we remained with the more conservative car, according to our analysis.

Just recently, in the last model year, we have been experimenting with the intermediate-sized car. This unit, equipped as per our normal accessory specifications, as a two-door hardtop, does at cost us any more than the conventional 4 door sedan initially. Our figures show, however, disposal at the end of a two year cycle will bring about 15% more than the regular sedan. This may thus have a tempering effect for us on the ever-increasing cost of operation of our fleet, particularly on depreciation expense which accounts for 50¢ of every dollar spent for automotive transportation.

We also provide six-Passenger Station Wagons for certain key area supervisors as well as full-sized two door Hardtops. District and division personnel are given a Luxury Line Hardtop with all of the "goodies." In addition, about 50% of our national fleet has factory-installed air conditioning. These units are located primarily in the southern half of the United States. This item, I might point out, is costly, both from an operational-maintenance standpoint, as well as increased depreciation expense. We figure that it costs us about $75 per year for depreciation alone on a two-year car. As this equipment becomes more popular nationally, in all probability, it will eventually encompass the entire United States.

 

Replacement Policy

Often, I am asked what our replacement policy is on our company cars. It varies. We trade many of our cars annually where market conditions are favorable and allow us to do so. However, this has been somewhat limited to the mid-west where freight factors seem to be more reasonable and the used car holds its value. Cars other than the one-year trade are retained in service for approximately 50 thousand miles or where they have been driven for three years. We have found this retention period usually results in the most economical level of depreciation. Beyond this point, repairs mount quite rapidly whereby any reduction in depreciation expense is more than offset by the increased cost of operation.

Our fleet at present is composed of 65% new cars and 30% one-year-old vehicles with the remaining 5% being older units. We have budgeted about 1,000 replacements during the 1970 model year, of which approximately half will be year-old cars, 45% two-year old models. The balance will all be older units.

 

Replacement Scheduling

In scheduling our vehicles for replacement prior to new car introduction time each fall, we review the records on every unit, its mileage build-up, and what the projected mileage will be by the following year. If the car is in an area where it is feasible to trade annually or if the mileage will accumulate to a point where the vehicle would begin to incur excessive repair expense in the subsequent year, it would be scheduled for replacement during the current model year. Otherwise, we normally would plan to keep the car in service. Our overall fleet mileage per car amounts to an average of 20 thousand miles per year. On those vehicles which have been replaced, the mileage would have accumulated to 35 thousand miles in about 21 months of service.

Bids on those cars scheduled for replacement are solicited from our vendors, commencing in the summer months and continuing into the fall and early winter, until completion. There is no hold-over of vehicles until a spring market develops, due to the continual decline in used car values. This would only result in a greater cash outlay at the time of the transaction. We request immediate delivery on our new car orders as soon as they are committed and can be scheduled for production with the factory. No artificial delay is induced into the transaction to spread delivery over a prolonged period of time. We feel that this policy results in a minimum of expenditure to our company and a maximum utilization of automotive equipment.

 

Dealer Negotiations

We handle all of our negotiations for replacements directly with dealers rather than delegating this responsibility to an outside leasing company. Basic contact and continued liaison with our dealer body is conducted throughout the United States by telephone. We feel the personal relationship resulting from telephone discussions is much more favorable and allows us to work more closely with the dealer. Particularly valuable is the ability to discuss any prevalent price differences as well as disparities that may arise on used car conditions. It also allows quicker action initially on dealer bids, since we are generally in a position to give an instantaneous answer to any bid proposal. On occasion, where practical, personal contact is also made with dealers in selected areas in order to develop a better understanding of local situations.

 

Written Bids & Bid Solicitation

Formal written bids which were utilized some years ago generally took too long to evaluate and required a reply to a dealer. Usually, there was some price adjustment to the bid that was needed due to misunderstanding that might have arisen on equipment specifications. After utilizing the telephone system for the past decade or so, we are firmly convinced of its' advantages and would probably never revert back to written bid proposals.

In bid solicitations from our vendors, we do not employ individual bids secured by our field representatives. Not only does this take a considerable amount of time from their basic sales activity, but can also give rise to a situation where we might be unwittingly purchasing certain equipment that is not desired nor authorized for our vehicles. It is a recognized fact that individual salesmen may have a tendency to "doll-up" their cars at company expense. This can put the dealer in a very compromising and embarrassing situation. Because he is usually requested to bury accessory items in his bid, most often in the trade-in allowance.

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As a matter of company policy, we don't want any "side" deals between our men and the dealer. All accessory items are to be stipulated directly on the dealer's invoice and any requests for additional equipment-cost free or personal payment-are to be referred to us for consideration. Another factor that could be prevalent in the solicitation of bids by a salesman is a bias on the part of the representative for a particular make of car. By manipulation of the bids, it would be possible for his preference to appear most favorable, for these reasons, we have established a policy of separation of the procurement function from the fleet driver, to minimize the possibility of any such practices.

 

Competitive Bids

In solicitation of bids on our used cars from dealers, we do not necessarily have to secure competitive bids to commit our orders. From general exposure to the overall car market, we are usually able to ascertain what price we should obtain for a vehicle. This is ascertained from market reports, price comparisons in parallel areas, as well as previous history. As a result, we are usually able to wrap up a series of commitments in a given area with a minimum of delay for the dealer.

I might also add that while price has a bearing on any fleet transaction, it is not the sole criteria upon which a bid is awarded. Past relationships, dealer loyalty, and the method in which our business is handled also have a direct influence on our decision of order placement. Many times we have had dealers that would come in with what might be termed a satisfactory bid, based on price alone. However, past contacts with our regular source of supply in the area had been very satisfactory so that we would rather continue with our regular dealer than switch to a new supplier, merely to save a few dollars.

 

Used Car Disposal

There are several basic methods that can be utilized by fleet operators in handling their used cars. Trade-ins, sight seen or unseen appraisals, wholesale, auctions, or outright sales are usually the various means utilized. There are probably valid reasons for any fleet, be it company-owned or leased, to follow one particular method in disposing of used cars. We happen to feel that the trade-in method or net cash difference has proven to be the best and most economical for us. For one thing, which we believe to be paramount, this method allows us to control the transaction before any commitments are made to the vendor. Should an unfavorable market develop or should a dealer's bid be out of line with general expectations, we are in a position to negate the deal at that point rather than leave it open for later determination of the used car value, which may prove inadequate. Such vehicles would be held in service until they... could be satisfactorily replaced at reasonable washout.

Another factor which influences our particular trade method is the state tax situation prevalent in many states. Where a transaction is assessed with a state sales tax, based on the net trade difference, it is to our financial advantage to reflect the used car disposal as a deduction on the dealer's invoice. This can mean up to a $100 tax savings in certain states, such as Illinois. At present, there are some 17 states which assess taxes on a net basis at the time of purchase.

 

Price Formulation

In handling the procurement of fleet vehicles, a question arises as to the method of pricing the transaction. Basically, all fleet operators today buy on a cost-plus basis rather than using the manufacturer's suggested retail price or any discount there from. It usually is a relatively simple matter to procure factory cost prices for reference in handling fleet purchases. Businesses thrive on the dispersal of such information. In fact, only a neophyte to the fleet business does not subscribe to such a service.

The usual method followed by most fleet and leasing companies today seems be calculated at a $50 markup over dealer cost or "tissue" and, in some instances, $75. This would not normally include any costs attributable to factory advertising or such similar charges and may or may not include a separate charge for dealer preparation of the new car dealer's profit (normally fixed at a value of $25). The factory holdback of 2% is usually left intact for the dealer and not eliminated from his cost figures. This item alone can add up to $60 to the dealer's profit. The holdback factor may be taken into partial consideration by some fleet accounts in computing the true vehicle cost on which to apply markups.

In our fleet operation, we are required, from a sound accounting basis, to price all of our vehicles consistently and to refrain from varying from transaction to transaction. Furthermore, due to the presence of state sales taxes, it is desirous to evaluate our new cars as low as practically possible and feasible. This means, naturally, that we also follow the "cost" method in preference to using a retail price, or a percentage discount there from.

 

Used Car Appraisals

Where a used car is involved in a fleet transaction, regardless of the method used in the new car portion of the deal, the final determination of the net cash differential rests with the evaluation that is ultimately placed on the used equipment. Deriving that price, of course, is the key to a satisfactory transaction from a fleet account standpoint. As briefly stated before, we utilize market reports as a guide in determining what price should be obtained on our used cars. This price is tempered by anticipated delivery rate, market and vehicle conditions, and parallel prices obtained on similar equipment in other related areas, as well as that derived historically.

In dealing with a select group of dealers who are familiar with our units, it is not always necessary to have a sight-seen appraisal of the equipment. A mutual understanding can be reached to compensate the dealer for any major damage that might appear on the car. This practice, of course, invokes a mutual trust arrangement between the fleet account and the dealer so that they can eventually reach agreement on what items might prove to be unsatisfactory on the trade-in.

Where a relatively new dealer is involved who may not be familiar with the condition of the used units, a different approach can be made. First, arrangements might be made to only have those units traded with him that can be physically appraised. Any adversities would then be taken info consideration immediately so that a net "as-is" price is obtained on each car. Or, if this is not practical, some ground rules might be established as to what would be acceptable on any anticipated damage on the used units. A sampling or cross-section of vehicles may be referred to the dealer in order for him to obtain an indication of vehicular condition. A basic price would then be reached on the market value of each trade-in and a commitment made for replacement without any actual physical appraisal of each of the used units. An inspection report on the trade-in would then be made at the time of delivery of the new car and any unusual conditions noted for separate adjustment. This report is usually coordinated through our district supervisor who has direct administrative responsibility for the driver of the vehicle. Such ad-versifies, once an agreement is reached, would then be paid separately to the dealer, leaving the purchase order intact as it was originally negotiated. In this manner, if there should be any misunderstanding or adjustment required on the adversities and subsequent billing, no delay would be encountered on payment of the basic car transaction. If these required adjustments were to be netted out of the used car price by the dealer, then, in the event of a disagreement, the entire transaction could be held up until an understanding was reached.

Where it is geographically feasible, we would prefer to have sight-seen bids made on our used cars being considered for replacement. Not only does this eliminate the need for subsequent adjustment, but it also allows a dealer to know exactly what he is buying. However, due to the widespread dispersal of our men, it is usually impossible to have the field representatives bring their vehicles in for an individual inspection and appraisal. The travel expense and disruption of normal sales activity would be prohibitive to the company. In situations such as this, the only logical method to follow is that of a sight-unseen or blind bid. This, of course, means a great deal of trust on the part of the dealer. In an attempt to spell out just what is considered as justified adversities on these unseen vehicles, we have compiled for dealer reference, a written policy on adjustments that has been used as a basis for deficiencies.

On occasion, unfortunately, we will encounter a dealer who will submit a satisfactory bid to us on the basic desired price on a piece of equipment that he has not physically appraised. Then, when the unit is turned in adversities are magnified well out of proportion to reality. Needless to say, such practices are exceedingly disturbing to us and after adjusting these inflated amounts down to acceptable levels, it will usually result in a refrainment of any further business activities with the dealer.

By, and large, in spite of all of the problems that can be encountered with a sight unseen, adjustment-later basis, we have found that this method of replacement works quite satisfactorily for us. We regularly deal with about 75 dealers across the country, a great number of which we have had continual relationship with for over a decade. We don't bat 1,000 on our deals and on occasion will have a misunderstanding with an over-enthusiastic dealer. But when the results are weighed against the savings in sales time and non-interference with our field representatives, it is more than satisfactory.