By Mike Antich
The jaw-dropping events of the past six months have made an indelible impression on many fleet managers. The very real possibility that two of the Detroit 3 could quickly (and unexpectedly) enter into Chapter 11 bankruptcy protection, along with some fleet management companies not accepting new-vehicle orders, has caused some corporations (especially those sole sourcing) to reassess sourcing strategies. Companies that sole sourced, including those that didn't, began developing contingency plans for alternative sourcing channels. This was not an act of disloyalty; rather, it was exercising prudent due diligence.
These recent events represent a watershed moment in the history of commercial fleet management with numerous strategic implications, such as fleet sourcing strategies in terms of fleet management services, fleet funding, and vehicle acquisitions.
Sole Sourcing vs. Dual Sourcing
The concept of fleet sourcing has evolved over the decades. In the 1970s and most of the 1980s, the trend was to use multiple suppliers. At this time, most 500-vehicle or larger fleets employed two lessors, sometimes even more. Typically, there was a 90-10 or 70-30 split in the amount of business provided to each lessor. The reason was a fleet needed a dominant lessor to generate the volume needed to get a pricing break. The argument favoring the use of more than one fleet management company was to maintain competitive pricing for the services received. It also allowed fleets the opportunity to benchmark service levels between suppliers. However, dual sourcing wasn't appropriate for all companies. Fleet size was a key determinant. The rule of thumb was if a fleet was comprised of fewer than 400 vehicles, it wasn't worth the fleet manager's time to duplicate fleet services.
In the late 1980s and early 1990s, the large-scale migration to single sourcing gained momentum. It was spurred by a larger trend in corporate America to outsource non-core services. In addition, the recession of 1990-91 caused many companies to downsize staffing levels. These layoffs found fleet managers being told by management they needed to do more with fewer staff. There's been no turning back from this new era of lean staffing, and fleet managers were forced to look to outside suppliers to perform services formerly handled by in-house staff. This outsourcing trend ultimately culminated with the emergence of bundled fleet service packages that came to be known generically as total fleet management in which corporations used a single vendor to provide all fleet services. The bundling of services into a single program made it difficult for fleets to switch lessors without widespread administrative headaches because these outsourced programs became intertwined in day-to-day fleet operations.
Since the 1990s, there has been a strong trend toward sole-source suppliers driven by corporate strategic sourcing initiatives to negotiate steep volume pricing discounts. Sole sourcing was also appealing because it helped eliminate many problems found with using two or more suppliers. In the case of dual lessors, a fleet manager had to modify both internal and field operating procedures to handle two sets of bills, two different new-vehicle ordering systems, two methods of remarketing used vehicles, two sets of national accounts suppliers (and two sets of identification cards), along with different procedures and reports.
In terms of vehicle acquisition, sole sourcing gained momentum as OEMs offered extremely attractive tiered-volume purchase programs that, for the most part, could only be triggered if most new-vehicle orders were placed with a single manufacturer. This led many fleets, especially larger ones, to negotiate lucrative multi-year sole-sourcing agreements with individual auto manufacturers that featured tiered-volume purchasing incentives.
Why Not Use Multiple Suppliers Elsewhere?
The oft-cited benefit for using multiple suppliers is that it creates a competitive situation, in which suppliers will maintain "competitive" pricing, maximize service, and allow exposure to new and improved programs and services. If you accept this supposition, then shouldn't this same strategy be applied to other areas within the corporation, such as insurance, 401(k) programs, phone systems, computer hardware and software, etc.? Would these services be improved by adding multiple suppliers? It is safe to say such a practice would create unnecessary complexity (and perhaps even havoc) in the management of these services at most companies.
The "competitive" situation created by using multiple suppliers is not a panacea, nor can it necessarily create a competitive environment. However, what happens if your sole supplier is no longer able to supply you with required products or services? Do you have sourcing alternatives? This is a question many fleet managers are asking themselves nowadays.
Let me know what you think.