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Short-Term Cost-Cutting Strategies Backfire in the Long-Run

February 18, 2010, by Mike Antich - Also by this author

By Mike Antich

Senior management is exerting intense pressure on fleet managers to control and/or reduce vehicle acquisition and operating expenses. The new reality of a tighter corporate operating environment has forced fleet managers to pursue two different types of cost-cutting goals - cost deferral and cost elimination.

The easiest way to cut fleet costs is to move or defer them to future fiscal years. One manifestation of this occurred when many corporations held off ordering new vehicles in the 2009 model-year (and 2008-MY) due to uncertainties facing their businesses and the overall economy. A related cost-cutting strategy is to extend replacement cycles by not ordering replacement vehicles. For example, more and more fleets are moving to a 75K- to 85K-mileage replacement parameter.

There are two categories of business activity in any company - income and expense. The income side includes sales and marketing, and any other activity charged with producing income for the company. The expense side includes areas such as administration, operations, and personnel, which are charged with managing the costs of doing business. If the fleet manager is on the cost side of the organization (operations, administration, etc.) there is even greater urgency to provide services at the lowest cost possible.

However, many cost-cutting decisions for fleet are made for the short-term, with very little consideration for total cost of ownership. Sometimes senior management is more interested in the fiscal, rather than economic, consequences of their decisions.

Tactical Cost-Cutting Strategies

In a recessionary economy, it is management's fiduciary responsibility to demand expense reductions and limit capital expenditures. Likewise, fleet managers, feeling the heat, dial up the pressure on fleet management companies and suppliers by scrutinizing fleet costs, often to the minutest details.

Since fleet is usually among the top 10 corporate capital expenditures, there is intense pressure to defer vehicle replacements. However, arbitrarily extending fleet vehicle replacement parameters could be counterproductive to the intended goal. Nearly all fleet-related expenses, both fixed and operating, are influenced by when a vehicle is replaced. For instance, deferring replacements and/or extending service lives increase the percentage of the fleet operating outside of its warranty period. As a result, maintenance costs and driver downtime increases. Also, the older the fleet, the higher the likelihood catastrophic failures will occur, which increases the percentage of out-of-stock purchases, the most expensive way to replace fleet vehicles. In addition, keeping older vehicles in service adversely affects fuel spend since it delays replacing lower mpg vehicles with higher mpg replacements.

The fact that deferring fleet replacement costs will result in additional costs tomorrow often is not fully taken into consideration by senior management. In tough economic times, long-term cost-effectiveness takes a back seat to short-term budget balancing. Management's cost-cutting directives for fleet are sometimes based on unfounded premises and unrealistic expectations that will backfire. Many short-term decisions will come back to haunt fleet managers, who, over time, are responsible for cleaning up the unintended consequences. This is why it is imperative for fleet managers to proactively participate in the development of all fleet-related cost-cutting initiatives.

Strategic Cost Containment Initiatives

Fleet managers interact with many company functions, such as human resources, legal, treasury, risk management, sales, and administrative services. Each has a stake in the fleet's operation. Fleet managers should tap into this expertise and understand how these functions can help reduce fleet costs. Likewise, drivers, field managers, department heads, executives with company vehicles, and others "touched" by the fleet function all have ideas on how fleet activities can be modified to achieve cost savings.

Fleet managers must think strategically when developing long-term cost-containment initiatives. Cost reductions should be achieved through operational efficiencies, such as vehicle and upfit standardization, selector list consolidation, spec'ing smaller displacement engines, or downsizing to smaller vehicle segments. Other cost containment initiatives focus on soft costs, such as driver downtime and concurrent lost revenue. Driver productivity can produce impressive results when quantifying cost savings, particularly in a well-run fleet program where the law of diminishing returns limits the impact of fixed and variable cost savings.

Achieving true cost savings involves more than just putting off expenditures in the hope your organization's fiscal situation will improve in the future - it requires eliminating costs. The best way to eliminate fleet costs is by removing underutilized vehicles from the fleet and making eligibility requirements more stringent to receive a company-provided vehicle. If you want to eliminate costs, this is the route to take, not deferring replacements.

Let me know what you think.



  1. 1. Christina Guzzo [ February 23, 2010 @ 09:28AM ]

    I just read your article and I thought it was great! These are exactly the principles GE Fleet Services tries to instill in our customers.

    I would like to add one comment. In your last paragraph you said "make eligibility requirements more stringent to receive a company-provided vehicle". I completely agree with this however I would caution that if you are restricting drivers from a company-provided vehicle and in lieu providing them with a reimbursement/allowance, that you should evaluate whether that reimbursement is ultimately truly more beneficial to you and your drivers. For example, companies need to consider whether they want to defer these costs onto their drivers and what the impact will be to their corporate image. Your fleet management provider should be able to help you with an analysis to assess the cost/benefit (both hard and soft) of such a strategy.

    Thanks again for a great article. This is the first article of yours that I have read and I am definitely adding you to my "favourites" list!

  2. 2. Lisa Kneggs [ February 23, 2010 @ 12:47PM ]

    75-85k?????? Try 200-225k. Of course ours is 95% service fleet and this has already come back to bite us. Stock purchases are through the roof.... BUT, I'm thankful they still need a fleet manager.

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Author Bio

Mike Antich

Editor and Associate Publisher

Mike has covered fleet management and remarketing for more than 20 years and entered the Fleet Hall of Fame in 2010.

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