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Institutionalizing Cost-Control Strategies

May 22, 2017, by Mike Antich - Also by this author

Senior management exerts intense pressure on fleet managers to control and/or reduce vehicle acquisition and operating expenses. To accomplish this, fleet managers can pursue three different cost-control strategies — cost savings, cost deferral, or cost avoidance. In order to implement a successful cost-control strategy you need to institutionalize the mechanisms to curb money-wasting behaviors.

Cost deferral is the easiest way to reduce annual fleet costs. This cost-control strategy simply defers or moves expenditures to future fiscal years. Essentially, cost deferral kicks the proverbial “can” down the road to be dealt with in the future.

Cost-saving measures are actions that lower current spending levels. Examples of cost-saving measures are reduced fuel expenditures, negotiation of price decreases for products and services, or the negotiation of a lower rental fees for infrequently used equipment. However, cost-saving initiatives are limited by the law of diminishing returns, especially with a well-managed fleet.

On the other hand, cost-avoidance initiatives are actions that eliminate incurring a cost in the future. One example is the elimination of underutilized assets or rightsizing a fleet.

Achieving true cost savings involves more than just deferring expenditures, it requires eliminating costs.

Avoid Trying to Control Costs on the Back-End

Depending on to whom fleet reports influences the acuity of management-exerted cost-control pressures. For instance, there are two categories of business activity in any company — income and expense. The income side includes sales, service, 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 a fleet manager reports up through the expense side of the organization (operations, administration, etc.) there is an even greater urgency to achieve at the lowest cost possible the acquisition of fleet assets and third-party fleet services.

A fundamental decision is where to focus your cost-control efforts. Typically, fleet cost-reduction programs focus on the fixed and operating costs of the asset; however, there’s a limit to how much a fleet manager can modify truck specifications without impacting the fleet mission. You can’t change the fundamental requirements of your business. This necessitates minimum fleet equipment specifications that, as a result, pre-define the expense parameters for your assets from both a fixed and operating cost perspective. In addition, if you acquire vehicle assets that best fulfill your fleet application, then any supplemental cost reduction will only be based on incremental refinements, in essence, chasing pennies to further reduce costs.

Fleet managers must think strategically when developing long-term cost-containment initiatives. The requisite foundation of any successful cost-reduction program is pre-existing operational efficiencies, which will allow you to focus on soft costs, such as vehicle/driver downtime and the resulting lost revenue. Vehicle/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.

Another misapplication of cost-control resources is that, all too often, managers attempt to control fleet costs on the back-end. The best time to control cost is before it occurs and the way to do this is through establishing policies and procedures that inhibit unnecessary spending and establish the parameters as to how drivers operate and maintain an asset. Fleet policy institutionalizes the mechanisms to curb money-wasting behaviors.

In summary, the best strategy to practice cost avoidance and eliminate incurring unnecessary costs is through increased fleet policy compliance. This must be the cornerstone of an overall cost-control strategy.

Let me know what you think.

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Comments

  1. 1. Tim C King [ May 23, 2017 @ 09:24AM ]

    With senior management being a principal customer of any fleet, this is a requirement. The response depends on the need. If it's temporary, then cost deferment is an option. However, this runs the risk of the fleet incurring increasing expenses in the long run.

    Assuming a well-managed fleet to begin with, the only solution remaining is to consider process redesign -- eliminating non-value added activities. This is where costs can be reduced, while improving customer service quality.

    And, I hate to keep beating this drum, but real success for fleets that don't have direct control over all of their expenses (operations, etc) is to partner with customers creating win-win results. Relying on policies and procedural controls/directives is counter-productive to effective customer service.

  2. 2. Lee Pierce [ May 28, 2017 @ 08:09AM ]

    You can can only control so much when you don't have full control or support from Operations and above. When that happens, rogue spend creeps in and the Fleet Manager is left to explain. Great article, helps to have this highlighted in our industry.

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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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