The Car and Truck Fleet and Leasing Management Magazine

How to Eliminate Hidden and Soft Fleet Costs

January 2004

Hard dollar savings. You’re paying too much for your vehicles, so your fleet manager negotiates better discounts or rebates in return for volume. You consolidate some sales territories and reduce the size of the fleet. You sell more vehicles to drivers, and resale proceeds climb. All are part of the unending hunt to save hard dollars in a fleet operation. Though achieving such savings is a challenge, they are simple to document, and their impact is easily recognized. But are hard dollars the only savings out there? Can your fleet manager achieve savings that are equally legitimate, even though they aren’t represented by smaller checks going out the door or larger ones coming in? The answer is yes; hidden and soft costs can be identified, controlled, even reduced or eliminated. What Are Soft Costs? The difference between soft and hard costs (and, of course, soft and hard savings) is a simple one. You buy something for $10 yesterday, and for $5 today — that’s $5 in hard cost savings. Hard dollar savings are a direct, quantifiable reduction in money spent or cost incurred. Soft dollars are savings to which a value must be assigned; downtime and productivity come to mind. Most fleet managers and executives spend the bulk of their time seeking those hard dollars. Renegotiating vehicle pricing, lease rates, or service fees fit our $10 to $5 model. Overall reduction in fixed or variable cost per mile and administrative or departmental costs result in hard dollar savings as well. Identifying and placing a value on soft costs can be a bit like herding cats. But the process begins by focusing on the single most critical resource your drivers have — time. The Cost of Downtime The bulk of company-provided vehicles, in broad terms, carry out either a sales or a service function. Company cars allow sales, marketing, or merchandising reps to visit customers, deliver products, and entertain customer contacts. Trucks and vans transport employees to repair, service, and deliver products. These employees produce revenue for the company, and their time carries a price tag. The first step in the search for soft dollar savings is to establish a dollar value on that time by breaking down both the costs of putting an employee in the field, as well as their impact on company revenue. For example, say a salesperson is given a base salary of $40,000 and a company vehicle. That salesperson produces $2 million of revenue per year, at a net profit margin of 5 percent. Benefits amount to 30 percent of base salary. The car costs 30 cents per mile, and the salesperson drives 20,000 miles per year. Assuming 260 eight-hour work days per year, personnel costs are $200 per day, $25 per hour. Vehicle costs are $23 per day, and sales generated are $7,692 per day, or $385 per day in net profit. The total cost per working day to put this person in the field would then amount to $223 (personnel plus vehicle costs), and the total net profit generated $385. Thus for each day of downtime, the cost to the company is a total of $608. Reducing Downtime The primary causes of downtime, vis-à-vis fleet, are mechanical breakdown and accidents. In the average, reasonably well-run fleet, mechanical downtime is relatively rare and generally short. Downtime due to accidents is longer and thus costlier. The most effective way to reduce mechanical downtime is to institute, track, and enforce a rigorous regimen of preventive maintenance. Use exception reports to see which vehicles are missing PM intervals, and have a follow-up process. Know and understand your rights under the vehicle warranty, and ameliorate your costs when breakdowns do occur by following up for post-warranty recovery. Accident-related downtime is easier to track. The most common measure of accident frequency is accidents per million miles; however, downtime avoidance can be measured in the absolute. In the average fleet, roughly 20 percent of vehicles will be involved in a collision annually, 200 accidents for a fleet of 1,000 vehicles. In most cases, the company will provide a replacement rental vehicle, so that actual time away from work can be limited, but rental cost is then added to the mix. Specialty vehicles usually cannot be replaced with rentals (upfitted trucks, utility vehicles, etc.), so while the driver may be able to get around, the job may not be doable out of a rental. Accidents can definitely be reduced in number, and the associated downtime and expense avoided. First, make certain all your drivers have valid drivers licenses, and check them at least once a year. Establish a clear and detailed safety policy, at the very least defining consequences for unsafe driving, moving violations, and chargeable accidents. Whenever possible, offer safe driver training; this can include anything from pamphlets and newsletters to formal written or behind-the-wheel testing. The key is to keep safety and defensive driving in your drivers’ minds, and to take preventive measures when unsafe drivers are found. “Hidden” Costs The word “hidden” is in quotations because these types of costs are often ignored or glossed over. Most successful fleet managers use the 80/20 rule when seeking to reduce costs: 80 percent of fleet costs can be found in 20 percent of fleet-cost categories. The combination of depreciation (fixed) and fuel (variable) costs make up the bulk of overall fleet vehicle costs. There comes a point where the law of diminishing returns kicks in, as fleet managers concentrate (rightly so) on the 80 percent, those areas where small changes are leveraged into substantial savings, and the bulk of excess costs have been identified and eliminated. Smart fleet managers next examine hidden costs, where savings, though not as large, can be found. One method fleet managers use to find these costs is looking at condition reports. Well-run fleets require a detailed vehicle condition report for every vehicle in the fleet at least once per year and on every vehicle coming out of service to be sold. Condition reports should be completed by the driver, attested to by a supervisor, and sent to the fleet manager. Properly completed condition reports should cover three primary areas: • Mechanical/glass. • Interior. • Body. Because the driver’s supervisor has signed off on the report, he or she is ultimately responsible for the condition of the vehicle. In the normal course of vehicle operation, the condition report provides evidence of the vehicle fitness, appearance, and safety. Catching conditions that negatively impact any of these three criteria will enable fleet managers to avoid future consequences and expense. For example: 1.Glass: The appearance of small breaks (“star” or “bull’s eye” breaks) and cracks should be dealt with immediately. Such damage can now be repaired for about $50, avoiding the much greater expense of replacing the entire windshield at a cost of several hundred dollars or more. If ignored, these minor breaks will eventually “travel,” and become irreparable. 2.Tires: One of the best investments you can make is a tread depth and air pressure gauge for each vehicle. Under-inflation is the most common cause of premature tire wear. Make sure that tire condition and air pressure are noted frequently and that wheels are balanced and the front-end properly aligned. If a condition report notes uneven wear, get the car in for service ASAP. 3.Minor Body Damage: Although prevention is the best medicine for physical damage, catching minor dents and scratches early can save a great deal of money down the line. Once the vehicle’s finish is damaged, moisture can get in and cause rust; a small dent can then result in a major repair. Make sure that your drivers and their supervisors are forewarned to repair minor damage promptly, so that major damage is avoided. 4.Interior Condition: Prohibiting smoking in a vehicle is the single most important action a fleet manager can take to prevent reconditioning deductions on remarketed vehicles. Cigarette burns in rugs, upholstery, and even headliners, can cost hundreds of dollars in lost used-vehicle sales proceeds. Prohibiting eating and drinking inside a company vehicle is also a good idea for the same reason. All of the above can be described as costs avoided, actions taken during the life of the fleet vehicle, which avoid later costs, not only during vehicle service, but also in resale. Remarketing Hidden Costs Without question, one of the most fertile areas for hidden cost savings is remarketing. Increasing resale proceeds and the attendant reduction in depreciation expense requires careful analysis, condition information, and regular attention. The resale market, like the stock market, is a live market, and it can be equally volatile. Fleet managers must be nimble in decision-making and able to identify alternative markets and used-vehicle buyers. The first and most important step in this process is the use of regular condition reports. As discussed earlier, tracking condition regularly during vehicle life enables fleet managers to deal with repairs, etc., as they occur. The most important condition report, vis-à-vis remarketing, comes when the vehicle is turned in for replacement. Your driver should be required to submit (with a supervisor’s signoff) a detailed condition report with photos, if possible. Next, again if possible, the delivering dealer for the new vehicle can be asked to provide a report. Finally, a third report completed by the auction or other remarketing source can be obtained. Now, the analysis can be completed. Carefully comparing the condition reports can reveal discrepancies, which may have a significant impact on the ultimate sale prices. A reparable crack in the windshield, for example, may show up on a subsequent report as broken, requiring replacement, which will reduce the resale proceeds by $200 or more. Worn, but usable, tires shouldn’t necessarily result in reconditioning deductions. Body damage, interior damage, and mechanical conditions must be clearly and carefully detailed, so that deductions for reconditioning at resale match the severity of the condition itself. One practice smart stock market investors use is diversification. Rather than putting all their money into one stock, they spread the risk, and are prepared to move money around to obtain the best returns. Fleet managers can accomplish something similar in the remarketing process. Unfortunately, it is all too common for a fleet manager to simply depend upon a lessor to pick up and sell all their vehicles. Since most lessors sell the majority of clients’ vehicles at auction, fleet managers who depend on lessors can miss opportunities offered by other markets. These markets include wholesalers, with whom fleet managers can negotiate pricing directly; brokers, who put buyers and sellers together; and even dealers themselves, who are often willing to buy turn-ins. In addition, there are geographical considerations in successful remarketing. Sometimes, markets can be soft in one region of the country, but stronger in another. This can be particularly true during the winter, when warm weather markets remain strong and cold weather markets suffer. Some types of vehicles will sell better in a different market. Pickup trucks and SUVs often will sell better in the Southeast and West than in the North or East. The ultimate point to be made is that smart fleet managers can increase resale proceeds by using several remarketing venues, being prepared to move vehicles from one area to another, and paying close attention to the overall process. Auditing Out Hidden Costs For leased fleets, the monthly lease billing can contain truly “hidden” savings, which can be mined via a regular and careful audit process. Here are several of the areas that fleet managers should audit: First billings: Nearly all fleet lessors have the same billing “trigger”: vehicles delivered prior to the 15th of a month are billed for that month, and those delivered after the 15th, for the following month. First billings for all new vehicles can be audited to make certain that this rule is applied properly and that double billings are corrected. Lease Rates: A number of items related to lease rates and rate factors can be audited. Confirm that proper amortization rates are used. Check the money cost factors and administrative fee. If you are on a floating rate, make certain that the rate factors reflect the proper rates. If you utilize an option to fix rates, verify that the rates have indeed been fixed. Billing stops: Lease billings, depending upon what you’ve negotiated with your lessor, should be stopped when the vehicle has been turned in or picked up for sale. Make certain that you’re not billed for vehicles that have been taken out of service and picked up for sale. Application of resale proceeds: When resale proceeds are received, they should be applied to your billing promptly, ideally on the next monthly billing. Audits can, and should, be conducted on fleet management services billings as well. For example, check that proper pricing has been used for maintenance and repair national account billings. Per vehicle per month and transaction fees should be billed according to the contract, and all work should be properly authorized and documented with a purchase order or other means. Hard Work = Results Seeking hidden and soft costs is not a glamorous undertaking. Like good police work, it requires a commitment to the same kind of grinding, determined effort, and no small amount of luck. Preparation and a plan are the keys.
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