The Car and Truck Fleet and Leasing Management Magazine

How Fleets Cope with Shrinking Budgets

July 2004, by Staff

Like never before, the budget crunch is on. Operating departments have to compete for every precious budget dollar, managers are expected to produce cost savings, and a global marketplace makes the business world more competitive than ever before.

Certainly, fleet managers are no exception; in fact, some companies look to fleets for savings as much or more than any departmental function. Senior managers, unfamiliar with how fleets operate, will freeze vehicle replacement, demand drastic vehicle downsizing, and impose draconian measures, without understanding that the wrong moves can actually increase costs.

Savvy fleet managers, however, will keep their heads and know where to look to stretch budget dollars to drop some sorely needed cash to the bottom line.

Build a Database. The starting point is a solid, up-to-date database. A cost cannot be controlled unless you know exactly what it is. If such a database doesn’t exist, start one immediately. Tracking fixed and variable expenses is the only way to find where the dollars are and thus take action.

If the fleet is leased and the company uses a fleet management company for maintenance/repair, accident management, or fuel, a rich source of data necessary for cost-reduction analysis is available.

With the right information, fleet managers can begin to review each segment of fleet budget costs and develop a game plan for squeezing out any remaining excess cost.

Examine Fixed Costs. Fleet costs are divided into two broad categories, fixed and variable. Fixed costs are generally those incurred from vehicle ownership, primarily depreciation and interest or lease costs (others include registration and title expense and insurance). Variable costs are those resulting from the operation of the vehicle, including fuel, maintenance/repair, oil, and tires.

The single largest cost overall in the provision of a fleet of vehicles is depreciation; that is, the difference between the original acquisition cost and the proceeds from resale. For leased fleets, this cost is the combination of the amount reserved for depreciation via the lease payments (in an open-end TRAC lease, the most common lease used) plus or minus any adjustment against that reserve when the vehicle is sold.

It has been said that fleet managers are in the business of creating a product - a used vehicle for the market. That job requires the creation of the best product possible: a well maintained vehicle with mileage commensurate with age. Vehicles coming out of service can be sold in one of two ways: either uncontrolled, on the open wholesale market; or controlled, to drivers and other employees. Since the open market generally will not provide the same level of return as a controlled market, maximizing employee/driver sales is a tried and true method of increasing returns, and thus decreasing depreciation expense. There are several ways employee/driver sales can be successful:

Proper Pricing. Employees will inevitably compare a company vehicle with a similar vehicle they may be able to buy on the open market. This comparison holds the key to the success of an employee sale program. If vehicle replacement criteria are properly established, the undepreciated cost will accurately reflect the wholesale market value for the vehicle. As employees will compare the asking price to vehicles posted in the local paper or on local retail used-car lots, there is an opportunity to obtain a price that is higher than the open market price, but lower than retail. This has often been termed “wholetail” pricing. Such pricing can return resale proceeds several hundred dollars higher than that at auction or from wholesalers, but still several hundred dollars lower than the employee can find in a local retail market. Conservatively, if a fleet sells 200 vehicles to employees in a model year and obtains just $300 per vehicle more than at auction, $60,000 will be returned to the bottom line.

Active Marketing. In many cases, companies will merely make out-of-service vehicles available to drivers on a passive basis; that is, drivers are aware that they may purchase vehicles, but the company will only provide quotes and information upon request. Employee sale programs can be actively marketed, resulting in more sales and greater savings. Provide a quote to every driver, whether or not asked. Open up the market by posting vehicles available for sale to all employees, either on a company bulletin board, in a newsletter, or on a company Web site. Make certain that all maintenance and repair records are available for review.

Provide a Package. Provide employees with a “one-stop shopping” experience when marketing. For employees who cannot or choose not to buy a vehicle for cash, offer used-vehicle financing; this can be done via a bank, credit union, or independent finance company. In addition, an extended warranty that can be rolled into the selling price will often enhance the vehicle’s value. Again, a number of vendors offer such coverage, which can range from simple powertrain to full maintenance and warranty.

All in all, few initiatives can so quickly and demonstrably reduce net depreciation cost than a properly structured, aggressively marketed employee sale program.

Prepare the Product. Of course, not all vehicles can or will be sold to employees; thus fleet managers should also focus on preparing the best product for the used-car marketplace. Make certain that preventive maintenance schedules are strictly followed. Obtain condition reports on a regular schedule, at least twice each year. Follow up on any and all physical damage noted; small dents and scratches, if not repaired, can develop rust, exacerbating the damage and increasing either the cost of repair or the deduction from resale price. Condition reports should be completed by the driver, then approved by a supervisor or manager attesting to its accuracy.

Another fixed cost that can be reviewed is insurance. Aside from annual premium negotiations with the liability carrier, fleet managers should make certain that, if self-insured for physical damage (as most mid-sized and large fleets tend to be), a surplus does not accumulate in the amount accrued.

Mine Your Variable Costs. As depreciation expense is to fixed cost, so fuel expense is to operating or variable cost. Fuel can comprise 60 percent or more of operating costs, and thus provides the most fertile ground for savings.

Again, data is king. If you are not using a fuel management program, start one today. Fleet fuel programs offer the convenience of many thousands of locations nationwide and provide great detail in cost data, which can be mined for savings. First, match your drivers’ fuel purchases against company fleet personal use policy. Many companies, though permitting personal use, do not pay for fuel used. Look for the “Friday/Monday” syndrome, where drivers fill the tank on Friday, then again on Monday, with the fuel used on a weekend for personal reasons. Notify drivers and managers in the field that the company will bill the drivers back for purchases made on these days, generally by deducting from the driver’s expense report. One large national fleet of 5,000 units has documented nearly $500,000 in annualized savings by tracking personal fuel purchases.

If you are using a fuel program and have not already done so, make the card a “fuel only” card, to eliminate non-fuel, personal purchases.

Examine carefully your vehicle selection and specification. If it can be done, use vehicles in which fuel efficiency is greater (this should be done very carefully; simply downsizing the car or the engine can actually result in an increase in fuel costs if the smaller vehicle is not up to the job).

Although it is a far smaller piece of the variable cost pie, preventive maintenance is a gateway not only to efficiency in variable costs, but fixed costs as well. The old oil filter commercial was right: you can pay now or pay later. Paying now for regularly scheduled maintenance will help avoid far more costly repairs down the road. Drivers who do not follow PM schedules will not achieve maximum fuel efficiency and risk expensive downtime. Use your leverage in purchasing to negotiate consideration for major repairs which fall just outside the warranty period; the cost of a transmission overhaul at 40,000 miles on a vehicle with a 36,000-mile powertrain warranty can be cut by up to half via such negotiations.

Preventive maintenance goes beyond simply changing oil and oil filters, however. With each PM visit, the shop should perform a safety check on brakes and tires. Catching the need for brake repair early can avoid replacing rotors and drums, which can double or triple the cost of a brake job. Checking for uneven wear on tires (the vast majority of tire wear is caused by misaligned and under-inflated wheels) and getting front-end alignments when necessary can help add tens of thousands of miles to tire life, saving thousands of dollars in tire expense. (Providing drivers with an air pressure gauge and making sure they use it is an excellent way to avoid under-inflation and premature wear.)

Consider Other Ideas. There are other ways to stretch budget dollars as well. One is to maximize fleet vehicle usage. Not all vehicles that come out of service should be sold immediately; many companies have been able to cut replacement rental expense, as well as reimbursement for occasional business driving, by keeping vehicles in service as pool cars beyond their normal replacement. This practice works very well particularly in large regional or corporate offices with many company vehicles, and a great deal of occasional business driving.

In some cases, vehicles are taken out of service prematurely, when drivers leave the company or the vehicles otherwise become surplus. Keep track of those vehicles; in cases where a driver has an accident and the vehicle is declared a total loss, another surplus vehicle, if well maintained and of sufficiently low mileage, can be transferred as a replacement. Avoiding emergency purchases from dealer stock can save thousands on a single car.

Another way to find savings and stretch budgets is to actively look for surplus vehicles. Most companies have a vehicle-assignment policy based upon minimum monthly or annual mileage. Review carefully the mileage driven by your fleet drivers; you may find that some vehicles are assigned in situations where the mileage is not sufficient to qualify.

All in all, stretching shrinking budget dollars requires good, up-to-date information, a focus on fleet policy, a little creativity, and a lot of common sense.

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