Proven Strategies to Reduce Fleet Costs
Ringing phones, meetings, buckets of e-mail, reports — the day of a fleet manager is a non-stop series of interruptions, crises, and schedule conflicts. The day goes quickly, and it is often easy to lose sight of what the basic, overall goal of fleet management is — cost containment and control.
Sometimes, however, just slowing down and going back to basics can help a harried fleet manager refocus on what’s important. Here are some of the most basic — and proven — ways that fleet managers can reduce costs.
‘Because That’s Where the Money Is’
Infamous bank robber Willie Sutton, when asked why he robbed banks, reportedly replied “because that’s where the money is.” That is, in a nutshell, the very theory that a good fleet manager uses to develop and implement a cost reduction program. Focusing on the largest expense items results in the greatest savings and the most productive use of a fleet manager’s time.
There are two basic categories of fleet expense: fixed and variable. These categories break down as follows:
- Fixed expense: Depreciation, lease or finance expense, and insurance.
- Variable expense: Fuel, maintenance and repair, tires, and oil.
There are further, more-specific expense items within these; however, breaking expense down further to seek savings is tantamount to killing a mosquito with a sledgehammer. It isn’t productive; the savings available are nominal; and the effort would be a waste of the fleet manager’s time.
Fleet expenses vary, of course, by region and type of vehicle. For our purposes, let’s look at how variable expense categories break down for intermediate cars, nationwide, as a percentage of total cost:
- Fuel: 75 percent.
- Oil: 2 percent.
- Tires: 6 percent.
- Maintenance/repair: 17 percent.
Again, the percentage of overall expense each of these categories represents vary by region, type of vehicle, and mileage, but the overall effect is clear. With a fleet manager’s time at a premium, serious efforts to reduce oil or tire expense do not result in the same level of savings that the same focus on fuel and maintenance/repair would. Put simply, use time wisely and go where the dollars are.
The same analysis for fixed expense is equally telling. Depreciation expense comprises more than 62 percent of fixed expense for intermediate cars, with the balance split more or less equally between insurance and lease/finance costs. Clearly, overall cost savings efforts are best focused on fixed expense, fuel, and maintenance/repair.
Savings Found Fixed Expenses
The three primary categories of fixed expense — depreciation, insurance, and lease/finance — are all within a fleet manager’s grasp for cost savings.
Savings in fleet leasing or financing are based in rate negotiation and in choosing the basis from which charges are derived. The most common lease used in mid-sized and larger fleets is an open-end lease with a terminal rental adjustment clause (TRAC). The lease rate factor is made up of three segments:
- Reserve for depreciation.
- Administrative fee.
- Interest charge. (The administrative fee and interest charge are often referred to as the “lease charge”).
The depreciation reserve is merely a bookkeeping exercise; some portion of the capitalized cost of the vehicle is paid each month to reserve for anticipated depreciation. Changing (lowering) the depreciation reserve rate, which in turn lowers the lease payment, doesn’t provide true savings. It results in a larger unamortized value for the resale proceeds to cover when the vehicle is sold. There may be some nominal savings when the cash flows are present valued; however, it generally isn’t worth the effort.
Both administrative fees and interest charges are subject to market pressure and negotiation. There are several interest rate instruments upon which fleet lease rate factors are based, including:
- Commercial paper.
- U.S. Treasury issues.
- LIBOR (London Interbank Offering Rate).
- The Prime rate.
Working with the company treasury department, a fleet manager can make certain the rate factor instrument is the most cost-efficient possible and can save tens of thousands of dollars each year.
In addition, most lessors offer both fixed and floating rates, and the option to switch from one to the other (with contractual restrictions). In an economy where rates are rising, for example, fixing rates can help avoid dramatic increases in fleet lease interest charges, and vice versa (opting for floating rates when interest rates are falling).
Administrative fees are usually expressed as a multiplier applied to the capitalized cost of the vehicle, i.e., .007, or 0.7 percent. As vehicle prices increase, the dollar amount of the administrative fee increases accordingly. Some lessors may be willing to charge a flat monthly administrative fee, which prevents this inflationary increase.
Reducing Depreciation Expense
Depreciation is where the money is, as Sutton would have said, and a fleet manager can take any number of actions to reduce depreciation expense. Most are basic fleet management methods that sometimes get lost in the shuffle of day-to-day work.
The single most effective way to increase resale proceeds and thus reduce depreciation is an employee sale program. Selling vehicles first to drivers or thereafter to any employee is a win-win for both the company and the buyer. The buyer can purchase a late-model, well-equipped vehicle that has been rigorously maintained at a price lower than that on the open retail market. The company receives proceeds greater than those available on the wholesale or auction market. The keys to a successful employee sale program are:
- Marketing. Too many companies merely make it known that vehicles may be purchased, then wait for the driver or another employee to request a price. Aggressive marketing of out-of-service vehicles ensures that vehicles are seen by the widest market possible. When new-vehicle orders are placed, the driver should be provided a price. Follow-up communications are also important; don’t simply send a price and wait for a reply. Finally, the Internet offers the company an opportunity to “post” vehicles available for sale to the entire company and include photos, condition reports, and preventive maintenance records.