The Car and Truck Fleet and Leasing Management Magazine

Depreciation Control Strategies: Used-Vehicle 'Production'

November 2006, by Staff

It is a given that when fleet managers create vehicle selectors, the most overarching criterion is that the selections can do the job they’re chosen to do. Once the vehicle is chosen, however, all of what follows should be geared toward taking that “raw material” and producing and selling the best usedvehicle product possible.

Viewing this challenge as a manufacturing or production process can help a fleet manager establish a formal process that, on a step-by-step basis, will minimize depreciation costs. Reducing the “cost of production,” as well as increasing the selling price, will do the job.

Vehicles are Raw Material
The “raw material” of the fleet selection process is the vehicle chosen to fulfill the mission. Fleet managers begin by narrowing choices to those vehicles capable of doing the job; it would be foolish to choose a two-door compact car as a job-site vehicle that must carry construction equipment or haul debris, for example.

The fleet raw material, however, comes in various colors with various equipment. Part of ensuring that the used-vehicle product will be the most marketable is choosing the proper equipment and colors that sell well. Additionally, acceptable vehicles are often available from more than one manufacturer. Much like their manufacturing counterparts, fleet managers need to carefully develop and acquire the raw materials needed for their product:

  • Narrow the vehicle choices to those best suited to the mission.
  • Equip the chosen vehicles carefully; make certain that powertrain options are sufficient to do the job, but no more. Don’t add equipment the marketplace won’t reward. For example, if the job is basic transportation, and the right vehicle is a simple four-door compact, adding upgraded sound systems or interior trim is a waste of money. The used-vehicle market will have no use for these options when buying a fourdoor compact car, and the additional cost will not be recovered.
  • Color choices are often overlookedas used-vehicle “production” material. A purple or lime-green car not only won’t price very well, but buyers will be difficult to find. Popular, more neutral colors such as silver, white, black, gray, etc. will move quickly and have the wider pool of buyers.
  • Once vehicles, equipment, and colors are chosen, savvy fleet managers will do all they can to leverage their buying power for both large and small fleets. Negotiating with a single manufacturer will keep the cost of the fleet raw material to a minimum.

    Plan the “Production”
    Manufacturers consider the smooth flow of production a key element in making and selling products profitably. It is no different with a fleet manager in maximizing the value of the used-vehicle product. This step is accomplished via a formal, written fleet replacement policy.

    Developing a cost-efficient vehicle replacement policy is not a complex process; however, it is a critical element in developing a used-vehicle “production schedule,” without which depreciation control is impossible.

    The criteria to examine when establishing replacement includes:

  • Order Placement. Although new model-year introduction is not as cut-and-dried as in years past (it is not uncommon for the automakers to introduce new models throughout the model-year), there remain two primary ordering cycles: fall, when most new model-years kick off, and spring, which heralds the beginning of the driving season after wintertime. Why are these two order cycles important? When vehicles are ordered in the fall, at the beginning of the model-year, a fleet will enjoy the full model-year’s use of the vehicle. In addition, the used-vehicle market is relatively strong, coming out of the slow summer season and prior to the even-slower winter market. Spring orders (March-May) take advantage of a strong market as well, as the retail market gears up for the spring and summer driving seasons.
  • Factory Orders. As often as possible, new vehicles should be ordered from the factory, rather than purchased from dealer stock. In a manufacturing environment, the regular planned production run is less costly and more profitable than custom runs of small numbers. Similarly, the production of used vehicles, when planned, is less costly than a custom order from dealer stock. The difference, of course, is that the cost of a custom production run can be recouped via higher pricing; the cost of an out-of-stock fleet purchase cannot so be recouped. The additional cost is sunk and will never be recovered.
  • Expense Tracking. Put simply, optimum replacement occurs at that point when the combination of fixed and variable expense is at its lowest. Depreciation is the large majority of fixed cost; maintenance/repair and fuel the biggest variable cost. Since drivers accumulate mileage at widely varying rates, most fleets will peg replacement based on time and mileage, with mileage most often the determining factor.

    Thus a fleet vehicle’s accumulated time in service is the “production” period for the used-vehicle product being produced. Keeping this production line running smoothly, as planned, will go a long way toward creating a finished product attractive to the marketplace. Disruptions, such as emergency or other purchases from dealer stock, should be kept to a minimum.

    “Build” a Used Vehicle
    The fleet manager has chosen the raw materials, established a production line, and now as vehicles are placed into service, the “manufacture” of the used-vehicle product can begin.

    Quality control is a critical element in any production process, with zero defects the ultimate goal. The goal is no different in building a used-fleet vehicle, and the means by which to reach that goal begin with preventive maintenance. Every fleet must have a clear, detailed preventive maintenance program, vigorously enforced, to ensure every vehicle is in the best possible condition when sold. Here are the key elements to a PM program:

  • The Schedule. All new vehicles come with a manufacturers’ PM schedule. However, fleets almost always accumulate mileage at a much faster pace than retail drivers; the schedules usually are set at increments of 7,500 miles or so. Most service shops that perform preventive maintenance recommend increments of 3,000 miles. For fleets, the answer lies somewhere in between, with 5,000 miles the most common (except in applications where mileage is extreme). The preventive maintenance schedule is built around oil and filter changes, with other PM scheduled at more infrequent increments (coolant flush/fill, tire rotation, etc.). Consultations with the manufacturer and a fleet maintenance supplier can assist the fleet manager in establishing an appropriate PM schedule.
  • Tracking/Enforcement. Creating a PM schedule and communicating it to the field isn’t enough; adherence and enforcement will inevitably be necessary. Most fleet maintenance suppliers provide exception reports, built around mileage calculations, that indicate which drivers haven’t performed PMs within the scheduled mileages. Of course, just identifying these exceptions is only the first step in the process. Fleet managers should have some communication process in place that helps enforce the policy. Drivers can be notified directly that their vehicles are past due for maintenance. It is even more effective if their managers are also involved. Beyond identifying violations of policy, there should also be consequences for failure to follow up on notification.

    The preventive maintenance scheduling and follow-up process is very much like the quality control efforts used by a manufacturer; the “production line” is monitored carefully, and the “workers” (drivers) are notified when the established process is not followed.

    Carefully Inspect
    Manufacturers also conduct careful product inspections at all stages of production; so, too, does the fleet manager inspect the used-vehicle product during its “production.” Condition reports reveal vehicle “defects” that must be corrected before the product is brought to market. Manufacturers generally inspect only selected pieces as they come down the line; fleet managers should be inspecting every vehicle regularly during its service life.

    It is not entirely unusual for condition reports to be used incorrectly, or not used at all. Just as PM exceptions should involve the driver’s manager, vehicle inspection reports should as well.

    The condition report begins with basic identifying information:

  • Driver name.
  • Location.
  • Vehicle number.
  • Year/make/model.
  • VIN number.
  • Date.
  • Odometer reading.

    The report itself is divided into three primary sections, mechanical, interior, and exterior condition.

  • Mechanical. Assuming that the driver likely isn’t a trained mechanic, the mechanical condition of the vehicle need not include detailed information on specific systems. Comments should be solicited on how the vehicle starts, runs, accelerates, brakes, steers, etc., with any problems or issues described in detail. Tire condition including tread depth readings and notations of uneven wear is important. These are items for follow-up.
  • Interior. The vehicle interior condition should be described in as much detail as possible. Upholstery, headliner, and carpeting, including stains, tears, burn marks, etc. should be noted. Anything missing, such as removable cup holders, ashtrays, change holders, etc., should be noted as well. Substantial damage should be documented with photos, as well as a brief description of how and when the damage occurred.
  • Exterior. In the initial process of selling a used vehicle, exterior condition and appearance are the most important factors. Some potential buyers won’t even bid on a vehicle whose exterior condition is poor. You only get one chance, the saying goes, to make a first impression. This means tracking all body damage, no matter how small, and making sure that any damage that has compromised the vehicle’s finish is repaired. If not repaired, such damage can eventually develop rust, resulting in far more expensive repairs down the road. Glass should be free of cracks or other small breaks, which will “travel” and require replacement. When damage clearly due to an accident (as opposed to normal nicks and dings) is noted, the fleet manager should be certain that the accident has been reported and if not, why.

    The driver should complete vehicle condition reports at least once each year (quarterly is better), and the results must be signed-off by the driver’s supervisor. Conditions requiring action should be noted by the fleet manager, and subsequent reports should reflect previous conditions acted upon.

    Many fleets transfer vehicles from one driver to another, and/or one location to another. In these cases, condition reports should be received from both the current driver and the driver receiving the vehicle, both attested to by their respective supervisors. Any discrepancy (damage noted by one but not the other, or differences in the description of the condition) is a red flag. Generally, the transferor will downplay damage he or she caused.

    Although the PM program is important in producing the quality used-vehicle product that will help minimize depreciation expense, it is the condition report that binds the production process together. Fleet managers deal in information, and condition reports are among the most critical sources of information.

    Go to Market
    The production process is now complete; the fleet manager has chosen the raw material, sent it “down the line,” and inspected it, resulting in a finished used-vehicle product to market and sell.

    Marketing the used-vehicle product is another process which often gets short shrift; too often, vehicles are merely sold. But a formal marketing program will help create interest in markets that can bring higher prices. This is most true in upstream markets, that is, selling to employees and other retail-type buyers.

    Selling vehicles directly to drivers is the single best method of obtaining maximum proceeds in the shortest time. Fleets have been selling fleet vehicles to drivers for many years. However, actually marketing them is a relatively new concept. Rather than simply asking a driver “Are you interested in buying your company vehicle?” — after the replacement has been ordered — the marketing process should begin from the moment the vehicle is brought into service. Drivers should be aware that they may purchase their vehicle when it is taken out of service and be confident that the price will be reasonable. They should also know that the company will provide additional products and services (extended warranty coverage, used-vehicle financing, etc.) if needed to make the sale.

    In an ideal fleet world, drivers or other employees would buy all out-of-service vehicles, but realistically this will never happen. The marketing and sale of those units not purchased in upstream markets is equally important. Leased fleets most often simply permit their lessor (open end) to gather up used vehicles and sell them at auction, with little or no involvement in the process. This is a mistake that can cost many thousands of dollars in depreciation expense. A product manufacturer would be shortsighted to simply sell its product to a single customer; so, too, is the fleet that leaves remarketing to a lessor only.

    Fleets can use other markets that can help further reduce depreciation expense. Selling vehicles on wholesale (non-auction) markets accomplishes two things: fleets can sell vehicle types that are weak in auction markets, and auction vendors are kept on their toes. Brokers also can be a great resource for higher mileage, rougher-condition vehicles.

    The bottom line is that, like any manufacturer, seeking the widest possible market for the used-car product makes good business sense.

    “Manufacture” Used Vehicles
    Approaching depreciation control from a manufacturing viewpoint is a useful method of formalizing a vehicle lifecycle process and ensuring that depreciation is kept at manageable levels.

  • Choosing the right raw material is the first step. The right vehicle, with the right equipment, will come “off the assembly line” ready for the market.
  • The manufacturing process continues with a formal preventive maintenance program, vigorously enforced. If the production process is sloppy, even the finest materials won’t produce a quality product.
  • Selecting the product as it comes “down the line” will make certain that flaws in the process are recognized and corrected. Quality control cannot be accomplished without the careful and regular inspection of the product while it is “built.”
  • Marketing and selling the finished product demands creativity and determination. All markets must be considered, from retail to wholesale, from online to physical auctions, and buyers need to know the product is available.

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