In the examples shown in this article, we depict an aggressive fleet manager with a hypothetical fleet of 3,000 vehicles replacing one-third of the fleet annually, or 1,000 vehicles a year, to illustrate the approximate cost that can be reduced or avoided by using all the tools available On one hand, leveraging fleet purchasing power involves timing by taking maximum advantage of automakers’ early-order incentives and avoiding mid-year price increases. On the other front, negotiating the best possible price from dealers or lessors and negotiating the maximum rifle-shot money from auto manufacturers using volume as leverage will work to the best financial advantage. Reducing the vehicle-purchase part of operating your fleet is not a one-stop process. Rather, it must be approached on several fronts to achieve the maximum financial leverage.

Early-Order Incentives
Each model-year some auto manufacturers offer what they call “Early-Order” and/or “Fast Start” dollar incentives to fleets that order new vehicles before a specified date. For example, in 2004 Ford offered fleets a $500 early-order incentive when a Taurus was ordered by Dec. 31, 2003 and produced by March 31, 2004. The incentive included free ABS brakes, a “Fast Start” $534 value, making a total package of $1,034 off-invoice. But the savings don’t stop there. Reducing the invoice cost by $1,034 decreases finance or lease expense by $101, and at 7.75 percent, cuts sales tax by another $80 over a three-year period. Total reduction: $1,215. The fleet manager must also think in terms of volume. We’re replacing 1,000 vehicles annually in our hypothetical fleet. That amounts to a total reduction of more than $1.2 million over three years. Another example of available early-order savings is the 2004 Chrysler Sebring. Chrysler offered a $750 off-invoice deal to fleets ordering the Sebring by November 30, 2003. Add the reduction in finance or lease cost and the sales tax and savings total about $881 per Sebring. Our volume at 1,000 vehicles gives us a cost reduction amounting to around $881,000 over three years. A few more examples in the Chevrolet line are the Impala and the Silverado. For fleets ordering by Jan. 2, 2004, Chevrolet offered a $1,500 early-order incentive on the Impala and $1,000 on the Silverado.  Adding the finance or lease cost and sales tax reduction brings the total savings on the Impala to about $1,763. Doing the same for the Silverado totals $1,175. Replacing 1,000 vehicles in our hypothetical fleet amounts to a cost reduction of about $1.76 million on the Impala and nearly $1.18 million on the Silverado over the next three years on our 2004-model purchasing action.

Mid-Year Price Increases
As shown in Chart 1, mid-year price increases are common in the middle of a model run. We surveyed 142 different 2003 make/ model vehicles. Seventy-four, or 52 percent, incurred a mid-year price increase. Again, the point here is timing. Delaying vehicle purchases past the middle of the model run may result in falling under a mid-year price increase. Yet as a used vehicle three years down the road, that purchase will be worth not one dime more than if your initial purchase had been timed to avoid the price increase.

Popular Vehicles Suffer Highest Increase
Chart 2 illustrates the top 25 2003-model vehicles that incurred the highest mid-year price increases. Note that some of the most popular fleet models such as the Ford Taurus LX, Chevrolet Impala, and Dodge Intrepid, fall within the top five. The fleet manager ordering a Taurus LX early in the model-year would avoid a $1,248 mid-year price increase. As in the previous early-order example, finance or lease cost and additional sales tax on that $1,248 would also be avoided — saving about $1,466 in total. After purchasing 1,000 Tauruses, an additional cost of approximately $1.5 million would be avoided over the ensuing three-year period. The 2003 Impala had a mid-year price increase of $1,103. Applying the additional finance or lease cost and sales tax brings the total additional cost of missing the timing on the Impala to about $1,296. With our hypothetical fleet purchasing 1,000 units a year, delaying the purchases beyond the mid-year price increase would cost this fleet nearly $1.3 million over three years. The 2003 Dodge Intrepid SE incurred a $1,090 mid-year price increase. Applying the additional three-year increase in finance or lease expense and sales tax brought about by the increased Intrepid cost brings the total to about $1,281 — for one Intrepid. In this example, our hypothetical fleet is purchasing 1,000 vehicles. The delay in purchasing the Intrepid SEs beyond the mid-year price increase would total approximately $1.3 million.

Negotiating Capitalized Cost
The approach used by the fleet manager to negotiate vehicle capitalized cost with either the vendor dealer or leasing company can have very serious long-term financial consequences. Yet, quite often, minimal thought is given to the actual structure during the negotiation process. Two pricing structure approaches can be considered by the fleet manager when examining the price of new vehicles. The most common views the factory invoice cost of a given vehicle, then negotiates a factory invoice less “X” amount of dollars to arrive at the contracted capitalized cost. The second views the cost of the vehicle from a dead net or net/net figure and negotiates a contracted cost by adding the cost of the drop-ship and a vendor profit to that figure. “Dead Net” or “Net/Net” are terms used to describe the actual cost the dealer pays the manufacturer, factoring in the holdback and financing that the dealer receives from the auto manufacturer.

Which is Best?
We will use a popular intermediate automobile as an example to answer the question. The factory invoice cost on our 2004 intermediate example is $19,722 excluding destination charges and national fleet discounts. Holdback on our intermediate comes to $640 (3 percent of MSRP with no destination charges included). The manufacturer's flooring (finance) rebate amounts to another $66, making the dealer’s dead net cost $19,016. In the factory invoice less X dollars approach, we negotiate factory-invoice less $300 for a 2004-model capitalized cost of $19,422. In the dead-net-plus approach we negotiate dead net, plus a $150 drop-ship fee, plus a $256 profit to the dealer. Under this negotiation, capitalized cost for the 2004 intermediate is $19,422. In both cases capitalized cost for the intermediate is the same, so it makes no difference on what pricing structure we based our negotiation, right?

Not Exactly
If we only consider model-year 2004, that is true. However, in 2005, the same intermediate will incur a model-year price increase that will automatically boost holdback and flooring dollars rebated to the dealer on our intermediate. If we had negotiated a contract based on a factory invoice less $300, the increase in holdback and flooring money on the 2005 model would automatically accrue as additional profit to our vendor dealer or lessor. Conversely, had we negotiated a contract based on dead-net-plus $266, the increase in holdback and flooring money would lower the price on our 2005 model. In our intermediate example here, that would put the 2005 model capitalized cost at $20,716 under our factory invoice-less-structure —and $20,669 under our dead-net-plus structure, excluding destination charges in both cases and assuming a 7-percent model-year price increase. On the face of it, the amount may seem insignificant— only $47 difference between the two approaches. However, remember that we are dealing with 1,000 units purchased annually. That fact changes our 2005-model year increase in contracting at factory-invoice-minus compared to dead-net-plus to approximately $47,000. Studies on vehicle-price increases over the long term indicate that we can expect vehicle prices to rise an average of 7 percent a year. This percentage is less some years and more others, however, when analyzed on a long-term basis, such as 20 years, the overall increase averages 7 percent a year.

Cumulative Long-Term Cost
Using our intermediate car as an example, Chart 3 illustrates the accumulated cost increase over a 10-year period acquiring 1,000 cars a year. An average annual vehicle-price increase of 7 percent per year is assumed. The $47 price difference cited previously on the 2005 model widens as the years go by, and holdback steadily increases until the disparity becomes $553 per vehicle by 2013. In acquiring 1,000 vehicles a year, as we are in this example, accumulated cost increase operating under the factory-invoice-less $300 compared to the dead-net-plus, drop-ship-plus $256 method approximates $2.5 million over 10 years. That said, the negotiating fleet manager should also take into consideration that the vendor dealer or leasing company’s expenses are going to rise over time. Some provision can and should be made in the contract to share part of the annual increase in holdback money with the vendor.

Negotiating Rifle-Shot Money
When operating a large fleet, the annual volume of vehicle purchases and/or leases automatically provides leverage to approach one or more auto manufacturers to negotiate for what is known as “rifle-shot money,” a set amount of dollars per vehicle either to be rebated to the company at the end of the year or deducted directly from the invoice cost of each vehicle purchased. The first negotiation in which the proactive fleet manager will engage is stipulating that the agreed dollar rebate is deducted directly from the invoice. The vehicle-capitalized cost will be reduced by that amount, and with it, the lease or interest cost as well as sales tax. Secondly, the proactive fleet manager will view the vehicles he or she is contemplating purchasing as a whole rather than in a vacuum. The total net depreciation cost is what is important, not merely the amount of the rebate from the manufacturer. One way to appreciate the whole picture without reinventing the wheel is to utilize a portion of www.edmunds.com “True Cost to Own” Web site. The True Cost to Own site depicts all the vehicle ownership costs over a five-year period, including cost of depreciation. A fleet manager can visit the site, select the model year, make, model, and trim level, and view forecasted depreciation five years hence. Chart 4 illustrates Edmunds.com’s forecasted depreciation for three years on seven 2004 intermediates.

A Combination of Factors
The aggressive fleet manager leverages the purchasing function to the maximum advantage for the company. The fleet manager must consider timing to obtain the maximum in early-order incentives and avoid mid-year price increases, the most advantageous vehicle price structure for the long-term and consider all factors in rifle-shot money negotiation. By carefully factoring in every aspect of the purchasing function, a proactive, aggressive fleet manager can save the company millions.

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