Factory Incentives Gain Greater Sway in Model Selection

Some fleet managers think fleet incentives are gaining greater importance in vehicle selection. They are not happy about it.

"When incentives were in their infancy, they were used as a competitive advantage to 'level' the playing field. Now, these same incentives are being used to 'tilt' the field in favor of specific manufacturers," said Jim McCarthy, director of vehicle management services for Siemens Shared Services in Iselin, NJ. "When the mark of success is based on the amount of incentives you are able to negotiate per vehicle, as opposed to your lifecycle cost successes, and when accounting departments start to budget for these rebates several months prior to the actual negotiations, then there is something drastically wrong."

There are a variety of reasons why this is occurring. One reason cited by some fleet managers is increased management pressure to reduce fleet costs. "We, as fleet managers, are now more than ever under the gun to reduce cost and expense in fleet operations," said Bob Brown, manager of vehicle fleet business and operations for Xerox Corp. in Rochester, NY.

Another reason cited is that manufacturers themselves are becoming more aggressive with their incentive programs, which, as McCarthy states, sometimes tilts the field in favor of a specific manufacturer.

"I hate to admit that incentives have, in fact, forced us to change selector vehicles," said McCarthy. "Recently, there has been an increasing disparity between manufacturer incentives. This disparity has been significant enough to make our selector choices more dependent on these negotiated rebates. When incentives are high enough to force this kind of decision, there is a problem."

Jim Anselmi, director of fleet operations and travel for Lorillard Tobacco in Greensboro, NC, also acknowledged that incentives have influenced selector decisions with his fleet. "Fleet incentives can and do tilt lifecycle cost analysis," he said. "Most of the other factors that contribute to lifecycle analysis are subjective. Fuel economy, repairs, and resale values in the secondary vehicle market are simply estimates, which are influenced by external factors that may or may not be under the manufacturer's or fleet manager's control." Despite this, Anselmi stressed that lifecycle costing should be the deciding factor used for accepting or rejecting models for a selector.

"Fleet incentives are important to the extent that they lower overall cost of the vehicle. However, fleet incentives, by themselves, should not be the deciding factor.

Manufacturers are Becoming More Aggressive with Incentives

The consensus among the interviewed fleet managers is that manafacturers have become more aggressive in the past several years with their incentive programs. The degree of aggressiveness on the part of manufacturers depends on the condition of the economy, as well as the popularity of specific vehicle lines.

"Recent high inventories have allowed for slightly higher incentives in some areas than we have experienced when manufacturers had extensive lead times on vehicles," said Merrit Kinne, fleet manager for Aramark in Burbank, CA. McCarthy of Siemens Shared Services agrees that manufacturers are becoming significantly more aggressive with their incentives. “No longer are these incentives being used to make their units competitive; they are now being used to almost force their vehicles onto certain selectors,” said McCarthy. “Since we manage fleets for 14 totally separate operating companies, this rebate process is becoming increasingly more difficult to manage and administer, especially when discussing rebates tied to specific quantity tiers and loyalty bonuses.”

Another fleet that has seen manufacturers aggressively pursuing its business is MetLife in Warwick, RI. “Over the past couple of years, it is our experience that the competition among manufacturers is increasingly fierce. The reps have been very aggressive in pursuing our business,” said Mike Buffi, fleet manager for MetLife. “This can only help us in achieving our goals of keeping costs as low as possible. I see this trend coming over the next few years with the economy slowing down as it is.” Pat Bell, fleet operations manager for Smith International in Houston, also agrees. “In the last year or two, I have seen manufacturers step up and offer a more aggressive program. So, as I have stated previously, incentives may not be the single most important factor, but it is an important factor in the equation with resale and fleet suitability, when you make your choices.”

According to Sheryl Grossman, fleet manager at GE Medical Systems in Milwaukee, “Up until the middle of the fall quarter of 2000, I think the manufacturers were very tight with their competitive pricing programs as they assumed the automotive business would stay as high as it has been for years. Now I know they think otherwise, but most fleets negotiate for both the spring and fall cycle as one package and you either make the selector or not up front in the fall, and we are all living with earlier decisions.”

Seconding this is Shirley Collins, head of U.S. fleet for GlaxoSmithKline. “The auto industry has seen a number of changes in the past few years, with mergers, reorganizations, discontinuations of models, and as a result it has become more and more competitive,” said Collins.

“Recent high inventories have allowed for slightly higher incentives in some areas than we have experienced when they had extensive lead times on cars,” said Merrit Kinne, fleet manager for Aramark in Burbank, CA. Likewise, David Edenhofer, corporate fleet manager for Farmers Insurance Group in Los Angeles, believes manufacturers have become more aggressive with their incentives.

“During the past several years, the manufacturers seem to know their competition and are willing to negotiate their prices to be in the ballpark. Since the fleet business provides consistent sales each year, I believe that they are very interested in retaining or increasing their market share. In our experience, the final cost of the same vehicle over the last few years has decreased,” added Edenhofer. David Fern, fleet manager for Textron Golf and Turf in Augusta, GA, also says that manufacturers have become more aggressive with their incentives.

“We believe that manufacturers have been increasingly aggressive in getting us to switch to their models,” said Fern. Some fleet managers observe that manufacturers are becoming more flexible with their incentive programs. “We negotiate deals each year with all three manufacturers,” said Richard Corsetti, car plan administrator for FM Global in Johnston, RI, a company that was created in 1999 through the merger of four insurance companies.

“The manufacturers realize they are competing for our business and often we are able to get some very attractive deals for the drivers and the company.” Corsetti believes the manufacturers will continue to be more aggressive in terms of incentives offered. “I feel manufacturers have more leeway on what they can offer to fleets than they have had in the past,” he said. “This year, Dodge offered a fleet incentive package on the Intrepid that included smokers' group, day-time running lights, eight-way power seat, anti-lock brakes, and keyless entry. This package was offered to fleets at a very attractive price and the drivers have responded by ordering more Intrepids,” said Corsetti. Tom Krause, fleet manager for West Bend Mutual Insurance Co. in West Bend, WI, likewise sees manufacturers having more leeway in the types of incentive packages they offer.

“Over the recent years, the manufacturers are sweetening the pot by making the packages affordable and more inclusive for the items requested by the drivers. There are some differences among manufacturers that are interesting. I will include CD players in the Ford product because it adds virtually nothing to the purchase price,” said Krause. “In my particular case, incentives from the manufacturer are nice, but it ultimately boils down to keeping my drivers happy.” Similarly, Kathy Kent, fleet manager for Avaya Communications in Basking Ridge, NJ, said manufacturers are offering more of a mix of incentives.

“I think some manufacturers are offering fleet option upgrades as part of the fleet incentives in lieu of being more aggressive with the money,” said Kent. “The retail market has been strong for the last few years and if the economy slows down, I think the fleet customers will see some changes.” Adding to this sentiment is Terry Blackwell, vice president of technical services for Charter Communications in St. Louis. “The factories seem to be getting more flexible in how fleet incentives are handled. The more money we can save on the invoice up front helps our budget process and we are much more favorable to these kinds of incentives,” said Blackwell.

Some See Manufacturers as Less Aggressive with Incentives

Brown of Xerox believes the manufacturers have become less aggressive with street programs but remain highly competitive when negotiating with individual fleets. “However, I still find that all the manufacturers are still fairly aggressive in working with each individual fleet manager in providing competi-tive allowance incentive dollars on an individual fleet basis,” said Brown.

“This aspect of the manufacturers’ incentive programs is very high in my decision-making process because my ultimate objective is to reduce the capitalized cost of the vehicles, which weighs very high in lifecycle costing.” However, manufacturer aggressiveness is not always sustainable. “Manufacturer aggressiveness depends on the product line and the desire to establish a new account,” said Anselmi of Lorillard. “Unfortunately, they are not always able to sustain the attractive incentives.”

For fleets that primarily buy light-duty trucks, there has been less aggressiveness on the part of manufacturers. “Trucks and vans make up the majority of our vehicle needs,” said Rodger Evans, corporate fleet manager for AT&T Broadband in Englewood, CO. “During the past several years, the manufacturers have enjoyed increased demand within the retail market for similar products.

Traditionally, this has reduced the manufacturers’ interest in providing additional support to the fleet industry,” said Evans. Other fleet managers are reporting that factories have been more aggressive in catering to smaller fleets, more so than they have in the past. “I do believe that in the past few years, the number of units the factories want you to buy is getting smaller and smaller. Before, if you didn’t have several hundred or more vehicles to order, they didn’t want your business,” said Donna McDonough, fleet manager for Mellon Bank in Pittsburgh, who manages a fleet of 450 vehicles. Scott Mayo, fleet director for Wendy’s International in Dublin, OH, however, does not believe that manufacturers are more aggressive with their incentives. “I think that the manufacturers are less aggressive than they were in the past. In my case, this may be a factor of my loyalty to one manufacturer. The other manufacturers know my history and do not make a great effort to sway me,” said Mayo.

Budgeting Up Front Monies Prior to Negotiations with Factories

As manufacturers have become more aggressive with their competitive pricing allowance, some finance and purchasing departments at companies are attaching more importance to “up front monies” than to total lifecycle cost of a vehicle. “In a business environment with many unknowns, up front monies are real, measurable, and easily presented to upper management,” said Bob Wagner, corporate commodity manager for Eaton Corp. in Cleveland.

“Lifecycle costs are impossible to project with the certainty of up front money. I would rather report to management a $500 saving per car up front than say we should buy this particular car because the used-car market indicates that this car versus its competition has experienced $500 lower depreciation over three years. Who knows what three years from now is going to bring?” asked Wagner.

Scott Thredgold, manager of fleet purchasing for the Church of Jesus Christ of Latter-Day Saints in Salt Lake City, says the Church’s vehicle plan reflects anticipated conservative rebates. “We have always stressed up front incentives, but at the same time, evaluate all incentives in a present valued lifecycle costs,” said Thredgold.

National Gypsum does budget anticipated fleet incentives. “But I always low ball the number,” said Don Woloszynek, manager, fleet services for National Gypsum in Charlotte, NC. “You just don’t know what our drivers are going to select at re-placement time and I’m no Karnak!”

One problem is that when fleet bids are being examined, it involves different departments within the company, with different priorities. “As we put together a team to look at the fleet bid process with manufacturers, it was a tough sell to get the finance people in the group to look at the total lifecycle process,” said Gail Watson, fleet & parking services manager for Nationwide Insurance. As for budgeting rebates in advance, Watson said, “I’m not sure how a company can, or would want to do this. I really think the money available from the manufacturers is limited and could go away if too many companies start ‘expecting’ things.” Stephen Levine, fleet manager for Pharmacia in Peapack, NJ, added, “I’m being somewhat simplistic, but when ‘financing/purchasing’ folks look at only the ‘front money,’ as happens in some companies, and not total holding costs, a fair and complete evaluation is not being made.”

Eight Ways Incentives Influence Selector Development

1. Ability to Upgrade Vehicles: “Incentives allow me to upgrade to a better car,” said Shirley Collins, head of U.S. fleet for GlaxoSmithKline in Research Triangle Park, NC. “A better car allows us to raise industry standards, which attract a higher caliber of employees.” Agreeing is Christy Coyte, fleet manager for Johnson Controls Inc. (JCI) in Plymouth, MI. “The fleet incentives offered on vehicles can, at times, be the deciding factor on whether or not a manufacturer’s vehicle makes our executive selector,” said Coyte. When Johnson Controls formulates its selector each model-year, it attempts to include a variety of vehicles to meet the needs of all JCI business units based on the mandatory vehicle criteria, while staying below a cap dollar limit. “If the fleet incentive is enough to bring the price of the vehicle under the cap limit, then it is included on the selector,” added Coyte.

2. Stretches a Limited Capital Funding Budget: “When you have a limited amount of capital funding that the corporation allows for fleet purchases, then fleet incentives play an important, if not major, role in selecting models for our annual and forecasted buy/lease decision,” said Gerald Cumby, fleet manager for Lockheed Martin in Ft. Worth, TX. “In some cases, one or two additional vehicles can be purchased from the incentive savings we might receive by volume procurement.”

3. Incentives for Volume Procurements Result in Substantial Savings: “Since we order 400 to 500 vehicles each model-year, the incentives become quite sizable and play an important part in our decision-making process, as they affect the operating cost,” said Pat Bell, fleet operations manager for Smith International in Houston. “However, incentives are not the sole factor in determining vehicle selection, but are an important contributing factor.”

4. Lowers Overall Holding Cost: “Incentives are nice because they impact the holding costs of our vehicles as we lease and do not buy,” said Don Woloszynek, manager, fleet services for National Gypsum in Charlotte, NC. Incentives are even more important when a fleet is funded by a closed-end lease and there is not a concern about resale considerations. “Anything off the price reduces cap cost,” says Charles Bowen, fleet manager for Rollins in Atlanta, GA, which funds its vehicles with a closed-end lease. “Incentives help our selection process because they contribute to the reduction of lease expenses.”

5. The Value of Money: “When you take into consideration the value of money, it’s always better to get ‘expensive’ money up front, rather than ‘cheap’ money later on,” said Chris Treutler, manager of vehicle operations and maintenance for USAA in San Antonio.

6. A Deciding Factor Between Similar Vehicles: Regardless of whether they are becoming more important or not, incentives do influence vehicle selection, as was the case with EquivServ, a division of Snap-on Tools, which operates a fleet of cargo vans, primarily Ford E-250s. “Fleet incentives do play a role in our selections in that we have recently become exclusive Ford customers to receive larger incentives and enhanced service,” said Mary Jane Davis, fleet manager for EquiServ in Conway, AR. According to Terry Blackwell, vice president of technical services for Charter Communications in St. Louis, “Factory incentives are a significant part of the selection process and are often the deciding factor between vehicles that are very similar.” He adds: “Resale value is not part of my selection criteria. The vehicle’s suitability for the job is the first criteria, then base cost and included options, then delivery issues, then factory incentives.”

Agreeing is Lynda Dinwiddie, fleet director for Laboratory Corp. of America in Burlington, NC. “Next to safety issues, LabCorp is very cost-conscious, so the incentive plays a significant role. If I have the choice of two to three different models that are basically equal in other areas, the tie-breaker will be the amount of the incentive and whether it comes directly off the invoice or if I have to wait to receive it at the end of the model-year. The overall projected volume of total purchases for a model-year will greatly affect what type of incentives is offered by the manufacturers,” adds Dinwiddie.

7. Incentives are Used by Manufacturers to Restrict Selectors: Incentives sometimes serve to restrict selectors and keep competitive models from making the list. “Without incentives I would be open to adding a few select models from other manufacturers,” said Scott Mayo, fleet director for Wendy’s International in Dublin, OH. “However, we have always been pretty loyal to one manufacturer and incentives are an added benefit to my loyalty.”

8. Increases Brand Purchasing Loyalty: Incentives are important for maintaining brand loyalty, as they help others within a company to see the value of a long-term relation with a specific supplier,” said David Watkins, fleet manager for Weyerhaeuser in Tacoma, WA. Lee Buttrick, field services manager for Boehringer Ingelheim Pharmaceuticals, similarly believes the manufacturers are forced to offer attractive incentives to maintain client loyalty. Scott Thredgold, manager of fleet purchasing for the Church of Jesus Christ of Latter-Day Saints, also agrees that fleet incentives are extremely important in maintaining purchasing loyalty to a specific manufacturer. Merrit Kinne, fleet manager for Aramark in Burbank, likewise believes that incentives are important in maintaining purchasing loyalty, “but they are not the sole determining factor. Product support, warranty, quality, lifetime operating cost, as well as resale, play a big part in this as well.”

Pros & Cons of Multi-Year Purchasing Agreements

The arguments favoring multi-year purchase agreements are a better acquisition cost and a consistent standard vehicle model for all employees. On the con side is employee morale, since there is usually no choice of vehicle. Plus, there is the risk of a product recall or market rejection of a new model or design. Chris Treutler, manager of vehicle operations and maintenance for USAA, sums up the pros and cons from his perspective. “Among the pros is that it makes for a great negotiating tool resulting in lower overall costs, and simplifies execution and cost of overall acquisition and maintenance program,” said Treutler. “On the con side, it tends to lock a fleet in, reduces flexibility, and can subject fleet to potentially unpleasant surprises.”

However, some believe multi-year purchasing agreements are gaining greater attraction for commercial fleets. “I definitely see more multi-year and multi-tier purchasing offers in the future and we are very receptive to it,” said Lynda Dinwiddie, fleet director for Laboratory Corp. of America in Burlington, NC, which is currently in the middle of a multi-year contract with DaimlerChrysler. “The various volume tier levels are based on each single year product buy with an additional per-vehicle incentive for signing a multi-year program. The separate multi-year incentive is not tied to a specific volume level. If handled right, these types of programs are win-win for both the fleet and the manufacturer,” adds Dinwiddie. Church of Jesus Christ of Latter-Day Saints requires a one-year domestic fleet agreement but now uses multi-year agreements on global contracts, said Scott Thredgold, manager of fleet purchasing. On the con side of multi-year purchase agreements is Don Woloszynek, manager, fleet services for National Gypsum in Charlotte, NC.

“I don’t see myself ever locking my company in to just one manufacturer,” said Woloszynek. “With different designs, new models coming up all the time, I don’t want to limit my possibilities by staying with one vehicle manufacturer. It’s too restrictive for me.” Farmers Insurance Group restricts its purchasing commitments to a single year. “We have been approached with multiple-year programs,” said David Edenhofer, corporate fleet manager. “However, we prefer not to commit to more than one year due to various factors such as new models that may provide better service or lower cost; there may be recall problems with a vehicle that we would be obligated to continue for another year; pricing for the next year’s model may be higher than the competition (unless you get guaranteed pricing for multiple years); and perhaps a redesign of the model you committed to does not meet your needs.”

Another concern about multi-year purchase agreements is regarding driver morale. “On the negative side, the drivers sometimes become bored with the same old car from year to year, but when the value received is good, you can always remind them that their company-provided vehicle is at no cost to them,” said David Watkins, fleet manager for Weyerhaeuser in Tacoma, WA. “On the positive side, the leverage with the manufacturer, received as a result of a long-term relationship, coupled with a sole-source decision, is of more value than the short-term bidding process used by some companies,” added Watkins. “For Eaton Corp. multi-year deals are a non-event,” said Bob Wagner, corporate commodity manager. “We are fairly consistent in our volume and product mix and we negotiate tiered programs with each manufacturer. It’s a formal ‘what if’ program. What if we order 100 vehicles? What if we order 500? What is the concession? Write it down. Then let us manage the buy to Eaton’s advantage,” added Wagner.