Otis Elevator Company, a wholly-owned subsidiary of United Technologies Corporation (UTC), is a world leader in the manufacture, installation, and maintenance of elevators, escalators, and moving walkways. For more than 150 years, its mission has been to provide the best service to its customers. In 2006, the company’s revenue exceeded $10.3 billion.
Keeping a close eye on its fleet financials, Otis executives and management team partnered successfully to create fleet efficiencies utilizing a system called Achieving Competitive Excellence (ACE). ACE is an Otis and UTC proprietary operating system focused on increasing efficiency and reducing waste. Otis facilities worldwide use the ACE operating system to improve quality and customer satisfaction while lowering costs.
“We’ve made a company-wide commitment to providing outstanding service,” said Tom Vaccaro, director, modernization and service, for Otis North and South America Area (NSAA). “That means responding promptly to customer requests, delivering what we promise, and never compromising on quality and safety.”
Approximately 3,500 of the company’s 4,000 U.S. and Canada vehicles are leased. Eighty-two percent of the company’s fleet vehicles are Fords (ranging from four-door sedans up to 26,000 lb.-GVW truck models). The remaining fleet makeup includes GM models (16 percent) and other assorted makes and models. The executive fleet includes 100 vehicles selected by drivers.
Fleet is currently the second-largest expense at Otis behind salaries and benefits.
Fleet Shift Allows Policy Changes and Cost Savings
Otis recommitted to its mission of quality and service seven years ago, undergoing a “fleet shift.”
“You can’t fix 10 low-lying fruit at the same time,” Vaccaro said. “We’ve targeted our goals one at a time since then and been very successful in the process.”
The fleet team, which includes Phil Schreiber, fleet manager, North America, and Cathy D’Onofrio, manager, supply management, Otis NSAA, first targeted out-of-stock purchases (at 38 percent) because they were the costliest expense, as well as an easy immediate fix with an immediate large payback at the time.
“We set a goal of no more than 5 percent of out-of-stock vehicle urchases,” Schreiber said.
Previously, there was an average price deferential of $2,500 per truck, and close to 300 trucks were purchased yearly out of stock. “Within two years, we reduced it to 3 percent out of stock,” he said.
Out-of-stock purchases are done only when all other methods, such as factory orders, bailment pools, and the leasing company pool, cannot provide the vehicle needed.
According to the team, branch communication was critical to the initiative’s success. Otis is a decentralized company with more than 120 branches in the United States and Canada, each branch acting as a separate profit center.
“Within the three years it took to change the mindset of our employees, we started to realize some substantial savings from where we were before,” Schreiber said.
In 2000, the average cost per vehicle, including cap cost and operating cost, was higher than it is today.
“This is in spite of inflation and gas prices,” D’Onofrio said. “So today, on a cost-per-vehicle basis, our costs are less than they were six or seven years ago.”
The team also redefined its replacement strategy, moving from a 48-month/80,000-mile cycle to a 60-month/100,000-mile cycle.
“We achieved more reliability with a longer cycle,” Schreiber said. “By the time we replace a vehicle, it is just about paid off.”
Otis recognized immediate results from the switch, gaining in excess of $400,000 net over book value for all vehicles sold, and up to $700,000 over time. Schreiber expects to surpass the $1 million mark this year. All savings go back to the fleet and fleet purchases.
“We also have the right mix of vehicles to generate that type of income as a result of vehicle sales,” D’Onofrio said. “And we have many remarketing venues that increase our results, including auctions, retailers, E-Value Buy, employee sales via our leasing company’s Web site, and wholesalers.”
After the switch to a higher mileage policy and fleet standardization, drivers remain happy with the vehicles due to a careful selection of company-added options that created a comfortable, safe environment for drivers. Maintenance issues have not increased, and the rate of catastrophic events, such as a loss of transmissions or engines, remains the same.
“If we had seen more maintenance or heavy repairs, we would have gone back to our 40/80 cycle,” Schreiber said.
Fleet Management Partners with Executives to Streamline Process
The fleet team works with Otis executives to continually evaluate fleet policy and cost initiatives. When the “fleet shift” movement was implemented in 2000, their partnership was more important than ever.
The fleet team worked with senior executives to uncover high-cost areas, understand the cost drivers, and simplify the number of models in the fleet.
“Our mechanics and their usage of the fleet are critical to our delivery of excellent customer service,” said Tom Vining, vice president of operations, Otis NSAA. “We were not willing to sacrifice quality or service to control costs. Together, we took a hard look at our processes to see where we could find better efficiencies.”
According to Vaccaro, certain levels of decisions had to reside with regional VPs or the president of the company in some cases.
“We are setting out guidelines and reviewing them on a regular basis,” Vaccaro said. “Developing a rational policy and enforcing it from the top had a lot to do with our success.”
According to D’Onofrio, senior management relies heavily on Schreiber’s expertise and leadership.
“He communicates benefits to us and allows management to make informed decisions based on well thought-out strategies, such as how to reduce our carbon footprint and how to offset cost increases in fuel,” she said.
Informing management of options and alternatives allows everyone on the team to make better decisions.
“The one thing we don’t want to do is negatively affect the productivity of our drivers who service our customers,” D’Onofrio said.
Follow-up and execution is vital, and so the team conducts regularly scheduled leadership meetings to develop and enforce policies.
Otis Established New Selector to Better Fit Company Needs
During the “fleet shift,” Otis also re-established its vehicle selector list. The ultimate goal was to identify cost and business drivers and uncover the rationale behind selecting a certain type of vehicle. They now assign vehicles based on the task at hand.
“We standardized all of the vehicles in our fleet,” Vaccaro said. “We created templates for each type of vehicle and configurations.”
Otis began with 23 vehicle platforms and driver options and ended with nine platforms with some variations, but no driver options.
“Driver options were a nightmare to administer, so we decided to end that program,” Schreiber said. “It was just too costly to run.”
While they worked on vehicle realignment, the team standardized upfitting. First, they worked with operation managers in the field, gathering input on preferred upfitting for different jobs, then developing standard upfitting platforms for each vehicle type.
Productivity and safety go hand-in-hand at Otis. For example, based on consideration from the field, fleet has designed a vehicle in Canada that includes a new, ergonomically friendly package.
“We have a dispersed fleet, about 120 branches across the United States and Canada,” D’Onofrio said. “Drivers work with the respective branches, and Phil communicates with each branch manager about policy. So during our realignment, while decisions were made at the headquarter level, Phil talked with the branch managers who then communicated the changes to drivers.”
Vendor Relationships Critical to Purchasing Power
Streamlined vendors are a critical part of the way Otis operates. The company’s vendors must be timely and flexible, yet offer the highest quality level. Otis customer satisfaction depends on it.
The team’s price negotiations and purchasing power have increased greatly based on interactions with business partners.
“I visit the vendors and examine their operations,” Schreiber said. “Through our long-term partnerships with them, we have been able to deflect many of the price increases in commodities (especially fuel).”
Because Otis is a division of UTC, all corporate fleet managers are asked to participate in OEM negotiations. This allows any division to bring to the table 10,000 vehicles in negotiating power in North America. About two years ago, UTC negotiated a global deal for its 38,000-unit worldwide fleet.
“With that type of volume, we got fantastic pricing,” D’Onofrio said.
One example of excellent partnership between Otis and its vendors ccurred in April 2007.
The company was experiencing delivery problems with bailment pool vehicles. Otis had received the vehicles within 40 days, which lengthened to 110 days. In early April, Otis and Carrier fleet managers, vehicle manufacturers, upfitters, and the leasing company gathered for 3½ days to iron out a better process.
“We conducted an event to create standard work processes and find efficiencies,” Schreiber said. “It was an incredible process. They came to the table because of the partnership we have with them.”
At the gathering, attendees took apart all processes from all companies present. Then, they put everything back together in a way that made sense for everyone, didn’t duplicate efforts, and supported one another. Results were immediate.
“Our goal was to drop delivery time from 110 days back to the previous 40-day schedule,” Schreiber said. “We actually dropped it down to 34 days. And our newest report for July, August, and September 2007 show the drop continued from 34 to 30 days average per vehicle.”
Bailment Pools and Driver Safety Aid Efficiencies
Another significant achievement for Otis includes establishing a private bailment pool. At any given time, the fleet has 60 to 100 vehicles of different types in the bailment pool, allowing fleet to deploy vehicles to the field within three to six weeks, based on upfitting and type of vehicle required. Previously, the turnaround time was 24 weeks with out-of-stock or factory orders.
“Faster deployment to the field means more money in our pocket,” Vaccaro said. The branches pay less for rentals, and their staff works out of a truck or a van designed for the work they do.
Otis has also reduced its accident rate by increasing driver safety, which translates into significant cost savings from reduced litigations, repairs, injuries, downtime, and insurance.
Seven years ago, the company’s accident rate was 24.7 percent. Today, that rate has declined to 15 percent.
“Each percentage drop equates to a quarter-million dollars,” Schreiber said. “Otis has by far the safest accident record globally of any company in the elevator business. For industrial fleets such as ours, the national rate is about 22 percent. We’re not lying on our laurels; we’ll push it down further.”
To accomplish this accident-rate decline, Schreiber worked with the environment, health & safety department, explaining that the company’s drivers spend 30-50 percent of their time in fleet vehicles and outlining why fleet should be part of Otis’ employee workplace safety program.
“They bought into it,” he said. “We already had safety managers in the field who became my partners.”
Schreiber began to work with the safety managers on rolling out new safety measures, including investigating all accidents and conducting a root cause analysis to drill down into why the accidents occurred, establishing a vendor-provided “1-800 How Is My Driving?” number on each vehicle, and implementing the ACE program.
“We communicated policies, trained drivers, worked with our insurance provider, and went over a detailed safety plan,” Schreiber said.
The safety program was partially customized for Otis’ needs. A pilot of the new safety program was implemented successfully in one company region. In addition to the training program now in place for drivers, the fleet team also reviews reports generated by the 1-800 program.
“We look at multiple offenders and work with them to correct the behavior,” he said. “There are serious consequences if the driver does not change the incorrect behavior.”
Otis Gets a Handle on Fuel Costs Through Diesel Implementation
Fuel, a topic on everyone’s mind, is another area in which Otis has implemented recent changes. Several effective fuel management initiatives have been instituted to mitigate the high cost of fuel.
“We’ve replaced about 25 percent of our high-mileage trucks with diesel vehicles, increasing mileage by 30 percent as compared to gasoline,” Schreiber said.
The fleet team was also able to operate the vehicles for four years versus two years. “Our formula suggested that our vehicles needed at least 25,000 business miles per year to even look at a diesel engine,” Schreiber said.
This extended mileage limit is due to the high premium paid for diesel engines, which increases capitalization cost.
Greening its fleet is difficult at Otis, due to the dispersion of its fleet throughout the country, cost-to-benefit ratios, and size of vehicles. However, the company is willing to monitor fuel availability infrastructure updates in the future.
“At such time the infrastructure is there and is cost-effective, we will decide how to continue greening the fleet, which technology is better, and which is a cost-effective, as well as easy, option to adopt,” D’Onofrio said.
Originally posted on Fleet Financials