Although overall fleet costs have remained stable for the past five years, fuel prices are starting to increase, which next to depreciation is the second largest fleet expense category. In prior years, stable fuel prices have helped offset inflationary pressures fleets have been experiencing in a number of areas, ranging from maintenance labor costs to price increases for replacement tires driven by higher commodity prices. The costs in most fleet categories have increased, resulting in upward pressure on a fleet’s total cost of ownership.
This concern about rising fleet costs was a recurrent theme in feedback expressed by both fleet managers and fleet suppliers in response to a recent Automotive Fleet survey focusing on 2018 industry trends. This concern was exemplified in the following survey response: “Costs are on the rise — raw material pricing is affecting tire pricing, fuel pricing is on the rise, as well as interest rates. How do we mitigate what might appear to be uncontrollable expenses,” said Brenda Davis, strategic sourcing commodity manager at Baker Hughes, a GE company.
Today’s inflationary cost pressures are being felt in a variety of other areas, such as higher vehicle acquisition expense to compensate for the proliferation of onboard safety equipment, to increased material costs being passed on to end-users in higher pricing for replacement parts and materials to build upfits.
“Vehicle costs continue to rise due to added technology, safety equipment, and more expensive lightweight materials like aluminum. We anticipate we will continue to see interest rates increase based on the past 18 months experience,” said Clay Gaudet, senior global fleet manager for AutoZone.
Often, fleet expenses are unpredictable and uncontrollable. “Cost reduction initiatives are a challenge, especially when managing unexpected expenses, which are hard to predict. However, it is critical to work toward overall cost reductions, because even minimal cost reductions will have a big impact toward the overall P&L,” said Joshua Chamuler, director of transportation for ThriftBooks.
Cost Control is a Perennial Concern
Historically, as revealed by decade-after-decade of AF industry surveys, the top two concerns for commercial fleets have alternated between safety and cost containment. “In addition to driver safety, one of the top challenges has always been to reduce fleet costs. This hasn’t changed since the Model T,” said Matt Betz, VP fleet channels for SambaSafety.
When fleet costs start to increase, cost containment initiatives take top priority, getting the attention not only of fleet management, but also senior management. Fleet managers are voicing concern about higher vehicle acquisition prices, upward pressure on interest rates, and residual values.
When budgets remain static, rising acquisition costs puts constraints on a fleet manager’s ability to spec vehicles appropriate to the fleet application.
“I am getting pressure from my management to increase driver savings programs in an already lean fleet operations,” said one fleet manager who wished to remain anonymous.
Even with fleet-equipped vehicles, acquisition costs are trending upward due to the increase in content in standard equipment packages and end-user demands to migrate advanced safety technologies to traditional fleet vehicle segments.
“We have lived in a great world with low interest rates and fuel costs at the pump and incredible residual values – all of these are changing and so FMCs must work with their clients to help them with other items such as selecting the right vehicle for the job and managing total cost of ownership (TCO) for a sound future,” said Dan Chengary, senior manager, mid-market accounts for Wheels.
Rising cost of vehicles translates to higher ownership and operating costs per mile. “When prices start to increase it often leads to a commodity mindset, but a balance is needed,” said John Brewington, president of Brewington & Company, a fleet consulting company. “Use of the ‘science’ part of fleet management to drive acquisition, maintenance, and management of fleet assets to a lowest price model will often lead to decreases in reliability, productivity, and operator satisfaction.”
This is especially important when operating a truck fleet with expensive auxiliary equipment upfits.
“Cost reduction of overall commercial fleet expenses have been one of the top challenges which fleet managers have had to endure over the last several years,” said Joe Birren, CTP, senior truck & upfit engineer for Merchants Fleet Management. “Making sure the commercial fleet vehicle chassis and upfit specs provide the greatest efficiency and performance for the intended vehicle application is critical to total cost of ownership savings and maximizing ROI. Utilizing a telematics program to monitor idle time, vehicle speed and routing can provide substantial fuel savings.”
In addition, higher acquisition costs and budgetary constraints make it difficult for fleets to optimize a vehicle replacement schedule and acquisition strategy. This has a direct bearing on driver satisfaction and productivity.
A common theme reported by fleet managers is being forced to do more with less. “We are doing more with less, in terms of funds, people, and technology,” said one fleet manager who wished to remain unnamed.
This was echoed by another fleet manager. “Procurement teams have been tasked with saving money and fleet managers are trying to keep drivers on the road. Prices are going up, not down. That applies to vehicles, upfits, and everything associated with delivering a unit to a driver.”
Focusing on TCO Reduction
Total cost of ownership encompasses all fixed and operating expenses associated with a vehicle during the course of its service life.
“The buzzword in our industry is definitely TCO. It may seem overused, but reducing TCO remains a goal of every fleet and every fleet manager. The old adage is true, ‘what gets measured gets managed.’ Are you investing in the technology to help you manage your vehicle expenses? Increasingly robust data-driven insights into fleet expenses can shape a vehicle lifecycle strategy that maximizes the impact of every dollar spent,” said Bryan Calloway, director – North Carolina for Enterprise Fleet Management.
This focus was stressed by many fleet manager respondents. “My main challenge is reducing TCO while increasing fuel economy,” said one fleet manager.
Making a similar comment was Scott Darling, director of fleet for Trugreen.
“My main challenge is controlling costs in all areas, such as fuel, maintenance, depreciation, and so on,” said Darling.
Higher Repair Costs
Another cost trend has been the increase in repair costs. “This is one of the most challenging areas as a fleet manager has no control over the parts prices for vehicles in their fleet, nor do they have any say in determining which costly pieces of technology they may not want,” said Bob Martines, CEO and founder of Corporate Claims Management (CCM). “When a vehicle sustains damage due to an accident, so many more parts are involved, driving repairs up dramatically. With the demands to make vehicles more fuel efficient and safer, the vehicles have become lighter thus more susceptible to additional damages. Add the safety components, such as airbag, sensors, and additional structural support, the cost adds thousands of dollars to the repair costs. How does a fleet manager go to management with cost projections that are uncontrollable?”
This concern was seconded by another fleet manager who wished to remain anonymous. “The high cost to repair a vehicle after a ‘small’ accident is causing us to choose to total out a vehicle at a much higher rate due to the cost to repair.”
Fuel Prices Creeping Upward
For the 2018 April–September summer driving season, the Energy Information Administration (EIA) of the U.S. Department of Energy forecasts regular gasoline retail prices to average $2.74 per gallon, up from an average of $2.41 gallon during the same period in 2017. For all of 2018, EIA expects regular gasoline retail prices to increase to an average of $2.64 per gallon compared to an average of $2.40 per gallon in calendar-year 2017.
The price of diesel is also increasing. The average price of No. 2 diesel in March 2018 was $2.98 per gallon compared to $ 2.56 per gallon in March 2017.
“Fuel price volatility, managing fuel surcharge costs, are very difficult, most businesses do not provide any capital to get where they need to be with savings,” said Joshua Chamuler, director of transportation for ThriftBooks.
Another hidden cost is the increase in fleet fuel fraud.
Since 2016, there has been an ongoing uptick in fuel card fraud. In light of this, it is important for companies to develop a fraud prevention strategy addressing misuse, slippage, and outright fraud, which are defined as:
- Misuse: This is when employees use company resources for personal gain, such as fueling a personal vehicle or filling a friend or family member’s vehicle.
- Slippage: This is when an employee uses company dollars to purchase non-fuel items, such as food and drinks, but falsely reports it as a legitimate fuel purchase.
- Fraud: This is perpetrated by a third-party and can include stolen and skimmed card data.
Here are some basic fraud prevention tips that all fleet managers and drivers should consider:
- Require PINs and prompts. Require drivers to enter a personal identification number PIN and prompt them to enter a unit number or other verification data element before they are able to use the fuel pump.
- Scrutinize the pump. Look for signs of tampering at the pump, like broken seals. If something on the pump looks suspicious, don’t use it. Always try to fill up at fuel stations with surveillance systems.
- Regularly monitor fuel card accounts. Watch for unusual charges either from a geography standpoint or dollar amount.
- Keep an eye on frequency of fill-ups: If a driver stops multiple times in one day in one state, there’s a good chance something outside the normal scope of business is occurring. A fraud prevention strategy should control the amount of money that can be spent per day on fuel. This control mechanism can be based on a daily dollar limit or by pre-funding a fuel card.
- Beware of credit card skimmers: Credit card skimming has become an increasingly common form of fraud, especially at fuel station. A skimming device is designed to look like a credit card scanner. When a credit card is swiped, the skimming device electronically captures cardholder data. Drivers should be on the lookout for skimming device when refueling. Check the pump next to your pump to see if the card reader and setup look different. If they do not match, do not use the pump and alert the attendant at the station. When possible, use the pump closest to the stores because proximity increases the risk of being caught in the act of installing or retrieving a skimming device.
- Educate drivers on the consequences of fuel card misuse and fraud: It is important to stress that committing misuse and fraud is illegal and can be justification for termination.
The most important fuel card fraud strategy is to do everything possible to avoid it from happening in the first place. The key to preventing fraud is to educate drivers so they are aware of the risks and vulnerabilities.
Increased Transaction Fees
Increasing fleet transaction fees which correlate to higher TCOs, accompanied with flat or shrinking budgets is a growing challenge to fleets.
“Acquisition costs are steadily increasing with more available vehicle options whether its safety related, comfort, or new fuel savings technology,” said Brett Switzky, fleet, trucking, & records retention Manager for American Family Mutual Insurance Company, S.I. “We’ve experienced a really good used car market the past few years, but that has been starting to steadily turn. Many FMCs are using third-party vendors to manage certain programs (tolls, registrations, MVRs, etc.) in which the additional costs (transaction fees) get passed on to the customers. Increasing insurance premiums due to higher repair costs for newer more complex vehicles along with rising fuel and maintenance costs.”
Stability from a Strong Economy
Others foresee fleet costs remaining stable and manageable due to favorable macroeconomic factors and a healthy national economy.
“Several issues create a constant background noise for all fleet managers: vehicle acquisition costs, regulations, fuel costs, and insurance. We think these will remain stable and under control for the most part, thanks to the robust competitive environment and generally healthy economy,” said Frank Dankovich, director of fleet sales for FCA US LLC. “However, like any other business executive, fleet managers will be pressured to contain or reduce their operating costs, and the automation of back-end functions, such as scheduling, accounting, etc., will be increasingly ‘outsourced’ to newer and more powerful software applications. All of these duties will funnel back to the fleet manager for monitoring and approval,” added Dankovich.
Under-Utilization of Assets
Achieving true cost savings involves more than just putting off expenditures in the hope your organization’s fiscal situation will improve in the future; it requires eliminating costs. The best way to eliminate fleet costs is by removing underutilized vehicles and equipment from inventory. Underutilized vehicles are defined as those accumulating fewer than 5,000 miles and/or 500 engine hours per year.
“However, the question of fleet utilization is often overlooked because many fleets do not invest in tracking fleet utilization. Additionally, fleet utilization will be very different based on how vehicles are being used in various types of fleets (sales, executive, delivery, government, utility, vocational, etc.). If you are under-utilizing your vehicles, are you really putting those assets to the best use of your organization?” said Calloway of Enterprise Fleet Management. “Today there are many solutions to improve utilization, often involving a combination of short-term rentals, car sharing, ride sharing, long-term leasing and reimbursement. When combined with telematics, these transportation solutions can greatly improve a fleet’s utilization, help fill gaps for seasonal or project-based work, and lower overall TCO.”
Aligning Fleet to Corporate Goals
An effective fleet manager fully understands corporate products and programs. They know their company’s business. They have a willingness to manage at a level that is “company impactful” rather than simply “fleet impactful.” Learning more about each department that utilizes fleet vehicles ensures fleet meets the real business needs and demands of the company. This gives the fleet manager the ability to link strategic business objectives to the management of the fleet.
However, this is not always the case. “I have always believed that some fleet professionals have a blind spot in this area. We are experts in fleet and usually know the right answer from a fleet perspective. What is more challenging is the need to balance the right fleet answer with how that answer fits with the goals and direction of the organization,” said Betz of SambaSafety.
Senior management exerts intense pressure on fleet managers to control and/or reduce vehicle acquisition and operating expenses. To accomplish this, fleet managers can pursue three different cost-control strategies — cost savings, cost deferral, or cost avoidance. In order to implement a successful cost-control strategy you need to institutionalize the mechanisms to curb money-wasting behaviors.
Cost deferral is the easiest way to reduce annual fleet costs. This cost-control strategy simply defers or moves expenditures to future fiscal years. Essentially, cost deferral kicks the proverbial “can” down the road to be dealt with in the future.
Cost-saving measures are actions that lower current spending levels. Examples of cost-saving measures are reduced fuel expenditures, negotiation of price decreases for products and services, or the negotiation of a lower rental fees for infrequently used equipment. However, cost-saving initiatives are limited by the law of diminishing returns, especially with a well-managed fleet.
On the other hand, cost-avoidance initiatives are actions that eliminate incurring a cost in the future. One example is the elimination of underutilized assets or rightsizing a fleet.
Achieving true cost savings involves more than just deferring expenditures, it requires eliminating costs.
“An age-old issue with veteran fleet managers is when they first start a job, there are any number of areas where fleet managers can find cost reductions, sometimes substantial. But as time goes on, and the fleet manager’s own success begins to eliminate the possibilities for savings, management’s own demand for savings does not diminish. When a fleet manager has succeeded in squeezing all or most excess cost out of the fleet, how does he or she explain to management that merely maintaining the efficiency they’ve worked so hard to achieve is enough? Are there indeed areas where documentable savings can be found, even after years of cost reduction, such as depreciation and fuel?” said Bob Cavalli, principal of RAC Fleet Consulting LLC.
Fleet managers must think strategically when developing long-term cost-containment initiatives. The requisite foundation of any successful cost-reduction program is pre-existing operational efficiencies, which will allow you to focus on soft costs, such as vehicle/driver downtime and the resulting lost revenue. Vehicle/driver productivity can produce impressive results when quantifying cost savings, particularly in a well-run fleet program where the law of diminishing returns limits the impact of fixed and variable cost savings.