How much is your fleet actually costing you?
If your team doesn’t have an accurate answer to this question, your company may be missing out on significant savings. Knowing what to look for and how to evaluate spend is essential.
The relationship between company fleet vehicles and procurement is an interesting one. In some instances, there are entire teams dedicated to managing fleet spend. In other cases, companies leave fleet completely unmanaged, or use a third party to manage select aspects of fleet-related activities. Fleet is an area in procurement where significant cost savings opportunities lie, but the knowledge of how to obtain those cost savings and how to evaluate fleet spend is often mysterious.
Organizations can typically break overall fleet spend down into a handful of sub-categories. This will make things easier to digest when starting a Fleet Assessment: acquisition, maintenance, fuel, remarketing and administration/licensing are good places to start. Of course, there are other ancillary sub-categories, but these five typically encompass the most impactful spend categories.
At the core of fleet management is the financial strategy behind acquisition of fleets. To buy or to lease is the first question that organizations should answer. Or, even further, a capital lease or an operating lease? What depreciation schedule should you use? In general, it is important to understand how your company’s accounting and finance strategy impacts vehicle financing, and which methodology is most beneficial when accounting for the assets on your books. When developing a financial strategy, it is important to bring together both Finance/Accounting and Operations to collaborate in making the decision.
The most obvious cost driver in relation to vehicle acquisition is deciding which units you should acquire. This is where Operations takes the lead. What is the purpose of the vehicle? Are they sedans for insurance adjusters? Are they tanker trucks for propane distribution? Are they tree trimming trucks for a utility company? Overall, the use of the vehicle needs to be properly aligned with the specifications. You wouldn’t want to buy a diesel Ford F350 for the insurance adjusters, for example, due to fuel mileage and high acquisition costs. Extreme examples aside, rationalizing your fleet vehicles for the specific vehicle application and ensuring things such as fuel mileage and add-on specs (i.e. hoists for tow trucks, decals, other up-fitting options) line up with what you need versus what drivers or fleet managers prefer. Corcentric’s Capital Equipment group has a plethora of tools and market data to drive decisions in the space.
Be careful not to neglect this area of potential cost savings. You can have the best acquisition strategy and perfect mix of fleet vehicles for your application, but if they continuously break down it will cancel out any cost savings you earned through acquisition or other areas. Evaluating the fleet maintenance policy, by vehicle type, is the first step. Does the maintenance plan line up with manufacturer recommendations? Are maintenance costs surging in older vehicles? And, possibly the most important question, are drivers complying with your established maintenance policies? A mismanaged maintenance program can destroy fleet budgets and put drivers in danger. Performing an analysis on the total cost of ownership (TCO) of a vehicle versus the cost of maintenance over the life of the vehicle (or lease) is something that can help Fleet managers determine when to replace older vehicles with newer ones, and get overall visibility into maintenance costs. Once visibility is obtained, then decisions can be made.
Where your procurement team stands in its maturity matters. To help companies assess where their team stands, from laggard to world-class, Corcentric recently hosted an on-demand webinar, “Addressing the Maturity Gaps in Procurement – Approaches to Improved Sourcing Efficiency and Effectiveness,” in which I was a participant, along with my Corcentric colleagues, David Pastore, Senior Director, Sourcing Operations and Mike Croasdale, Senior Director, Group Purchasing Organization (GPO). We were also fortunate to include The Hackett Group’s Chris Sawchuck, Principal & Global Procurement Advisory Practice Leader and Jonathon Fehring, Director, Procurement & P2P Executive Advisory.
Fuel Card Spend
Fuel often presents overlooked cost savings opportunities. But there are many configurations and programs you can employ. First, you need to evaluate what return you are getting, via rebate, on your fuel card spend. What your in-network gas stations look like and, which ones are considered out of network, and do they line up with the routes your fleet drivers are travelling. Getting a competitive rebate for in-network fueling is an easy way to bolster savings. Additionally, looking at alternate programs such as on-site fueling programs or dedicated fuel (on-site storage) can help increase cost savings. On-site fueling, for example, is a great alternative if driver fraud and mis-reporting of personal fuel versus fuel for business is rampant.
This is another area to look at when evaluating the cost of Fleet Programs. Remarketing is a great way to offset acquisition costs and get as much value as possible out of vehicles being cycled out of use. Remarketing typically isn’t a huge spend category, but it is important that your remarketing strategy aligns with your goals in selling vehicles. Are you looking to get optimal value back for the assets being sold? Are you looking to sell the assets as soon as possible at potentially less than fair market value? Are you looking to get troubled vehicles off the books? Your goals as a Fleet Manager will determine where the vehicles are sold and how they are sold (auction market versus private listing, for example). You should also investigate remarketing fees. Flat fees per vehicle and commission based on sale value are the most common fees to be looked at for the cost of outsourced remarketing programs. If remarketing is handled in-house, the time to sale and time investment of internal resources need to be measured and weighed. When it comes to procurement maturity, the numbers don’t lie. The Hackett Group’s 2020 Procurement Benchmark measured how best-in-class, mature procurement and sourcing organizations stood in contrast to their peers and the results are striking: Best-in-class organizations realized:
Licensing and Administrative Fees
These include a broad array of fees that can add up over time both in terms of the burden on your internal staff to manage them (if handled in-house) and the cost to fulfill them. This spend category includes anything from managing the Title and Insurance documents to managing the lease and financing documentation. Record retention of driver information and vehicle information provides key visibility and enables compliance with DOT and other financial requirements. You may have internal resources where their sole responsibility is to manage this aspect of the Fleet Program, or you may outsource this function to a fleet management company. Either way, there are significant costs associated with managing all the documentation related to a Fleet Program. This is an area where the nickels and dimes add up to big expenses or, when managed properly, big savings.
When looking into the total cost to manage and run a fleet of vehicles there are many cost drivers involved. It is important to take an all-encompassing approach starting with the largest cost drivers (acquisition) before working your way down to remarketing and administrative fees. Done in this order, it will enable a streamlined and comprehensive evaluation.
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