Maximizing Oversight with Minimal Overhead

 

At a Glance

There are several key elements to successfully managing employee spend, without taking on additional administrative overhead:

• Know what the spend is - you can't manage what you don't see.
• Use fleet programs - most fleet suppliers provide a full menu of fleet and fleet-related programs.
• Make full use of any controls these programs offer to prevent wasteful spending before it

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The terms have changed over the years — expense control, expense management, cost reduction, cost control. Today, the new buzzwords are "spend management," Whatever the phrase, it all comes down to the same thing: prudent oversight of the company's money, no matter what the purpose may be.

For fleet managers, this means what the drivers spend to operate and care for their company vehicles. It can also include other travel-related spending, such as meals, lodging, entertainment, and airfare. Thousands of dollars, over each year, for each driver add up to millions in spend. It's a tough challenge, but there are ways to manage spend without breaking the bank in overhead.

Why Spend Management?

This question often arises: Why worry about spend management? The answer is a simple one. There are only two ways a business can improve the bottom line: It can increase sales (sell more or raise prices) or it can reduce costs.

Say your company operates at an after-tax margin of 5 percent. To generate an additional $1 in profit, sales must be increased by $20. However, reducing cost by $1 results in $1 in additional profit.

The point is, every dollar of reduced cost drops straight to the bottom line, while a dollar of increased sales only increases profits by a nickel. Thus, the never-ending emphasis management places on cost reduction.

A major component of cost reduction is managing how the company's money is spent. Thus, spend management.

At a 5-percent profit margin, a company spends most of what it receives in revenues. Costs of goods sold (including raw materials, labor, benefits, and other general and administrative costs), and taxes.

Companies have accountants to manage tax provisions, which leaves managers and department heads to manage the rest. Sometimes, managers lose sight of the fact that whenever a company spends more than it produces in cash flow, the balance must be borrowed, adding more cost (interest expense) to the profit and loss statement. It isn't their money: the checks always clear, suppliers get paid, and so do employees. This can be a dangerous attitude if allowed to continue unchecked.

As a prelude to spend management (specific to the manager's responsibilities), managers and executives must be held responsible for cash flow, dollars in and dollars out, and understand that if the business were their own and there wasn't enough in the bank to pay the bills (and the employees), they'd either have to borrow to do it, or delay payments.

Differences in Fleet Spend

What, then, makes up fleet spend? Exactly what dollars go out to pay for what? Defining fleet spend begins by dividing overall costs into two broad categories:

• Fixed costs are related to the acquisition and ownership/lease of the vehicle, which include lease payments, capital expenditures (if owned), interest expense, insurance, and tax/title/license.

• Variable (or operating) costs are associated with the operation of the vehicle, which include fuel, maintenance/repair, tires, and tolls.

The next step is understanding that a fleet manager cannot manage an expense or spend unless he or she knows what it is, meaning data capture. The ownership/lease and operation of a fleet of vehicles generates a great deal of data - including dates, times, and type of spend.

The data for fixed costs can be captured quickly and easily, without a great deal of administrative effort. If the fleet is leased, this data is captured via the lessor; if owned, internal controls can be used (i.e., depreciation reserve and interest expense can be captured internally once it is set up electronically). Insurance costs are usually established via accrual for physical damage (if the fleet is self-insured), and premiums for purchased insurance billed by the chosen carrier.

Variable expense, by its very definition, is more difficult to capture. Such expense varies widely by individual vehicle, depending on a number of factors, including geography, mission, mileage, and the driver. In the early days of fleet management, most variable costs were captured via individual expense reporting. Drivers drove, purchased fuel, paid tolls, got oil changes, paid for it out of pocket, and submitted an expense report which included odometer readings.

Fleet managers had to have a system into which this data was input for review and control. Fortunately, there are now many more payment options available to drivers, and the process is far more automated.

Currently Available Programs

What are the current payment options? Most fleets know fleet programs exist that they can use for the drivers' convenience that also makes data capture (and therefore spend management) simple and routine.

Fuel spend is the single largest variable fleet expense. Depending on pump prices, it can make up as much as 70 percent of variable costs, perhaps more. A typical fleet will spend approximately $3,000 to $4,000 per year, per vehicle for fuel at today's prices. It is also the spend that occurs more frequently than any other, as drivers purchase fuel several days a week, and, in some cases, every day. Fleet fuel-card programs allow drivers to purchase fuel whenever necessary, and provide fleet managers access to the detail these transactions produce, individually and fleet-wide.

Fleet maintenance, repair, and tire expense is less regular; however, individual transactions are much larger than those for fuel. Here, too, there are maintenance management programs that provide a national network of repair facilities, centralized billing, and detailed data capture and availability.

These programs fill the requirement that fleet managers must capture all necessary data to properly and effectively manage spend, without piling on administrative expense. Some of these programs will carry fees for use, which, of course are negotiable depending upon the size of the fleet (and the spend).

However, just having access to data is only the first step in managing spend. Fleet managers manage data, but they also manage behavior. Using and implementing the controls and features of these programs is the next step.

[PAGEBREAK]Before & After

You now have your drivers' spend coming in under one or the other of the various fleet programs available. Buying fuel, paying tolls, getting oil changes, and leasing vehicles is simple, and the data these activities produce is captured in a single location. Now, a fleet manager needs to determine how to properly control such spend.

There are two ways fleet spend can be managed: via controls before the fact and via actions after the fact.

Fleet service programs, such as maintenance management, provide the ability to place strict controls on what is purchased, when, by whom, and how that spend is authorized. On one hand, don't place draconian controls on drivers to the point that their day-to-day performance of duties suffers. On the other hand, make full use of the resources the fleet supplier offers.

Limit a driver's authorization to spend to cover only emergencies, such as a flat tire repair or a tow. Once the vehicle is in the shop, use the technical expertise your supplier offers to its fullest extent.

Most maintenance program providers offer the expertise of ASE-certified technicians, who track the vehicle's maintenance history, and negotiate with the shop regarding work performed. This is the proactive approach that can make spend management much easier.

Similarly, fuel-card programs offer card controls that stop activity at the pump. Fleet managers can limit how often a card can be used, dollar spend by time period, and even limit use by zip code. Managing by preventing unnecessary spend is nearly foolproof, and once the controls are set up, there is literally no administrative or overhead cost. Managing spend by preventing spend is eminently logical, and it works every time.

If placing limits on spend is the "before," what, then, is the "after"?

Not all controls are available and some simply aren't practical. This is where management by exception fills the gap after the fact.

For example, fuel cards cannot limit an individual transaction by the number of gallons, at least not universally throughout the merchant network. Many such card programs, however, enable the fleet manager to note in the vehicle inventory record the tank capacity. Thus if a sedan has a capacity of 20 gallons, and a transaction exceeds this amount, the transaction can be reported as an exception, and the fleet manager can follow up with the driver.

Thus, overhead and administrative costs attached to spend management can be held to a minimum by using all the controls and authorization limits fleet suppliers offer, and covering much of the rest using exception parameters and reporting.

When to Leverage Spend

Yet another "hot" business term today is "leveraging spend." It has become more and more prevalent in many companies to establish a "strategic sourcing" function. Strategic sourcing is simply the process where the company audits the company spend - no matter what the purpose - and seeks to combine previously unrelated spending under a single source. This both simplifies spending and leverages volumes into greater discounts or better pricing.

As far as fleet is concerned, the single most attractive expense for strategic sourcing is fuel spend. It is the largest single fleet variable expense, occurs regularly throughout the fleet, is predictable, and can amount to tens of millions of dollars in larger fleets. Most often, strategic sourcing suggests combining fleet fuel spend with other employee-related spend, such as travel/entertainment and office supplies, under a purchasing or "one-card" program via one of the company's banks. A one-card program spend can easily exceed $50 million, and much like larger fleet fuel spend the company can receive rebates from the bank.

There is nothing wrong with leveraging spend; however, fleet managers need to be very careful about allowing strategic sourcing to make the decision. By using a commercial card for fuel (or any other fleet-related spend, for that matter), the fleet manager will lose critical level III data, particularly odometer readings. Nearly all of a fleet's spend, both fixed and variable, is measured in cost/use ratios, which, in most cases, include mileage (miles per gallon, cost per mile).

Further, losing that data will make replacement scheduling difficult, as that too is generally related to time and mileage. Unfortunately, strategic sourcing staffers sometimes aren't all that concerned with anything other than maximizing leverage into maximum discounts and rebates; the effect this has on fleet operational issues is not a factor in the decision.

Many, if not most strategic sourcing professionals, will include a subject-matter expert in the process, and this is where the fleet manager can have significant input. Sourcing professionals do understand that although spend can be leveraged, there can be additional costs tacked on that may well use up any savings the leverage produces, if the administrative and technical requirements of the spend category aren't met.

There is, however, another way fleet managers can leverage fleet spend; and they've been doing it for a long time, albeit under a different name. It's called "bundling" in this business, which is a tried-and-true method to receive maximum leverage for all fleet spend. It includes leasing, maintenance/repair, accident repairs, fuel, and even some administrative expenses (license/title/tax administration, tolls, and parking tickets).

Some fleet managers prefer "best practices" in choosing fleet suppliers, and there are valid arguments for that, too. Bundling - placing most or all fleet programs with a single supplier - enables the supplier to depend on several revenue streams, and blend margins from them all into what can be eye-opening discounts. Another advantage is that single sourcing is almost always the most administratively efficient way to leverage spend as well. One contact, one data source, one bill, and one supplier.