6. Lower Acquisition Cost
The largest component of TCO is almost always the depreciation of any given asset. However, fuel may exceed depreciation for very high-mileage, low-acquisition cost fleets. At any rate, achieving the lowest vehicle acquisition cost possible is paramount to reducing fleet costs. Even fleet novices understand that the lowest acquisition cost is not necessarily the optimal vehicle to acquire because the resale value of the vehicle plays a pivotal role in TCO. For example, a subcompact sedan may cost less initially than a midsize sedan, but the sub-compact may depreciate more, resulting in a higher TCO.
Common acquisition cost-reduction strategies also include negotiating price based on “triple-net” cost. This means starting negotiation with the dealer (or lessor, who is acting as the buying dealer) at dealer invoice, exclusive of OEM factory holdback, flooring (e.g., OEM financing paid to the dealer), and advertising refunds.
Factory-paid dealer delivery fees should also be negotiated along with receipt of national fleet or retail incentives (whichever is lower). Once a transparent net price is established, the fleet manager should negotiate a reasonable flat fee of profit for the dealer.
Fleet organizations should also negotiate volume discounts with one or more OEMs, employing either a single or multiple OEM vendor strategy. These discounts vary widely and are not necessarily dependent on fleet size. Generally, fleet organizations that start negotiations early in the model year get the best opportunity of savings. An OEM most often offers the greatest incentives for the vehicle models that they wish to “move.” This may be due to the phasing out of low-demand models or simply that the OEM has greater profit to share.
Regardless, savvy fleet managers employ lifecycle principles to determine the best deal, using reliable residual value projections from automotie industry resources such as ALG, Black Book, and others.
Note, ordering vehicles from the factory vs. out of dealer inventory saves, on average, at least $1,000 (some calculate $2,000) per typical light-duty vehicle. The target benchmark for out-of-stock acquisition is less than 1 percent.
Cost-Reduction Potential: Moderate to Large.
7. Assure Higher Resale Value
Previous sections of this article have dealt with the importance of managing depreciation and selling a vehicle at the economically optimal point in its lifecycle. Corporate fleets typically sell and average of 16 percent of its vehicles to employees (10 percent on the low end and more than 20 percent at the high end, depending on the industry). The advantages of driver/employee sales include:
- Faster receipt of proceeds.
- Higher residuals (priced a bit higher than wholesale).
- Driver takes better care of the vehicle.
- Auction and transportation fee savings.
Fleet managers should have mechanisms in place to prevent drivers from spending for unnecessary cosmetic, non-safety related repairs. Otherwise, true savings can be greatly diminished.
Additional ways to increase the resale value is to select only vehicle colors that yield the best return (typically white and other neutral colors) and to provide maintenance records to potential buyers. Reducing the cost of sales improves net residual gains. Thus, avoid any reconditioning of the vehicle other than moderate cleaning (less than $80). Managing auction and transportation fees can reduce the cost of sale by hundreds of dollars.
Finally, fleet managers should benchmark sales results against reliable fleet industry publications such as Black Book “fair” condition.
Cost-Reduction Potential: Small to Moderate.
8. Lower Maintenance Costs
Often, fleet managers adhere to outmoded beliefs for preventive maintenance (PM) practices, such as the belief that a PM should be performed every 3,000 miles. Such frequent PMs are only required for vehicles that operate under “severe” duty as defined by the OEM. Executive decision makers should consult with their fleet managers to determine the ideal practices for the company’s fleet, using OEM recommendations as a resource. Many light-duty fleet intervals have been extended to between 6,000 and 7,000 miles. Increased use of synthetic oils will also extend PM intervals (offsetting the higher cost of synthetic oil). Thus, on-time PMs become more important as intervals between PMs are extended.
After many years of ongoing price increases, tire costs were stable in 2013, largely as a result of pricing wars between the tire companies that brought down prices. A significant factor influencing tire cost has been the increased diameters of OEM-specified tires. These larger tires, however, increase mpg, vehicle performance, and have a longer tread life, which will likely mitigate increased tire cost.
Cost-Reduction Potential: Small to Moderate
9. Lower Crash Costs
The safe operation of employer-provided and employee-provided vehicles is of paramount importance in a well-run fleet organization. An effective safety management program provides many benefits that have a direct impact on profitability:
- Reducing the risk and cost of accidents and injuries.
- Reducing the cost of insurance.
- Increasing driver productivity.
- Enhancing driver morale and retention.
A commonly used methodology to translate crash costs into lost profits is to take the fully loaded expenses associated with fleet crashes and divide the number by the organization’s operating profit margin. The result is the total additional sales revenue the organization must produce to replace lost profits due to fleet crashes. For example, in an organization with an operating profit margin of 10 percent and annual accident-related expenses of $500,000, an additional $5 million in sales revenue is needed to replace the $500,000 in lost profits due to accidents.
Fleet managers alone cannot implement and sustain a successful safety program. It must be driven from the top and be a CEO and COO priority, as well as being actively supported at all levels of management.
Finally, sources such as Risk Management magazine and Risk & Insurance Online provide ample examples of court punitive awards due to fleet accidents that tally into the millions:
- 2007: Florida, $11 million settlement.
- 2004: Georgia, $2.75 million jury award.
- 2004: Texas, $3.5 million settlement.
Cost-Reduction Potential: Moderate to Large
10. Lower Overhead Costs
Overhead costs, also known as indirect costs, include the cost of management and administrative staff, buildings and facilities, including fuel sites, computer systems, utilities, tools, taxes, and many other factors that cannot be attributed directly to a vehicle. While no set formula exists for calculating the percentage of a fleet budget devoted to overhead, an Activity Based Costing (ABC) exercise is useful for identifying the sources of these costs as a first step.
Cost-Reduction Potential: Small to Moderate.
About the Authors
Gary Hatfield is a vice president at Mercury Associates. He can be reached at [email protected]
Janis Christensen, CAFM, is director of corporate fleet consulting at Mercury Associates. She can be reached at [email protected]