Managing the Financial Side of Commercial Fleets

Balancing Cost Reduction with Productivity Gains

January 2017, by Bob Cavalli

Photo: iStock
Photo: iStock

“Ommmm.” The industry probably isn’t quite ready for fleet managers chanting mantras and seeking to balance their seven chakras. But there is sometimes a ying-yang conflict between the need to reduce fleet costs, while at the same time contributing to increased productivity.  

Though the latter is not often a stated responsibility for the fleet manager, the former — cost reduction — is; in spades. Fleet managers are perpetually required to do more with less, and document how they do it. Is there really a conflict between the two goals? There isn’t. They are mutually beneficial, and one leads to the other.

The following are some tips on reaching the Zen balance between two superficially conflicting goals.

Defining Terms

As with any analysis or discussion of any subject, it is a good idea to define terms. In this case, they are relatively straight forward:

Cost Reduction: Pretty clear, no?  Reducing cost is just that, reducing cost. Expending less today than one did yesterday, or planning to spend less tomorrow than one is spending today. But for our purposes here, let’s include cost containment too.

For example, commodity prices can experience astonishing swings, from wholesale down to retail pricing. Fuel, which is the large majority of fleet vehicle operating cost, is in no small part dependent on fuel prices at the pump. In an environment of rising pump prices for gasoline, or diesel fuel, or even natural gas and propane-autogas, a smart fleet manager can take action to keep fuel cost increases below the increase in the price at the fueling location. 

Productivity: From an economic perspective, defines productivity as “the rate at which goods and services having exchange value (i.e., that can be acquired in return for something, usually money) are brought forth or produced.” In a manufacturing environment, what is the cost per unit, or the number of units produced per time period, of the product or service? There are two ways that productivity can be measured within a fleet environment: first, what is the total cost of having and operating a vehicle, and second what can that vehicle produce (i.e. how many customer contacts can be conducted, or deliveries performed, or product serviced, etc.)? Thus, we can extend the definition to measure not only the rate (X products per hour, day, etc.) but the cost per unit produced. 

Are these two formally defined activities in conflict? They certainly can be. Fleet cost can be reduced without any corresponding increase in productivity; even resulting in a decrease in productivity. Reducing vehicle size could conceivably result in fewer products delivered, or an increase in the individual cost of a customer contact. Conversely, one can increase productivity — produce more per unit of time — by increasing cost; in the previous example, using a larger delivery truck might enable a company to deliver more product per load, but the truck might cost more to acquire and operate. Cost reduction and productivity gains are not always compatible with one another.

Cost Reduction Targets

Fleet managers target specific fleet costs for their reduction efforts; success means that fleet vehicles can do the same “work” using fewer resources, which one can easily say is an increase in productivity. 

For example, by far the largest fixed cost fleet vehicles incur is depreciation. It is a function simply of the difference between the original asset cost and the proceeds from its sale. The fact that it makes up some 60% or more of fixed costs makes it a favorite target for fleet managers looking for “low hanging fruit” in cost savings. 

But how, indeed, does depreciation impact productivity? Not, technically, by the dictionary definition given above. Reducing depreciation cost doesn’t result in a salesman being able to produce more sales in a particular time period. But it would enable those sales to be produced at a lower overall cost per unit, and, by that measure, reducing depreciation cost provides for increased productivity, i.e., more production per dollar spent. 

Other Expenses

Again, depreciation is the largest fixed cost, and fuel the biggest operating cost, so that is where the fleet manager’s focus usually is for cost reduction. Results will make the vehicle more productive (driving the same miles for less cost), and the driver as well (lower cost per unit of product or service produced). 

Thus, any cost savings will result in a more productive vehicle and a lower cost per unit of product, in other words, increased productivity. There are ways that fleet managers can quantify such productivity increases that go hand in hand with cost reduction (the latter always have to be documented). For example, a reduction in the cost of a service technician’s service call on a customer will be reduced by whatever the per unit cost reduction the fleet manager has achieved. 

Now, there are two ways a company can increase its bottom line: increase sales or reduce costs. Sales increases only increase the bottom line by an amount equal to the net after tax profit margin, e.g., for a company with a margin of 10% will see 10 cents profit for each dollar in sales. On the other hand, a $1 reduction in costs drops in its entirety to the bottom line: $1 in cost reduction equals $1 in profit. Thus, a fleet manager’s responsibility to reduce costs produces more income than any sales increase will. 

Productivity Increases

We’ve seen how cost reduction will partner smoothly with an equivalent increase in productivity.  But can fleet managers achieve direct productivity increases? By the dictionary definition, this would require some fleet activity which actually allows the driver to do more — sell more products, perform more service, achieve more deliveries, or whatever the mission may be. 

The answer, of course, is yes, there are a number of things a fleet manager can do to increase productivity — increase the rate at which products and services are produced. Let’s say that a consumer product manufacturer has a fleet of pickup trucks, driven by service technicians who provide installation and service to the product.  These trucks are upfit with utility bodies, with a ladder rack, in which are carried tools, test equipment, parts, and subassemblies. Drivers travel a regular route, with service appointments scheduled each day within the area assigned to them. 

The ability to be productive lies in no small way in the upfit of the truck; drivers must be able to access the ladder, tools, parts, and equipment quickly and easily during each service call; the time it takes to do so adds to the overall time and cost of each service call. The more calls a technician can make in a chosen period of time (a day, a week, etc.) the more productive he or she can be. 

Now, the fleet manager reviews the upfit, researches alternatives, and discovers that there is one that can make access to the ladder, the tools, and the parts used in a typical service call much easier, easier to the point where each service technician can now make one additional service call each week. Now we can do some basic arithmetic to find out how this change has increased productivity. 

Assume that this example service fleet consists of 100 trucks, and that each truck/driver makes four service calls each day, or 20 each week, and that a service call costs the company $300 (salaries, benefits, costs for the vehicle, tools and other items used). Changing the upfit to accommodate more efficient access to the items needed for a “typical” service call reduces the time required for each one, enough so that an additional call can be made each week. Twenty-one calls in a five-day working week is more productive than 20 was; the cost of each call is also reduced by roughly $16 (20 calls X $300 each = $6,000; $6,000 / 21 = $285.71 each), slightly more than a 5% cost reduction, and a corresponding 5% increase in productivity. 

And so the Zen of the intersection of cost reduction and productivity increase is clearly evident. Let’s look at another example of how these two activities can again be concurrent.

One of the hottest products in the fleet industry today is telematics. Whether a factory option or an aftermarket addition, telematics has quietly revolutionized the availability, gathering, and mining of critical fleet data. One of the first capabilities telematics brought to the industry was GPS tracking which, first, allowed drivers to know where they are and the best ways to get to where they’re going, and, second, allowed fleet managers to know both of the above as well. 

GPS tracking also could provide drivers with routing assistance, i.e., the ability to show the best and quickest way to move from one appointment to another.  It is not unusual for drivers to move from one territory to another, or for turnover in the ranks to bring new drivers into areas with which they’re not familiar. GPS tracking provides drivers with routing assistance from day one, dramatically shortening or even eliminating the time it used to take to become familiar with a route. 

Whether it is a new driver or a veteran, GPS provides the most efficient, real-time routing assistance; a clear way to improve productivity, and, again, to reduce costs. Reasonable assumptions can be made, regarding time gained once GPS tracking can route drivers more efficiently. Reducing drive time on a daily basis by a total of one hour (efficient routes, live traffic reports, avoiding construction delays, etc.) each day can add five hours to each drivers’ productive time. Four calls a day (as previously assumed) would require two hours per call; thus, a gain of an hour a day could reasonably add a total of two-and-a-half calls per week. Extending this out on an annual basis, there are roughly 260 working days per year over 52 weeks. Deducting two weeks’ vacation, that leaves 50 working weeks per year. Adding two-and-a-half calls per week adds a total of 125 additional service calls each year. Previously, our 100 unit fleet, performing a total of 20 calls per day would handle a total of 5,000 service calls per year. Adding 125 calls per year is a 2.5% increase in productivity, which was achieved simply by providing drivers with better, more efficient routing.

Data captured from telematics devices and other sources can help fleet managers find areas for cost savings beyond the “low-hanging” fruit. Photo: iStock
Data captured from telematics devices and other sources can help fleet managers find areas for cost savings beyond the “low-hanging” fruit. Photo: iStock

There would also be a reduction in training time for new hires and transfers, and, thus, the combined cost reduction and productivity adds up.

Finally, let’s look at a delivery fleet. Perhaps it is operating a cab/chassis with a van body or box upfit, allowing drivers to deliver product to the customer. In order to maximize the vehicles’ usefulness in this mission, drivers must return to a warehouse or other facility to reload for further deliveries. 

What if the fleet manager can find a different configuration, one which allows the truck to load more product, and consequently require fewer return trips for reloading? This might make both the vehicles as well as their drivers more productive; and more productive elements in the process might well provide an ultimate reduction in costs. The overall point is that the usual search for fleet cost savings, while critical to the fleet manager’s contribution to productivity, can be expanded to include vehicle and upfit specs.

Hand In Hand

It may seem at times that reducing cost would hurt productivity, in that fewer resources are provided in the production process. But the above examples prove otherwise. 

Reducing vehicle costs, whether in depreciation, fuel, or other categories, actually will make vehicles themselves more productive, while at the same time reducing the per-unit cost of creating the product or providing the service, thus cost reduction and productivity increases meld perfectly.

There is much a fleet manager can do to achieve both cost reductions as well as the attendant increase in productivity.

Know your costs; track all categories of expense regularly. Fleet managers will always be asked to reduce cost, but apply the appropriate productivity increase arithmetic to the process as well. 

“Check your specs.” Don’t assume that because a certain vehicle configuration has been used for a long time that it is the most efficient one. Remain close to the OEM representative, and your upfit provider, to continually analyze what improvements can be made. Reducing the rate at which product and service can be produced is an increase in productivity, and will concurrently reduce the per-unit cost as well. Again, cost reduction partners with productivity.

Consider the benefits of telematics, particularly as they apply to routing and vehicle tracking. Know what your company vehicle driver turnover ratio is, because not only will such technology make both vehicles and their drivers more productive, but will reduce the time needed to acclimate new drivers to the job. 

Zen, among other definitions, can be defined as achieving a balance between body and mind. The Zen of fleet management might also be defined as achieving the balance between cost reduction and productivity increases. While it may seem at first glance that the two states are in conflict, careful analysis shows that one leads to another, and they both lead to more efficient fleet management.

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