Getting the Straight Scoop on Sourcing Strategies and Depreciation Management
There are two parts of the depreciation equation: acquisition cost and resale value. The latter gets the lion’s share of attention, but original cost can be managed successfully,
and sometimes brings solid cost savings.
Fleet managers know there are two over-arching fleet costs: variable cost (fuel) and fixed cost (depreciation). Clearly, fuel-cost management has been in the headlines recently, with volatile fuel prices and alternative-fuel vehicles grabbing most of the attention.
But, managing depreciation is every bit as important. Most of the attention given to managing depreciation goes to resale: how to maximize resale dollars, and, thus, minimize depreciation. Equal attention, however, should be given to the “front end” or acquisition cost, and the strategies experienced fleet managers use to reduce the prices they pay for fleet vehicles. And, it isn’t just about price, either.
Although much has been written about the difference between amortization and depreciation, it’s a good idea to start there. It is relatively simple: When a vehicle (or any asset) is acquired, the company must decide how quickly its value declines with use, and reflect that decline on the books. This is amortization.
After an asset is taken from service and sold, the actual value that has been lost is determined by simply deducting the resale proceeds from the original cost. This is depreciation. Ideally, the two numbers — amortization and depreciation — will be the same, or more realistically, fairly close.
Amortization is an entirely arbitrary number, so there is no need to “manage” it in the strictest sense of the word. Depreciation, however, is not arbitrary, and fleet managers must constantly track and adjust for both original cost and resale values to keep it as low as possible. There are a number of sourcing strategies experienced fleet managers consider when seeking to manage and reduce depreciation expense.
Strategic sourcing has become all the rage in the corporate world, and for good reason. Leveraging the volume of a corporation’s purchases makes purchasing simpler, and results in volume pricing.
Strategic sourcing applies the full leverage of the company’s purchasing power, whether buying vehicles, paper clips, or office furniture. Some companies have a culture that pushes responsibility down as close to the customer as possible. There’s nothing at all wrong with this; however, doing so as it pertains to acquiring fleet vehicles won’t achieve the best pricing available. Simply put, the price for buying 500 vehicles will be better than that for buying five.
There are different ways this can be accomplished, depending on how the company is structured. For example, some companies are a single entity, with regional or branch locations spread across the country. Under this scenario, sourcing fleet vehicles strategically is a relatively simple matter.
Other companies consist of a corporate office/entity, with two or more business units under it, whose purposes may or may not be related. The fleet requirements for the business units may be dramatically different — one might have only a sales fleet, another just a service fleet, still others a combination of both. Just because one division needs only cars, and another just vans does not necessarily mean that the volume cannot be leveraged.
Taking a Single Sourcing Approach
More or less joined at the hip with strategic sourcing is single sourcing. Common sense dictates that if a company leverages all of its volume, it must be with a single supplier to achieve maximum savings. For a long time, a number of fleets have “split” their volume among two or more suppliers; the logic being that each of them will compete all the more vigorously for more of the business when they are competing with others. But, a fleet lessor will be every bit as vigorous in “protecting” a very large customer that it has all the business of, as it will, if it only has half.
Single sourcing can be accomplished in a number of ways:
A fleet can single source with a fleet management company (FMC) or fleet lessor. Whether leased or owned, FMCs can “bundle” all vehicle types needed into a single program. Across-the-board pricing for cars, trucks, and other vehicles can be negotiated. This way, in the case where a corporate entity has two or more distinct business units with unique fleet requirements, a master agreement can be signed.
There are also large, national fleet-oriented dealer groups that have sophisticated ordering and delivery processes, and multiple franchises. For a company-owned fleet, which prefers to deal directly with a dealer, these groups can provide whatever vehicles the customer needs with a master agreement on pricing. This allows leveraging across multiple brands and vehicle types.
Under either of these scenarios, fleets can negotiate with a single manufacturer if the automaker can provide the vehicles required for additional discounts and incentives.
No matter how it’s done, single sourcing can help fleets maximize their buying power under a single supplier; however, not all sourcing strategies have to do with negotiating price.