Managing the Financial Side of Commercial Fleets

Fleet Leasing vs. Purchasing Decision-Making

November 2017, by Tim C. King

Graphic courtesy of Getty Images.
Graphic courtesy of Getty Images.

When selecting a vehicle, most people look at more than just financial considerations when it comes to filling their personal transportation needs. These considerations might include considering leasing as an option.

Organizations considering fleet leasing often only consider the more immediate financial factors. As a result of this, the finance group may be the decision-maker for when considering this option. But, doing so may result in overlooking other benefits with substantial savings that are unique to fleets and their customers.

This is comparable to letting your accountant choose your personal vehicle, who may exclude other values such as capacity, performance, style, comfort, economy, reliability, image, etc. It’s obvious this approach wouldn’t work for most of us. The same principle applies for fleets with leasing.

And yet, this limited perspective is quite common when it comes to fleet leasing decision-making. There are two principal reasons for this. First, the financial aspects typically dominate the focus, for the reason previously stated. And second, even fleets are often unaware of all of the hidden benefits of leasing — particularly those from a specialized full-service fleet leasing firm.

The purpose of this isn’t to sell leasing. It’s to highlight these benefits to fleets – so that they aren’t overlooked. In some cases, the opportunities of leasing can literally redefine a fleet’s customer service. But, to identify these, it’s useful to first review some basic fundamentals.

Fleet Asset Management

As any manager knows, the cost of the services provided is a significant component to defining your success.

With fleets, a principal determining cost factor is managing its assets — the vehicles and equipment. This involves a lifecycle of procurement, managing the operations and maintenance, and disposal of each of these assets.

Leasing can encompass all of these functional aspects. One of the most challenging (and critical) is effectively and consistently replacing equipment to optimize costs and quality of services.

For any fleet this is contingent upon stable consistent funding. Unfortunately, for many, this is simply not available to support groups like fleet. Funding often is dependent upon the overall financials of the parent firm or organization; which is subject to a number of variables. As a result, many fleet replacement schedules vary based upon financial conditions.

At a Glance

When comparing purchasing and leasing, fleets should examine all aspects of each, including:

  • Hidden savings with adopting the lowest lifecycles with fleet equipment.
  • Equipment pricing. 
  • Elimination of non-value added current process requirements.
  • Associated savings with outsourcing opportunities. 
  • The improved service quality and lower costs to customers. These encompass both internal and external customer entities.

Depending on the severity of these limitations, this can cause dramatic impacts to customer service with both costs and quality issues. As a result, the effectiveness of this function can define and override the entire fleet services support. Hopefully, you’re not in a situation like this. For fleets that have always experienced this, it often defines their business culture. It can become accepted practice, since “it’s the way it’s always been done”.

Even when identified in these situations, since there’s no apparent solution, it also tends to preclude further study — since previous efforts to address this may have been fruitless. Typically, this situation is simply accepted and largely ignored.

In these cases, leasing may present an opportunity to break-out of this mold and redefine the fleets’ and its customers’ success.

Funding Stability

For these fleets, the principal opportunity leasing provides is funding stability. With operating leases (which is the subject of this article), a different type of funding is involved with procuring fleet assets. Instead of relying on capital funding to purchase equipment, leasing utilizes operating expense funding.

What’s given up is ownership. What’s gained is a different source of funding that may not be subject to the ups-and-downs of the organizations’ capital budget and financials.

As stated earlier, removing this instability from fleet replacements can profoundly affect a fleet’s and its parent organization’s performance.

The most immediate benefit is felt by customers with the improved equipment quality. However, for some fleets this may be both under-valued and under-appreciated.

What does get attention though is the resulting lower operating and maintenance costs. And, often this is not only the result of reduced downtime and maintenance, but the associated reduced parts and labor requirements. The only issue with this is that it will usually take some time to fully realize the extent of these often otherwise missed savings.

Additional Hidden Savings

For fleets that have always purchased equipment, leasing offers a number of additional benefits that are also easily overlooked.

One contributing factor with this is viewing leasing as only process improvement. This is the result of thinking that the procurement process is simply replacing purchases with leasing. This is a very easy mistake to make.

In reality, full-service fleet leasing encompasses process redesign. And, while this may not sound significant; it involves profound change and a vastly greater scope. This includes not only redesigning the entire procurement process (from inception to delivery), but also eliminating substantial non-value added tasks that can realize significant savings of fleet’s time and money.

The following will examine each of these often missed opportunities; starting with the beginning of the procurement process.

Equipment Lifecycles

Optimal fleet replacement decisions require extensive knowledge, including equipment operating and maintenance costs incurred by both the fleet and its customers.

However, in the case of fleet purchasing, this requirement is removed when fleet replacements are defined by budget constraints.

When this occurs, fleets are forced to prioritize equipment to “fit” within the available funding. Depending upon the extent of the budget constraints, this can result in contentious and lengthy discussions with customer groups fighting over limited dollars to meet their equipment needs. This is not only stressful and time consuming, but also counter-productive to achieving optimal customer satisfaction, which is the ultimate goal of any service provider.

Leasing offers an alternative with numerous benefits.

First, the periods of leased vehicles and equipment are well-defined upfront — being typically based on achieving optimum lowest lifecycle costs (This also essentially coincides with optimal equipment quality). Combined, these represent the goal of any fleet with asset management — in both minimizing costs and maximizing quality.

Second, with the leasing firm performing this function as a part of their business requirements, it largely eliminates the need for the fleet to perform these life-cost analyses for fleet equipment — another significant cost and time savings.

Facilitated Decision Making

With leasing, once customers and fleets have the funding authorization and identify the lease periods, the subsequent procurement decision making is simple. If vehicles and equipment have reached this optimum replacement timeframe, they are eligible for replacement.

In a transition to leasing, there will be a need to temporarily prioritize the replacements to avoid disrupting the fleet by trying to replace all of these units at once. Once this has been accomplished, the goal is to levelize fleet replacements to optimize the process going forward.

For new or additional equipment, leasing decisions are similar to purchasing — involving comparing savings and costs with procurement; to other alternatives such as rentals or contracting.

This same approach should be also taken with replacements; it only compares the replacement alternatives (again rentals or contracting) to the lease cost.

These leasing decision-making requirements are in sharp contrast to that required for purchasing decisions. With this, the fleet has to develop or acquire its own criteria for optimum equipment replacement schedules based on their overall costs.

For some fleets, accurately determining these costs can be a formidable task, depending on the information available.

With purchasing, replacing owned equipment involves comparing the costs of the current unit to the replacement. This includes ownership, operating, and maintenance costs — both to the fleet and its customers.

With leasing, replacements are easy since it automatically occurs at the end of the equipment’s lease period.

It’s that simple. And, there’s usually no prioritization or disagreements between customers and fleet. Leasing promotes cooperation and improved customer relations — important goals for any service provider.
But, the benefits don’t end here.

Equipment Pricing

Fleets often purchase equipment through their local suppliers, such as dealers. This is good for community relations and can enhance service support in some cases. But, it comes at a significant hidden cost.

When the fleet organization’s financial group performs its analysis of leasing versus purchasing, the benefits of the supplier/fleet relationship can be overlooked because it’s normally outside the scope of their expertise and function.

With a sole focus on comparing the high-level financial cost/benefits such as interest rates, taxes, etc.; it may not get into actual comparisons of procurement pricing with the two options.

It’s easy for this to occur. The financial experts are focused on the high-level financials, not realizing there may be a fundamental pricing difference with the two procurement processes.

With many full-service lessors, because of their purchasing volume, they not only possess economies-of-scale with their services, but they also realize substantially reduced pricing from OEM suppliers. This can offset all other financial considerations; while at the same time being missed.

When a fleet is procuring equipment from a lessor, that leasing firm may be an OEM suppliers’ major customer.

It’s a stark contrast to your organization’s purchases from local dealers. And, the pricing typically reflects this. As a result, leasing firms can realize 20-30% savings over typical fleet purchases in some cases.

This, and the following outsourcing opportunities, can add up to sizable hidden savings opportunities often overlooked.

Specifications

Many full-service lease providers offer specifications support. This can simplify and reduce the associated fleet’s requirements in two ways — both resulting in savings with specification requirements. Since the fleet is working with only the leasing firm(s), specifications can be simplified and less formal. Additionally, the specification function may be outsourced all or in part to realize reduced staffing and expertise savings.

It’s basically an opportunity to out-source a specialized function. For some fleets this may be advantageous and facilitate these savings opportunities.

Procurement Decision Making

Since leasing replaces equipment purchasing, many of its associated requirements and processes are avoided as well. This represents a significant savings to both the fleet and the organization’s purchasing group.

The most significant is the elimination of the request for proposal (RFP) or request for quotation (RFQ) process. Competitive bidding is simply no longer necessary, since selection of individual equipment suppliers with leasing is based upon comparing the monthly lease costs of each alternative source. The initial purchase price component is automatically built-in to this.

Opportunities can be identified with a lowest life-cost approach to evaluating bids. The process identified with purchasing equipment is similarly eliminated since it is automatic with comparing monthly leasing costs with the alternatives being considered. This is another hidden time and work savings.

The only procurement requirement with leasing is the initial determination of the leasing provider(s). It’s that simple. Once this is performed, the subsequent decision-making is automatic (in terms of when to replace equipment), and involves comparing the monthly lease costs with the alternatives.

Procurement Follow Through

With the purchasing process, once a direction is identified, the process is implemented with initiating a purchase order or similar document.

Leasing involves a much more simple process: It’s just communicating to the lessor what’s needed.

For purchases, the next step for most fleets is meeting with vendors and coordinating subsequent requirements, including follow-up communications on status, expediting, and delivery.

This typically entails all of the suppliers involved. This is not only with the initial vehicle supplier (with cab & chassis procurements), but also with any subsequent after-market requirements.

With leasing there’s the necessary or desired coordination with the lessor. But everything else is typically taken care of by the lessor. This eliminates the staffing, their time, and associated requirements normally associated with fleet purchasing procurements.

Delivery & Associated Processes

Leasing also simplifies the delivery and associated processes. First, since typically all procurements are handled by the leasing firm(s), this both simplifies and standardizes the delivery process. Unlike with purchasing, there are no longer a multitude of varying and differing suppliers to coordinate with. The fleet coordinates with only the lessors involved.

They are the go-to source for all requirements or issues.

In the case of full-service leases, licensing/registration can also be performed prior to delivery along with any associated tasks such as inspections, training, added retrofits/additions, etc.

A fleet has the opportunity to out-source all of these functions, without giving up any control. And, in most cases with the extent of the lessor’s expertise and volume, these services can be both significantly enhanced and simplified — all while reducing costs, time, and resource requirements for the fleet. With many of these services, they are included in the lease cost.

Equipment Maintenance

Again, with full-service leasing there are a multitude of options to support fleet maintenance functions as well. One may be out-sourcing the required preventive maintenance (PM) function. Another could include all the other supporting maintenance requirements such as repairs, warranty coordination and support, breakdowns, etc. These are based on the services offered by the leasing provider and the fleet’s discretion.

Options are good when it comes to opportunities.

Equipment Disposal

With purchased equipment, the disposal function presents a significant requirement. It’s a burden that involves a number of choices; including whether to perform this in-house or to out-source all of it or in part.

And then, there’s all the coordination, time, and effort involved with actually selling, donating, or otherwise disposing of surplus and retired equipment.

Leasing entirely eliminates these issues for a fleet. Equipment is simply picked-up and taken away at the fleet’s and their customers’ convenience.

For most units, the timing is automatic at the end of the lease period. Additionally, lessors have processes to accommodate early terminations of equipment if it’s necessary.

It doesn’t get much easier than this.

Savings Opportunities Summary

As you can see, there exists a plethora of opportunities that can be overlooked in a high-level financial oriented analysis.

The principal message here is to avoid only focusing on this level of financial detail.

It can be difficult for fleet managers to grasp or appreciate the full scope of the opportunities leasing offers upfront. To fully appreciate this, realize that some leasing firms are also unaware of the scope of these potential benefits.

To examine these effectively, many managers will have to think out-of-the box. Leasing is that much of a change to all of the traditionally-required processes associated with purchasing. And the associated benefits are typically missed, since they result from an entirely different way of doing business — in this case the procurement function.

About the author: Tim King retired in 2008 following a 30-year career with what is now NVEnergy, an electric utility based in Las Vegas. He is the author of Fleet Services: Managing to Redefine Success.

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