Taking the Right Steps in Vehicle Acquisition
Image courtesy of iStockphoto.com.
From the outside looking in, vehicle acquisition may seem like an easy process: You choose the vehicle you want and you buy it. Fleet managers know it’s not as simple as that. Vehicle acquisition involves a complex array of decisions, ranging from what types of new vehicles should be purchased when and from whom, to how that purchase will perform for the fleet over time.
There are best practices fleets can follow that will simplify the process and ensure the company’s vehicle dollars are well spent.
When it comes to acquiring new vehicles, timing is everything. So, when is the best time to order? That answer often depends on a number of factors. The obvious consideration is knowing how early an order needs to be made to get the vehicle on time. But, timing can also mean money — so it’s important to consider how the timing of the order will affect purchase price and resale values, too.
Cindy Gomez, director of Vehicle Acquisitions at Donlen, said the best practice for determining when to submit orders is to start at the end, then work backward. To do so, ask these questions, in this order:
- When is the vehicle needed?
- What is the vehicle lead time?
- If upfitting is required, what is the upfit lead time?
- What is the estimated shipping time for each mode of transport? Which one will help the vehicle arrive on time?
In addition to asking these questions, Gomez said the most important step is to simply start planning early on.
“It is in the best interest of the customer to work with their fleet management company (FMC) as early as possible in the ordering process,” she said. “This will result in the customer ordering the right vehicle, for the right price, delivered at the right time.”
Elizabeth Kelly, director of operations, vehicle acquisition, LeasePlan, agreed that understanding lead time is a key factor in getting the timing right.
“Vehicle production varies by make and model, therefore it’s important to know how long of a process to expect,” she said. “If you are upfitting your vehicle, remember to factor in additional time for shipments and upfit completion before delivery. Also, if your policy allows for driver ordering, be sure to allocate time in your schedule for drivers to do their part.”
While ensuring enough planning time for upfitting and delivery is important, it’s also critical to consider the timing of the actual purchase — and the selling of the vehicles the fleet’s replacing. Kelly suggested re-evaluating the ordering cycle.
“Many fleet managers order later in the year to take advantage of higher resale values. However, the influx of orders can cause delays on spring deliveries,” she explained. “Ordering earlier — September is the optimal time — could potentially avoid these delays, as well as possible maintenance costs associated with maintaining turn-ins. Some fleets also stagger ordering throughout the year to avoid delays.”
Kelly also recommended staying up-to-date with manufacturers’ production schedules.
“Keeping up with scheduled cut-off and start-up dates can put you one step ahead of the game when it comes to ordering,” she said. “Sometimes, OEMs can suddenly cut off production of a certain model. Constantly monitoring their production schedules can help avoid surprises.”
For Scott Edidin, senior account manager at Wheels, the planning process begins early in the year.
“In the spring, all customers should reach out to the manufacturers to review current product, new product, and negotiate incentive packages,” he said.
Edidin also advised fleets to think carefully about resale timing.
“It is important for your used vehicles to hit the right time because each week prices could decrease. For example, starting in early fall, wholesale or retail values could decrease by $50 to $75 per week, which is why it is critical to get out ahead of your planning,” he said.
Doing some advanced planning can also be helpful to take advantage of factory order pricing, said James Crocker, director of Fleet Operations, Merchants Fleet Management.
“Ordering directly from the OEMs allows for specific options to be selected and reduces overall cost as there is little to no mark up by the dealer,” he said. “If vehicles are not purchased through factory ordering, vehicle costs increase as dealers drive up the price to cover their various advertising and overhead costs. By not being able to factory order, you may also be forced to pay for options that are not needed based on available dealer inventory.”
Jeffrey Perkins, general manager, Fleet Operations at Motorlease, agreed that factory ordering has its advantages.
“When possible, factory ordering is the most economical way to go about acquiring a vehicle,” he said. “Factory ordering ensures consistency throughout the fleet and only necessary and desired options are included. Depending on the manufacturer and even the fleet management company, the pricing may be fixed whether you are placing that order in the beginning of the model-year or the end of the model-year.”
If you’ve missed the window for factory ordering, all savings are not lost: Purchasing from a bailment pool can yield price advantages and quicker delivery, too.
“A bailment pool can be used to earn the benefits of factory order pricing,” Crocker said. “Bailment pools do limit options to what is currently in the inventory of the pools, but, if the right vehicle is available, the cost benefits of factory pricing can be taken and the pool can shorten the overall order-to-delivery timeline.”
Perkins agreed that, while bailment pools may not offer exactly what the fleet needs, they do come with attractive price tags and lead times.
“When it becomes necessary to acquire a vehicle quickly and a true ‘build to suit’ factory order will take too long, fleet managers should inquire with their fleet management company about the manufacturer pool program,” he said. “Some manufacturers have vehicles currently in production or perhaps even already built, which can be redirected to your area of need. It is possible there may be limited color options or the equipment may stray from your standard build, but, by utilizing this approach, you should be able to maintain your factory order pricing structure.”
Perkins warned that, if buyers take the dealer route, it’s likely they won’t be as happy with the price, nor is it as likely to suit driver needs.
“When it is absolutely necessary to purchase a vehicle out of dealer stock inventory, you should assume that there will be a premium cost associated with doing so. It is possible that the vehicle located will have more equipment than necessary or that the vehicle may need to be transported,” he said.
However, he also said there are steps fleet managers can take to improve the situation.
“Clearly setting the expectations with your fleet management company will assist in making the acquisition process go smoother, as well as decrease the amount of time involved in getting your driver on the road,” Perkins suggested. “Some helpful things to submit when requesting a vehicle out of dealer inventory are multiple color choices, necessary equipment as well as equipment which will not be accepted in the vehicle.”
Partha Ghosh, director, Supply Chain Management, ARI, has seen an uptick in dealer stock purchases as of late — a trend he cautioned fleet managers to beware of.
“Ordering patterns are shifting slightly more toward stock purchases vs. factory orders. While factory orders still dominate ordering patterns, stock purchases seem to be picking up,” he said. “If this is, indeed, a trend, fleet managers should consider certain implications as part of this decision process. While the primary purpose of purchasing an out-of-stock vehicle is the ‘immediate’ availability of the vehicle vs. factory ordering that same vehicle, there are some key trade-offs.”
Ghosh said, on average, an out-of-stock vehicle can cost $3,000 more than the factory model — or even more, depending on the model and/or options. He also advised fleets to be flexible about vehicle options and features when purchasing from dealer stock, due to the difficulty of finding an out-of-stock vehicle that exactly matches the needed specs.
“Looking ahead and anticipating vehicle needs, while always challenging, is the optimal route for acquisitions as it enables factory ordering, which leads to acquiring the correctly spec’d vehicles at typically the lowest possible cost,” he said.
In addition to factory ordering, if the fleet manager has successfully planned ahead, he or she may be able to negotiate an incentive program with manufacturers to reduce purchase costs. Incentives are typically based on annual order volume throughout the model year.
“Having a negotiated agreement in place ahead of time will alleviate the stress of trying to strike a deal at the last minute, when your negotiating position may be weaker due to rapidly approaching deadlines,” said Bud Behling, president, BBL Fleet. “Completed agreements will also increase order-to-delivery efficiencies. Your fleet management partner can assist in the review of your incentive agreement to verify whether you are receiving the most competitive incentives based on your annual order volumes and the length of your agreement.”
Edidin of Wheels advised fleets not to limit the number of manufacturers to consider, even if they’ve relied on one particular OEM in the past.
“We encourage our clients to reach out to different manufacturers beyond what is on their current selector level,” he said. “Know every manufacturer and every option; invite everyone to the table because you might be surprised what might work for your fleet, and it also helps in contingency situations. Once you weigh all your options, and then negotiate your best deal. Consult with your fleet management provider on negotiation strategies.”
Ghosh of ARI noted; however, that staying the course with one or two OEMs also has its benefits — but comes with risks, too. “Standardizing the OEM selection can have a tremendous streamlining impact on the acquisitions process, and, furthermore, have significant downstream benefits, in the operational expense categories incurred by fleets,” he said. “Standardizing the fleet to one or two OEMs (depending on the variety of vehicle types) is the optimal route, as the acquisition process is simpler to execute, and the usual upfitting process can also be streamlined. The downside risk of standardizing on one or so OEMs is the same as ‘putting all of your eggs in one basket,’ in the event unexpected manufacturing/production or maintenance issues arise.”
If the fleet hasn’t performed a replacement cycle analysis yet, forget all the other best practices and start here. Finding the sweet spot for when to replace a vehicle — ideally before maintenance costs and downtime begin to rise, but while resale values remain profitable — can yield valuable savings while allowing fleets to get the best performance from every vehicle.
“Historically, fleet managers would, in many cases, allow their vehicles to be ‘driven into the ground,’ and this would often result in unexpected downtime when the vehicle was no longer usable and delay from waiting for the replacement vehicle. In addition, as age and mileage accrued, maintenance costs would often significantly increase, negatively impacting operating costs and total cost of ownership (TCO),” explained Ghosh of ARI. “Today, fleet managers are realizing that determining the optimal replacement timing for each vehicle or segment of vehicles in their fleets can drive tremendous benefits and advantages, ranging from minimizing downtime and operating costs to keeping up with the fast-changing safety and technology features in more recent models as part of their fleets and ensuring the safety and comfort of their drivers in the process.”
Although a replacement cycle will typically apply to an entire category of vehicles, as with all vehicles of a certain make and model, Edidin of Wheels suggested a vehicle-by-vehicle replacement analysis strategy can be beneficial at times.
“Evaluating your replacement vehicles by exception and, if needed, implementing your decision on a vehicle-by-vehicle basis will allow you to decide which alternative replacement strategy might work best, like replacing based on current parameters, short cycle, or extending the lifecycle,” he said. “This is a great way to optimize your overall fleet spend.”
When considering which vehicles to purchase, it’s essential to know what each will be used for and the specs required to meet those applications. Understanding how a vehicle helps the driver do his or her job should guide the choice — in essence, it’s the shopping list that’s turned to when evaluating different makes and models.
“It is essential to match your vehicle selection to the application or function of each vehicle. Vehicles that are too large or have more power than the job requires will increase operating expenses such as lower mpg and higher routine maintenance costs,” said Crocker of Merchants Fleet Management. “Conversely, if a vehicle is undersized or powered for its job application there will be increased wear on the vehicle and, thus, increased repairs outside of regular maintenance may be required. Selecting the right vehicle for the job it is performing can lower mpg and indirect cost like fuel expense, insurance expense, and maintenance.”
Gomez of Donlen suggested working with the fleet’s FMC to understand the company’s core business and the specific function of each vehicle that needs replacing.
“This will allow your FMC to evaluate and analyze each asset type, which can potentially reduce your carbon footprint, increase driver efficiency and satisfaction resulting in lower driver turn over and increased revenue,” she said. “Due to newer and more efficient vehicle models, and especially, if upfitting is required, it is a good practice to allow your FMC to send a consultant out to the field and work with the drivers and branch/fleet managers. This will allow the FMC consultant to understand the current vehicle application, any possible safety concerns and what pain points they are currently experiencing. With this information your FMC can provide recommendations for possible standardization, reducing overall upfit cost and reducing order-to-delivery lead times by working with our top tier vendors.”
Even though the right vehicle with just the right spec may have been identified, it’s also important to consider what that vehicle will cost the fleet. And, that’s not just purchase price — it’s the cost of the vehicle over its entire lifecycle. If there’s indecision between vehicle types — or a struggle to narrow down vehicle choices —looking at TCO will be both wise and incredibly helpful.
“It is important to have your FMC evaluate the total cost of ownership, and compare these assets with similar alternatives,” said Gomez of Donlen. “By analyzing this information, FMCs can narrow down the customers’ vehicle choices and upfit options to ensure they are ordering vehicles within their budget potentially reduce their overall cost of ownership and maximize their ROI.”
Perkins of Motorlease agreed that TCO is a critical consideration. “I cannot stress the importance of TCO enough,” he said. “Depreciation is the single largest expense in owning a vehicle. Capitalized cost as well as the residual value are key drivers in the way in which depreciation is calculated and ultimately affect the interest expense. Fuel followed by insurance as well as maintenance are other leading factors of TCO and should not be ignored.”
Although the importance of TCO can’t be overlooked, Edidin of Wheels said matching the vehicle to the need remains the most important consideration.
“At Wheels, we review a variety of variables that impact the TCO of a vehicle — mpg, resale, maintenance, depreciation, and more. But, the key to identifying a strategic selector is to ensure the vehicles on your TCO analysis best meet the fleet’s needs and overall business goals,” he said. “One vehicle may have the lowest TCO, but if the vehicle is too small to meet your business need, then it’s not the best choice.”
While the vehicle acquisition process mainly focuses on vehicle cost, order and replacement timing, and application, there are also best practices that apply to drivers.
Sara Schingen, business analyst with EMKAY, suggested creating a list of approved specs and options from which drivers are allowed to choose.
“Along with providing available specs, put policies in place regarding additional options or trim-level requirements to make the ordering process for the driver as smooth as possible, while limiting the interaction needed from the fleet administrator. The idea is to minimize fleet administrator involvement so they may focus on their business.”
Along with providing clear guidance to drivers on their available options, Crocker of Merchants Fleet Management also suggested paring down that list to increase buying power.
“Purchasing a large volume of vehicles from OEMs allows for greater negotiation power,” he said. “When end-users are given wide selection parameters they will utilize the breadth of options offered. Limiting options increases the number of like vehicles and thus increases the ability to negotiate on volume incentives.
Additionally, if a consistent replacement policy with a predictable acquisition schedule is set, better incentives can be negotiated with the OEMs.”
After vehicles are ordered, Schingen suggested fleet managers set expectations with drivers about order and delivery timelines.
“It is best to educate the driver on the ordering process, while also advising them on what they will receive and when,” she said. “Taking a proactive stance on the ordering process minimizes the drivers’ concerns and questions, putting them at ease throughout the process.”
Schingen also recommended explaining the delivery process, as well as the steps drivers must take after the vehicle arrives. “The vehicle will need to be titled and registered, and, depending on which state the vehicle is delivered to, the vehicle may need permanent plates on it before it will be released. The process may take longer in some cases,” she said. “So, by proactively updating the driver of the status as well as explain the delivery steps, questions will be answered up front and their level of patience is usually a bit higher as well.”
In addition to streamlining the ordering process for drivers, Behling of BBL Fleet said fleets can simplify their own ordering process by moving it online.
“The actual placement of an order utilizing an online ordering portal has multiple benefits to a fleet manager,” he said. “It reduces the paper flow and can minimize order timeframes. Online ordering can eliminate common order errors because standardized specs are downloaded. The online ordering portal can also be ‘pushed’ to the drivers, allowing approved drivers to order their vehicles themselves, freeing up a fleet manager’s time.”