Managing the Financial Side of Commercial Fleets

How to Leverage Fleet Vehicle Purchases

July 2016, by Chris Wolski - Also by this author

Graphic courtesy of iStockphoto.com.
Graphic courtesy of iStockphoto.com.

While purchasing fleet vehicles is a complex, time-consuming process filled with intricacies concerning upfits, rightsizing, and total cost of ownership (TCO), fleet managers bring a number of advantages to the table when negotiating vehicle purchases with OEMs.

Several fleet managers shared how they have leveraged their purchasing power to get not only the best deal, but the right deal for their companies’ fleets.

Buying in Bulk

For major fleets, one of the biggest advantages they bring to the table is volume and the willingness to sign multi-year contracts.

“Volume is a primary driver,” observed Abe Stephenson, fleet and administration manager for DISH Network. “All suppliers use volume as a key indicator of the value of the procurement cycle. Years of history with a certain provider can also help, with familiarity of the products and services required by the customer contributing to the efficiency of the supplier, which should make it easier for them to supply those products and services at a lower cost over time. However, brand new relationships with suppliers are also an opportunity to leverage purchasing power as both sides are going through their ‘honeymoon’ phase together.”

Volume is only part of the equation. As with any personal or business relationship, a long-term commitment also gives the fleet the leverage of a loyal customer.

At A Glance

Fleets have a number of ways they can leverage their purchasing power with OEMs. This includes:

  • Buying in bulk.
  • Single sourcing.
  • Concentrating on only a handful of models.
  • Taking advantage of financing through their FMCs.

“When we go out to bid, we make it very clear that we’re loyal, we’re looking for a business partner. What we try to make our business partners understand is that we’re not looking for a flavor-of-the-month type deal, we’re looking for long term. We favor five-year deals if we can get them. We tell them that ‘We’re here for you through thick and thin.’ A lot of companies have embraced that,” said Dave Rush, senior manager for environmental health and safety and fleet for R.J. Reynolds.

Nikith Rajendran, director of fleet operations for SolarCity, has built the energy provider’s fleet over the past several years. He implemented a multi-tiered purchasing program that allowed him to negotiate prices within each tier. He works with Ford, GM, Isuzu, and Mercedes-Benz.

“Incentives are a key way of reducing prices. We went to a multi-tiered program, because there was high variabilityin vehicle demand internally. And then we tried to negotiate the tier that we thought we would be in,” he said. “The second thing we did, that was more important, was trying to get the OEMs to build a pool for us. OEMs built pools at locations we requested them to. That helped cut lead time for us; 2013-2015 were super aggressive growth years for us. We were growing almost 100% year-over-year. Without the pools we couldn’t have done that. Cutting down lead time in this way was more crucial than getting the incentives.”

Buying in bulk, particularly if the fleet is highly visible, can give the OEM an advantage in the marketplace.

“Every OEM wants to see fleets using their products,” said Stephenson. “And, with branded fleets, there’s an influencing factor when fleets choose a particular OEM. What better advertising for an OEM then when visible brand names are driving down the highways in their vehicles.  That is definitely part of the dialogue between fleets and OEMs.”

Simplifying Purchasing

Buying in bulk and signing multi-year contracts will certainly give a fleet benefits in purchasing, but these are only the first of several steps that fleets can take to leverage their purchasing power and build in efficiencies.
Phil Samuelson, fleet and capital asset manager for USIC, has developed a minimum number of specs for the single-sourced fleet.

“When we develop our specs, we work with Donlen, our FMC, on what our best options are for complete costing. We also try to minimize the number of specs that we have. We try to use a vehicle for multiple purposes. We have different entities in our company, and try to pick vehicles that work all across the board,” he said.

Having fewer vehicle models/variations helps fleets operationally as well.

“Using fewer variations of makes/models provides our technicians with better consistency and productivity by having a similar experience with the vehicle type and the upfitting that goes in it,” said Stephenson of DISH. “A significant part of the ‘vehicle’ for service fleets is the upfitting, and it’s not uncommon that different upfitting may be required for different makes/models. So, it’s best to determine a short list of vehicle/upfitting combinations that works best and use it at scale.”

Rush of R.J. Reynolds is single sourced with GM, with a large number of the fleet’s 2,500 vehicles GMC Terrain models. This reliance on a single model, while simplifying and leveraging purchasing, has had a happy benefit for the fleet as a whole.

“Most of our vehicles are for sales reps and they love the SUV. We come from it from a slightly different philosophy. We buy a little higher-end vehicle than you typically see in a fleet vehicle. We wanted the safety features,” he said. “What we didn’t anticipate was the effect on morale. People take more pride in their vehicles. Not only are we getting the safety features, but drivers are taking better care of them. They use them for personal use, so it’s been a very good thing for us as a company.”

Rajendran of SolarCity said that the key to simplifying purchasing and reducing costs was planning ahead. Planning ahead dramatically increased the proportion of factory ordered vehicles, leading to reduced costs.

He did several studies with the company’s FMC, GE Capital Fleet Management (now Element), which allowed him to identify the optimal vehicles for the fleet.

This resulted in minimizing the number of vehicles to a handful of standardized models from four OEMs.

Lead times continued to be an issue. For instance in 2013, lead times were as long as 17 weeks for a box truck. Rajendran worked with the OEM to build pools of the standardized models, and was able to better coordinate where vehicles were built and where they were delivered, cutting lead times significantly. By the end of 2015 lead times came down to three weeks, he said.

Standardization was critical in being able to cut these lead times.

“Another reason for standardization is that we move vehicles around a lot because there is a lot of volatility in terms of growth, and so drivers change constantly. If it is a standardized vehicle and setup, it would be much easier for the new driver,” he said. “We didn’t want to have a lot of variables in our vehicle types.”

Buying only one or two models in bulk can also give fleets other advantages.

For instance, USIC has purchased about 4,000 Chevrolet Colorado pickups, which has given the fleet some benefits in terms of lead times and ordering.

“We’ve been able to do some things with GM that we wouldn’t have been able to do if we didn’t have as much volume,” said Samuelson. “They’ve actually changed their production for us, such as doing a carpet delete that isn’t available normally, so they built a procedure for us. Again, volume gives us benefits.”

The cyclical nature of USIC’s construction business, which runs from spring to fall, means that Samuelson is ordering vehicles outside of the most popular ordering periods.

“Our cycling timing is out of the ordinary. We have a tendency to bring on vehicles in the late part of the year from November through March. A lot of fleets try to cycle in the fall,” he said. “I think when we’re talking the kind of volumes we do, it entices the manufacturer, because I think it helps them to fill in production volume on some times when production volume isn’t as high. We usually go for build dates that aren’t as competitive.”

Leveraging Single Sourcing

Single sourcing is among the biggest ways that fleets can leverage their purchasing position.

“Single sourcing is certainly a clear way to make a supplier understand their need to support the customer through the process, and is also a good indicator of the health and trust of the value proposition,” said Stephenson of DISH. “Single sourcing a vehicle OEM however, certainly has some engineering benefits as well since there are fewer cargo space configurations to adjust your upfitting to.”

Rush of R.J. Reynolds noted that the fleet’s commitment to an OEM will likely be reciprocated by the OEM.

“We look at it from a leverage standpoint. It gives us more leverage with our business partner when they know that we’re not trying to spread our business over numerous companies,” said Rush. “We tell them that ‘We have faith in you, we have faith in your product, and we’re willing to give you all of the business if you can bring us an attractive deal to the table.’ To go with a single source, when GM knew we were getting 100% of our business, they put a little more effort to ‘conquer’ our business.”

Rush, who became the R.J. Reynolds fleet manager four years ago, went out to bid shortly after taking over the fleet. The company has operated a single-source fleet for decades, and he has continued this tradition with the new deal he struck with GM.

He characterized the bidding between the OEMs who submitted proposals as “very aggressive.” The RFP was loaded with the kind of details outlining what R.J. Reynolds expected from the winning OEM.

“The RFP I sent out was a very lengthy, and it had a lot of detail that it required to be submitted,” he said. “When I got the proposal back from each of the OEMs, I could look at it not only from a purchasing standpoint, not only from a maintenance standpoint, but even from an accident/repair standpoint.”

Potential Single-Sourcing Pitfalls

While single sourcing has a lot of benefits for the fleets that use it, there are reasons why fleets may not be able to or choose not to pursue single sourcing.

Rajendran of SolarCity said that single sourcing wasn’t an option for the energy fleet, because “it wasn’t strictly one-size fits all. My customers are the crews that are using the vehicles, and we wanted to satisfy their requirements. There are different crew types with different job profiles and different vehicular needs. Our goal was to figure out what vehicle type made sense for the crew type and then I had to figure out which of the OEMs offered the best vehicle in terms of specs and availability and so on, and that’s why we had to work with four OEMs. We just wanted to go with a few OEMs and developed standardized models within those few.”

But there are other reasons that fleets might not want to pursue single sourcing as a purchasing strategy.

“I do not single source. I feel one of the riskiest aspects of single sourcing is factory delays,” said a fleet manager who asked to remain anonymous. “If you need to buy or sell vehicles as a part of your goals or strategy, a delay in OTD can completely control the outcome and timing.”

Samuelson of USIC noted that vehicle availability has occasionally been an issue for the fleet.

“We had a product restriction on one of the vehicles we ordered, because of a part delay,” he said. “We were able to circumvent it, but that’s definitely a risk with single sourcing.”

R.J. Reynolds experienced an availability issue due to the economic recovery following the Great Recession.

“We committed to our OEM at the time when others had stopped buying vehicles. We kept on buying through the hard times,” said Rush. “What hit us hard was when everybody else started buying cars, our orders didn’t get filled as quick. So we had a lot of delays.”

Another challenge, though a lesser one, is the risk of a model that makes up the bulk of the fleet getting recalled.

“We went through a recall,” said Rush. “It hit us for a few days until we could get rentals. But it wasn’t anything different than if we experienced a natural disaster. It’s an obstacle that’s out there; we know it’s out there. The real key to it is that we don’t push the limits of our vehicles in terms of replacement. We keep our vehicles in top notch condition in terms of cosmetic and mechanical, so if we have to run our vehicles a little bit longer, it’s not an issue, so it doesn’t cost a lot of money. I think we’ve put all of our parameters in place in case there’s a strike or a recall or there’s anything that would cause us downtime, we’re in a pretty good position to weather the storm so to speak.”

Financing Power

USIC, DISH Network, R.J. Reynolds, and SolarCity have all relied on leveraging their partnerships with their fleet management companies to purchase their vehicles, setting them all up on a leasing arrangement.

This financing method gives the fleet specific benefits to allay risk.

“Use of FMCs for funding is a primary component of our financing solution and has significant impacts on financial planning,” said Stephenson of DISH. “Vehicle manufacturers have a great advantage here if they can offer vehicles with significant improvements in mpg for example, even if they come at a higher acquisition cost. By financing purchases and spreading payments over the longest term possible, fleets can enjoy cash flow savings in month one. MPG savings can be seen right away with the higher vehicle cost spread over several years.”

Being able to line up funding and cycling will also help fleets leverage their purchasing power.

“A consistent cycle provides the OEMs with greater confidence in your order projections,” said the fleet manager who asked to remain anonymous.

Bottom Line

The relationship between a fleet and an OEM doesn’t exist in a vacuum. At its fundamental level, it is a relationship between the fleet manager and the OEM’s representative, and needs to be cultivated.

“If you are both aware of your goals and what it is going to take for the both of you to reach them, then you both know how to react to anything that puts them at risk,” said the fleet manager who asked to remain anonymous. 

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