Managing the Financial Side of Commercial Fleets

Turning Saved Pennies Into Saved Dollars

January 2017, by Bob Cavalli

Photo courtesy of istockphoto.com
Photo courtesy of istockphoto.com

When a new fleet manager takes the helm, there are usually some ripe areas to search for cost savings. With both limited time and resources, fleet managers often first look to the two largest categories of fleet expense, depreciation (fixed) and fuel (variable) where some quick, often substantial savings can be found. That’s where most of the money goes, so it makes eminent sense that that’s where the most savings can be found.

Flash forward a couple of years. The fleet manager, working hard, has squeezed as much excess cost out of these expense categories as is reasonably possible. What now? There are a number of areas where what looks like chasing pennies can turn quickly into dollars.

At a Glance

Depreciation and fuel are good starting points for fleet managers looking to trim expenses. Other ways fleets can cut costs include:

  •  Extending oil change intervals (where appropriate).
  •  Implementing a fleet safety program to cut crashes.
  •  Cutting idling.
  •  Maintaining proper tire inflation.

Starting With the Basics

It makes sense that before we delve into where the savings might be, it’s a good idea to recap what the basic cost categories are (as defined decades ago by NAFA). There are two broad categories of fleet vehicle expense:
Fixed costs: Those costs associated with the acquisition of vehicles. These are expenses that are incurred whether the vehicle is driven or not, and without regard to how much it is used.

Variable (sometimes called Operating) costs: These are costs associated with the operation of the vehicle; the more it is driven, the more cost is incurred.

Within these two broad categories are sub-categories, attributed to more specific costs:

Fixed Costs
• Depreciation (or lease or funding) expense.
• Insurance (both liability as well as physical damage).
• License/title/tax.

Variable Costs
• Fuel.
• Maintenance/repair.
• Tires.
• Oil.
• Misc. (includes car washes, parking, tolls, etc.).

Both depreciation and fuel account for anywhere from 60% to as much as 75% of their respective categories, that doesn’t seem to leave much to attack when looking for savings.

But with the right approach and knowing the math, thousands of dollars of additional savings can be realized.

Cutting Fixed Costs

Working from the bottom of the above list up, license and title fees are what they are, and must be paid. There is little that can be done in this category to achieve measurable and reportable savings. As far as taxes are concerned, though, there is at least an analysis that can be performed which, if the numbers work out, can result in savings that management can recognize.

There are some states that are so-called “up-front” sales tax states, that is, sales tax is charged up front on the full value of the vehicle. For example, if the vehicle cap cost is $30,000, and the up-front rate is 5%, $1,500 is due. For a leased fleet, this increases the cap cost by that amount, such that the result is a lease cap cost of $31,500.

Now the test: There is a cost to the fleet for these additional tax dollars; if the lease rate is 2%, the cost is 2% of $1,500 during the term in service. But what if the company, rather than “leasing” the tax, decided to pay it up front? The “opportunity” cost would be the return lost in using the money for the vehicle rather than investing it back into the company. If the opportunity cost is greater than the cost related to the lease, it would be better to pay the tax up front. If not, and if the lease cost is greater than that internal return, it would be better to capitalize the sales tax into the lease.

Insurance provides a good opportunity for savings. Most larger fleets (100 units and up) self-insure for physical damage; an accrual account is created, and each month a fixed amount is entered for each unit, and when accidents occur, there is money in the budget to pay for them.

Begin with a safety program. A formal fleet safety program, including driver training, a reward/penalty policy for accidents (or lack thereof), careful, regular tracking of MVRs. A fairly standard assumption is that a fleet will have a number of accidents equal to about 20% of the number of vehicles in the fleet, e.g., a 500-vehicle fleet will experience 100 accidents in a year (the accident frequency rate). If the average hard costs, such as replacement rentals, physical damage repairs, and soft costs, including down time, is $8,000, with a 20% accident rate, the total cost is a whopping $800,000.

The company decides to implement a comprehensive safety program and policy, such as described above. Further, the policy reduces the accident rate from 20% to 15%, a total of 25 accidents fewer than previously. The savings — a full $200,000 — are nothing to sneeze at. Deduct the cost of the program and the savings will still be substantial. It’s not exactly chasing pennies, but it’s a renewed focus on a cost factor that is too often ignored.

Trimming Variable Costs

Fuel is the major variable expense, however, there are several other categories that can hold hidden savings for the determined fleet manager.

We can begin with maintenance and repair. The most common focus on reducing costs in this category surrounds establishing a rigorously enforced preventive maintenance schedule, and, in cases where a fleet subscribes to a management program, negotiating fees downward. But there are other ways that fleet managers can mine this category of expense for heretofore hidden savings.

Depending on the annual miles driven, a fleet manager can change the preventive maintenance schedule. If the fleet has 500 units, and a $29.95 cost for an oil change with a policy that requires oil changes at 5,000 mile intervals, and vehicles are driven on an average 24,000 miles each year, this works out to roughly five oil changes per vehicle per year, costing $149.75. For the entire fleet, then, the total annual cost of oil changes is $74,875.

What if the interval is moved to every 7,500 miles? Most OEMs will agree that, with the level of oil quality today, and the current state of engine quality, this would not have any appreciable negative impact on vehicle condition or performance. Now the math would be as follows: three, rather than five, oil changes per vehicle per year, costing $89.85, or a total of $44,925 for the 500 unit fleet. This is a not insignificant savings of $29,950 per year; savings resulting from a simple, appropriate extension of the oil change schedule.

Saving with Telematics

One of the newest — and hottest — fleet management technologies is telematics. Real-time access to a wide list of vehicle information has taken the industry by storm, and permits fleet managers to access potential savings quickly and easily.

In its more primitive stages, telematics allowed fleet managers to track the location of vehicles, and drivers to find the quickest and best routes to their destinations. But telematics has evolved into something far more than that, and the information it provides can help save money in a number of concrete ways:

Idling: More of a problem with truck fleets than with car fleets, excessive idling wastes both fuel and money. Idling is one of the “events” that telematics can track. The U.S. Department of Energy has published estimates about how much fuel various vehicle types burn at a normal idle. For a full-sized, four-door sedan with a gasoline engine it’s about 0.4 gallons/hour. Including allowing the car to “warm up” after starting, it is reasonable to assume that a fleet car sits at idle (other than at traffic controls or in traffic) roughly an hour each day, five hours per week. Making some conservative assumptions — $2.00/gallon for a 500-unit fleet — idling burns 1,000 gallons of fuel, a full $2,000 in wasted funds each week for $104,000 each year. Taking the information provided, and establishing policy and communications with drivers to reduce idle time (cut “warm up” time in half, shut vehicles down when stopped for more than a few minutes), cutting a mere 25% of idle time saves $26,000 in fuel. The same goes for larger vehicles, such as light- and medium-duty trucks, where the savings can be larger still.

Routing: Telematics can help drivers who drive regular routes to find the best, fastest routes to their stops. Real-time traffic information, construction delays, and closed roads can be avoided, helping drivers be more productive. The math is different for every mission, but all the fleet manager has to do is to determine what the overall cost of a driver’s stop is, then figure out how much is saved if a driver can make one more stop per day.

“Event” reporting: Telematics devices now report “events,” including speeding, hard braking, hard acceleration, and idling. There are savings in all this data, including reductions in insurance premiums, weeding out careless drivers, and increased fuel economy. Once again, fleet managers need to sift through this information carefully, know their costs, and report the savings.

Diagnostics: The latest telematics technology allows for “on-the-fly,” real-time engine and performance diagnostics. Devices can actually read engine codes, and warn drivers when component failures are imminent. Repairs can be performed, reducing downtime and keeping vehicles on the road.

Telematics can help fleet managers find those pennies in savings and turn them into real hard and soft dollar cost reductions.

Keeping Tires Inflated

Tires are often ignored as a relatively small element of total vehicle costs. But there are some real, quantifiable savings to be had if tire maintenance is monitored.

Many, if not most, vehicles today have tire warning systems; a light comes on in the dash when there is a problem. And the single most common issue with tire performance and life is underinflation.

Studies have shown that underinflation can reduce tire life by roughly 10% for an equal (10%) level of low pressure. A tire that is underinflated by 10 psi can reduce life by as much as 14,000 miles or more (assuming a proper inflation at 32 psi, underinflating by 10 psi would reduce tire life by roughly one-third). We can extrapolate what savings can result from a concerted effort to educate drivers on the importance of maintaining proper inflation. A tire that normally would be replaced at 40,000 miles, underinflated by 10 psi, would require replacement at 26,000 miles. Over a vehicle life of 75,000 miles, this would require nearly one full additional set of new tires. Being conservative, let’s say that one-third of a 500-unit fleet or 167 vehicles run tires that are seriously underinflated, and each of these will require at least one additional new tire in its life in service. At a cost of $85 for a new tire, including balancing and taxes, we’re talking about $14,195 dollars per month of additional tire cost over 30 months. Eliminating underinflation can save roughly $5,700 per year.

Further, underinflated tires suffer increased rolling resistance, which results in lower fuel efficiency. We can run some numbers here, too. Similar studies about the effects underinflation has on fuel efficiency shows that it is reduced by an average of 0.2% for every 1 psi of underinflation. For the example above, underinflation of 10% for a tire requiring 32 psi for peak performance — 3 psi — would experience a 0.6% reduction in fuel efficiency. Thus a vehicle that should be attaining 25 mpg would now only get 23.5 mpg. Driving 25,000/year, rather than requiring 1,000 gallons of fuel it would now need an additional 64 gallons which, at $2/gallon, adds $128 dollars to cost. Carrying out the math, for the 167 vehicles in the example fleet that run underinflated tires, the total additional cost is $21,376. Just cutting that in half saves more than $10,500 each year.

Don’t Stop at the Big Costs

It is certainly true that the old adage 80% of costs can be found in 20% of cost categories is a great place for a fleet manager to begin the search for savings. It matters little how the fleet may have been managed in the past. Any fleet manager new to the job should give his or her immediate focus to depreciation and fuel, because that’s where most of the money is.

And that is a task that doesn’t end; both categories require regular monitoring, even after months or years of hard work have squeezed most of the excess cost out of them. But sooner or later fleet managers will face the law of diminishing returns, that is, the time and effort given in the past will have smaller and smaller rewards.

For that reason, it makes sense to turn the focus to other categories of expense, where though the savings may not be as substantial as with the larger areas of cost (early savings in depreciation and fuel can literally save hundreds of thousands, even millions of dollars depending on circumstances and fleet size). There is always excess cost that, when added up, can continue to give the fleet manager some surprising numbers to report up the management ladder. And you can be certain that they’ll be waiting for it.

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The term used in some European countries, e.g., Spain, for closed end leases, which ordinarily include the lessor assuming responsibility for maintenance and tire costs in addition to residual value risk.

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