Managing the Financial Side of Commercial Fleets

How to Analyze Your Sourcing Alternatives

November 2017, by Bob Cavalli

Photo courtesy of Getty Images.
Photo courtesy of Getty Images.

As staffing and resources for fleet managers continue to dwindle, and management’s call for more and more cost savings never ends, fleet managers are forced to look toward outsourcing more than ever.

Fortunately, there are more options today than ever before; financial, administrative and clerical, reporting, and data sources. Fleet managers have myriad choices available to them to help manage and reduce fleet costs. Here are some tips on how to find the best alternatives for your company.

There are two overarching categories of fleet activity:

Administrative/Clerical: these are the “how” of fleet activity, processes and procedures used in the day-to-day operation of the fleet.

Management: management responsibilities involve decision making regarding the application and use of key resources, time, staff, and money. Strategic planning, budgeting, and policy are also management activities.

Most outsourcing will involve administrative/clerical activity; a fleet manager’s staff might perform this function, if the fleet manager is fortunate enough to even have staff. Such activity primarily consists of “paperwork” (in 2017, computer work), filling out forms, submitting and “filing” documents, etc. It may involve low-level approvals, i.e. reviewing new vehicle orders before submission.

Some of these processes can involve the application of key resources, such as money. These might include paying parking tickets and renewing registrations. But this application of funds doesn’t require any kind of management decision; tickets must be paid, and registrations renewed, which brings these activities back into the clerical/administration category.

Considering the outsourcing of management responsibilities is a far more challenging process. After all, no source outside the company will have the same consideration for your resources than an employee would. That said, though, there are ways to develop a process to source some level of management tasks, while retaining ultimate authority.

Priorities

Different companies, different managers, and different circumstances all play a role in the sourcing decision. For example, a fleet manager might place greater importance in technology than price, price over service processes, and utility over all. A good basic start would be in vehicle selection.

Most everything that occurs within a fleet operation begins with vehicle selection; it is one of the fundamental responsibilities any fleet manager has. There are a number of key considerations in deciding what type, and what brand, vehicle(s) to use.

  • Utility: Is the vehicle capable of doing the job?
  • Cost: Is the vehicle’s TCO competitive in the market for like vehicles?
  • Availability: Is there sufficient fleet allocation?
  • OTD Time: How quickly can an ordered vehicle be built and shipped?

A veteran FMC sales executive may work for a company that regularly responds to formal request for proposals (RFP) for fleet services and vehicles.

Those companies often times outline the elements of a respondent’s programs that were most important. One way this is done is by giving each element a corresponding percentage score. For example, 25% for technology, 30% for references from existing customers, 25% for price, and 20% for client service processes. Often times, having the lowest price is not the determining factor in an RFP.

So the point here is to be honest with sourcing candidates. If price is the determining factor, as is often, just say so. If it’s technology, own up to that. Whatever your needs and priorities are, make certain all bidders know what they are, and you will be more likely to get a response and proposal that addresses far more often.

Assets vs. Services

There are differences in sourcing, and analyzing your sourcing alternatives, for assets (vehicles, upfits, etc.) than for services (maintenance management, etc). And even within those two categories, there are other considerations:

Is the sourcing on a strategic level? Is the company looking to obtain maximum leverage from its spend?

Is there an incumbent? Will the company explain why the business is being bid? For assets, will the award involve price, cost (TCO), or both?

For services, how much authority will bidders be given? What are the components of your procurement process? When were they last reviewed and updated?

Looking at sourcing on a strategic level, the first thing to ask is if the corporate strategic sourcing manager or group is involved? If so, they’ll need to understand that it isn’t just the spend that should be considered. Strategic sourcing involves the company looking for categories of spend, within departments, that they consider “like” spend, to put them together and look to outsource the entire lot. Fleet managers shudder when this possibility is raised; true enough, there needs to be some method of purchasing maintenance, tires, and repairs. But that can be done with a simple corporate credit card, and leveraging the spend will generate greater rebates or other incentives from the issuer.

Of course, it isn’t just the spend that is important in a maintenance management program.

One of the foundations of the program is the technical expertise an FMC brings to the process; certified technicians who have access to authorization authority, the full history of each vehicle, and who discuss needed repairs with a shop and negotiate the work to be done.

Data is also crucial. Without full data on activity under the program, it is impossible to properly calculate and track total cost of ownership (TCO), and other key cost/use relationships within all cost categories.

Along with the data comes reporting; regular overall reports covering cost per mile numbers for the entire fleet, by make/model, and exception reports seeking out non or underperforming vehicles and vehicle classes.

Though a simple purchasing card can open up very nearly all mechanical shops (based upon a major credit card platform), shops not in a maintenance management network won’t know the proper procedures for authorization and billing.

Strategic sourcing won’t know these and other requirements, as it is its sole responsibility to simply find spend, and combine it to be sourced from a single vendor.

So how should strategic sourcing be incorporated into the overall sourcing analysis?

The Analysis

First of all, most companies, if they’re doing strategic sourcing properly, will seek a subject matter expert (SME) for all categories of spend they’re looking to source. In this case, of course, the fleet manager fits the bill.

Fleet managers first must accept the fact that the company chooses to use strategic sourcing to review all spend in the company, and seek the most cost effective source for it.

That said, as SME for the fleet spend in question, the previously mentioned issues such as data, technical resources, reporting, and a shop network that is familiar with the process still need to be considered. It is the fleet manager’s responsibility to not only bring these factors to sourcing’s attention, but to be an advocate for them to be at the top of the analysis.

If this is vigorously done, it is at least likely that sourcing will understand that maintenance spend cannot be judged under the same criteria as, for example, travel and entertainment spend. Accomplishing that will be the first step toward leaving the sourcing of maintenance spend in the hands of the fleet manager.

Sourcing Vehicles

What about sourcing assets, particularly vehicles? There likely is no other asset spend within the company that is comparable to the fleet’s need to source vehicles.

Some companies simply will establish their vehicle selection, then source the vehicles from an FMC provider/lessor. The first analysis to be done is the classic lease versus own question. To perform this process completely, the two alternatives must be viewed from the standpoint of the present value of the net after tax cash flows. Leasing does provide immediate cash flow benefits: purchasing a vehicle involves an immediate outflow of tens of thousands of dollars, versus the first outflow of a lease is the first monthly payment, a few hundred dollars.

But the analysis must be performed over the service life of the vehicle; though ownership involves that big outflow initially, there are inflows of reduced taxes, as the company takes tax deductions for accelerated depreciation and any other tax benefits of ownership. The lease payment may allow the deduction of payments as expense, which would reduce the company’s taxable revenues and profits.

One or the other will end up being the more cost effective of the two, but this isn’t the only consideration involved. After the method of sourcing has been established, the single most important consideration is utility — which make and model is best suited for the mission the vehicle is required to accomplish. This analysis will most likely involve looking at a number of manufacturers, as most (not all) OEMs have a vehicle that at first glance fits the job.

What next? There are ways to narrow down the choices.

If the mission requires a truck or a van then what is the load? Will that asset be a ‘people carrier’ or a work vehicle? Finding the most capable and cost efficient powertrain is crucial.

Nearly 40% of overall cost, and as much as 70% of fixed cost is depreciation — the difference between the cost and the resale proceeds of the vehicle. One factor that can help narrow down a vehicle selection choice is finding the vehicle that will retain the most value over the course of its service life.

Similarly, the original cost of the vehicle should also be considered, as the other half of the depreciation equation is the original cost.

However, not all of an OEMs product line carries adequate fleet allocation. This will of course impact availability and order to delivery times.

For trucks, often there will be the need for an upfit; which choice has the best upfit availability “off the shelf,” and which would require customization (more expensive)?

These are just some of the elements of the analysis when sourcing vehicles.

The Source

In either case, an actual source for the program, or the asset, must be chosen. In other words, you’ve dealt with strategic sourcing for maintenance spend, and chosen the best application and most cost effective vehicle. Now who will supply them?

This is more ‘up the alley’ of most fleet managers. If the choice, for example, for the vehicle is made, and either leasing or ownership is determined, much of the time the source will be an FMC. And the same goes for maintenance management. What does the bid look like, and the resulting analysis?

Choose the FMCs that you feel will be best able to do the job. Most fleet managers are familiar with FMCs, either through direct experience, via contact, or using peers in the marketplace.

Though most companies have somewhat extensive ‘boilerplate’ language in their RFPs or request for quotations (RFQ), try to be simple and direct.

Decide, as mentioned back in the beginning, what elements of a program — price, technology, service, etc. — will be important, and what role each will play in the decision. Make sure all bidders know them.

Ask for a written response. This can be provided in a number of formats such as scanned document, burned CD, hard copy, or a combination.

Review each response within the elements chosen to “score” each response.

Choose finalists. One method many procurement professionals use is to ask for a “best and final” bid from each.

Schedule two on-site visits: one to the final bidders and one at your headquarters for them.

At this point, a decision should be fairly obvious. It might be after the best and final bids are received, or it may go right down to the site visits. But the decision should be made in light of the scoring methods, and after the process is complete a source will generally be clear.

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