Managing the Financial Side of Commercial Fleets

Thinking Outside the Box: Breaking Traditional Rules of Fleet Management

A wise man once said “change isn’t bad, it’s just different.” Fleet managers looking for innovation can start by challenging the “conventional wisdom” of fleet management, and thinking outside the box.

May 2013, by Staff

It’s a common story. The new fleet manager comes to work, and the first order of business is looking for cost reduction. Whether it’s process improvement, price negotiations with suppliers, improving fuel efficiency or resale results, cost savings is job one.

At some point, however, cost reduction can be subject to the law of diminishing returns. Using the 80/20 rule, the new fleet manager looks at fuel efficiency, depreciation, and perhaps supplier agreements first. Then, maybe at vehicle selection, where perhaps some downsizing can be done. The big dollars can be found quickly, but sooner or later, the new manager has done the job well, and the fleet is running about as well as it can run.

What next? Cost reduction becomes cost containment, even reducing increases; the big savings have already been achieved. What can be next for the innovative fleet manager is to begin to question the conventional wisdom, and perhaps break some of the rules.

Traditions & Conventional Wisdom

Some things in fleet management are no different today than they were 50 years ago; the mission remains the same. Other things have changed so dramatically that fleet managers in 1963 would be as lost today as today’s fleet managers would have been lost back then.

There are enduring traditions, a “conventional wisdom” that remains today much the same as they did then. Some of them are vehicle specific, some of them process oriented, still others involve policy. Here are a few of these fleet management traditions:

  • Replacement policy. Autos should be replaced within a cycle algorithm of 36 months or 65,000-85,000 miles, whichever occurs first. Light trucks can stay in service a bit longer.
  • Amortization. Autos, 50 months, or 2 percent per month, and again, light trucks a bit longer, perhaps 60 months.
  • Maintenance management. Fleet managers, for the most part, aren’t SAE-certified vehicle technicians. Thus they need the kind of expertise that a maintenance management program provides, in order to negotiate with repair facilities, and make certain that only necessary work is done.
  • Maintenance scheduling. The bottom line is that a maintenance schedule should revolve around oil/oil filter changes at 5,000- to 7,500-mile increments.
  • Remarketing. Beyond an employee purchase program, the safest and most effective way to sell out-of-service vehicles is by having a lessor run them through the auction lane.

Should these traditions be ignored, tossed into the trash? Certainly not. But any fleet manager who is looking for better ways to do things in an environment of diminishing returns needs to think carefully, and question the traditions of fleet management.

Replacement Policy a Constant

Replacement policy has remained relatively constant for decades. Three years and some mileage figure in the mid to upper five figures has been the gold standard for autos, with light trucks and vans extended sometimes to four years, and the mileage to the upper five figures to as much as 100,000. But, why?

There are a number of reasons. First, it was developed around 50 years ago or so, and was an accurate reflection of what the cost-efficient, useful life of a typical four-door sedan was. It was also a reflection of new-vehicle warranties were — usually, 12 months or 12,000 miles. And, finally, it tracked what the estimated useful life of the major drivetrain systems (engine and transmission) were.

Fleet managers have been taught that this cycle is optimal because, since warranties ran out before the first year was over, they needed to be careful about keeping vehicles in service too long, since the odds of a major component failure increased as time and mileage accumulated. Replacing a vehicle at roughly 30 months, with 55,000-65,000 miles on the odometer, would enable the company to squeeze some mileage out of the tires and brakes that would likely be needed at 30,000-40,000 miles, get the car out of service before an engine or transmission failed, and achieve strong resale proceeds.

But, vehicles have changed since this policy was set, as have warranties. Powertrain warranties are at a minimum set for five years, and can be as much as 10 years, with warrantied mileage from 60,000 to 100,000 miles. While a fleet manager in 1975 could expect several engine failures, and even more transmissions gone during the year, today both are rare, and will more likely be covered under warranty.

So, why not try a longer cycle for autos, say, 48 months, 100,000 miles? 60 months, 125,000 miles for trucks? Provided the fleet has a strictly enforced preventive maintenance policy, there may be savings to be had in extending replacement beyond what has been the industry standard for decades. The combination of longer warranties and much better quality (more advanced technology, and better, stronger materials) make it worth moving outside the replacement policy box.

Bucking Amortization Wisdom

Another enduring fleet management tradition can be found in amortization. Amortization logic holds that a vehicle’s capitalized cost should be amortized at a rate that will result in the unamortized value, at replacement, will best reflect the anticipated value in the open market. In simpler terms, accrued expense should match actual expense. For decades, that rate has most often been 50 months, or 2 percent per month.

Now, there is nothing at all wrong with amortizing fleet vehicles over a 50 month period — or any other period for that matter. But, for many years, it seemed as though that 2 percent per month number was ubiquitous, no matter what kind of vehicles they were or how many miles they accumulated. Using a “standard” amortization rate defeats the purpose of the entire process. Further, any accountant will tell you that the ideal is to book an expense in the period in which it is incurred; using a universal rate of amortization will often result in terminal rental adjustment clause (TRAC) lease “gains” and “losses,” as the capitalized cost is reduced either too quickly or too slowly to match the actual decline in value.

Bucking the common amortization wisdom is almost a no-brainer. Some vehicles, such as those in urban territories, will not drive as many miles annually as those in a more rural setting. Thus, the fleet manager who is dedicated to using amortization properly (not to mention keeping the auditors happy) will use different rates for different circumstances. If a car in the plains of West Texas is running 30,000 miles per year, don’t amortize it at the same rate as one which is covering the city of Chicago. Match amortization to use, and cash flow will be more even.

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