Managing the Financial Side of Commercial Fleets

Taking Fleet Productivity to the Next Level

“Productivity” is a word bandied about in business all the time, but what is it? How is it measured and achieved? In 2011, fleet managers have little choice but to answer these questions.

May 2011, by Staff

AT A GLANCE
Increasing fleet productivity involves:

Defining it in terms of vehicle and departmental aspects.

Determining how to measure it.

Identifying ways to improve it using all the resources available.

Webster's defines productivity rather obviously: "The quality or state of being productive." Drilling down, productive is defined as "having the quality or power of producing, especially in abundance."

So how does a fleet manager make his or her fleet more capable of producing abundantly? Better put, how can you get more work out of the resources given? Productivity is a key element in any economic discussion; it determines costs, prices, efficiency, and a host of qualities found in any business endeavor. The first two steps in increasing productivity are first to define it, and then determine how it is to be measured. The third step, achieving it, is the real challenge.

Improving Fleet Productivity

Fleet managers have two areas where productivity can be enhanced:

The fleet itself. The vehicles, their costs, and the amount of work the vehicles can do in relation to the costs associated with them.

The fleet function. The fleet manager, his/her staff (if any), and how much work they can do relative to the time and resources they have to do it.

Like employees, fleet vehicles are "hired" to do a job - provide transportation, deliver products and services, and perform tasks on a jobsite. They have costs associated with acquiring and holding them and costs associated with operating them. Vehicle productivity can thus be defined as the relationship between the work a vehicle does and the resources required to do it.

Departmentally, a fleet manager incurs costs associated with the administration and management of fleet vehicles. Vehicles must be ordered; delivered; records and files kept; costs tracked and analyzed; titles, registrations, and inspections administered; and vehicles sold. Some fleet managers have staff to manage as well, while others do not. Fleet departmental productivity is defined in much the same way that any business function is defined: how much work can be done in relation to the resources (people, money, time) necessary to do it.

Thus, fleet managers are challenged to step up the productivity of the vehicles they manage, as well as how they're administered and managed.

Maximizing Vehicle Productivity

Managing a fleet of vehicles is an exercise in productivity; in essence, the job is that of squeezing as much production out of company vehicles as possible.

How is the productivity of a fleet vehicle measured? Fortunately, the industry has provided fleet managers with some very specific measures. All of them, in one way or another, are time or mileage/cost ratios, which makes measuring vehicle productivity relatively simple.

Fixed or holding costs, those costs incurred in the acquisition and ownership/use of the vehicle, consist primarily of depreciation and leasing or finance (money) expenses. It is important to note that depreciation expense can only truly be measured after a vehicle has been taken out of service and sold; during a vehicle's term in service, it is only an accrual or reserve established to "cover" true depreciation.

Reducing Depreciation

Because depreciation makes up 70 percent or more of holding costs, it is a natural first stop in stepping up productivity. For purposes here, fleet depreciation is simply the difference between the original cost of a vehicle (either purchase cost or the cost capitalized into a lease) and the net proceeds when it is sold. Depreciation is expressed (measured) in either dollars per month or cents per mile (cpm) - both are cost/use ratios. Merely reducing the net depreciation number, therefore, is an increase in productivity only if the use, expressed either in cost (cents) or time (months), remain the same or increase.

For example, if the original vehicle cost $20,000, was kept in service for 30 months accumulating 75,000 miles, and is then sold for $7,000, the actual depreciation is expressed as follows:

Net depreciation is $13,000

            ($20,000 - $7,000 = $13,000)

Cost per mile is $0.173

            ($13,000 x 100 / 75,000 = 17.3 cpm)

Dollars per month are $433.33

            ($13,000 / 30 = $433.33)

Thus, if the depreciation dollars decrease while achieving the same mileage and time in service, or conversely mileage or time increase at the same level of depreciation cost, an increase in productivity has been achieved. Most commonly, decreases in depreciation are sought either by decreasing the original cost or increasing resale proceeds. There are practical limits to the former (only so many dollars are available in the original cost), so most efforts to increase productivity by addressing depreciation costs center on increasing resale proceeds. This is not a bad idea at all; there are a number of ways this can be accomplished:

Employee sales.

Varying markets used (wholesale, auction, broker, even retail).

Increasing condition report follow ups.

Enforcement of preventive maintenance policy.

How can a fleet manager go from the traditional to the next level? It may sound like blasphemy, but keeping vehicles in service beyond the usual replacement time and mileage criteria can be done, and can result in additional savings/increased productivity. Most auto and light truck fleets keep vehicles in service for 24-48 months or 65,000-100,000 miles, whichever comes first. The common wisdom is that beyond that, the fleet risks major component failure (as mileage accumulates), decreased resale values, and even reduced fuel efficiency.

While these can indeed happen, they don't necessarily have to happen. Vehicles today are (despite common perceptions that "they don't build them like they used to") far better engineered, have more extensive warranties, and retain value at a better rate than did vehicles 25 or 30 years ago. The key, of course, is a rigorous preventive maintenance program, coupled with detailed condition reports for which follow-up and action are critical.

The next level of productivity? It could be extending the service life of your fleet vehicles beyond what the industry has historically recommended. The depreciation curve tends to flatten out as time and mileage accumulate; the greatest period of depreciation occurs in the initial weeks in service. Once a new car has been titled, registered, and hits the road, it becomes a used car and suffers its greatest drop in value. Beyond the second, third, and fourth years of service, all things being equal, the drop in resale value becomes less and less precipitous.

Extending replacement cannot, nor should it, be done without testing the waters for some period. Select vehicles over a replacement period to keep in service. If, say, the replacement mileage is normally 75,000 miles, keep a handful beyond that. Extend one to 90,000 miles, another to 100,000, and still another to 125,000. When they are sold, run the full lifecycle depreciation analysis and compare it to that of vehicles replaced normally. You may well find that, on a cost-per-mile or dollars-per-month basis, your depreciation costs will actually decline. The next step is to run the same cost analysis for variable, or operating costs (fuel, maintenance/repair, tires, oil). If those at least remain steady, you have a winning strategy for taking a major portion of your fleet productivity to the next level. Naturally, if the test vehicles don't pan out cost-wise, it is a simple matter to shut the test down.

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