Fleet managers know there are two over-arching fleet costs: variable cost (fuel) and fixed cost (depreciation). Clearly, fuel-cost management has been in the headlines recently, with volatile fuel prices and alternative-fuel vehicles grabbing most of the attention.
But, managing depreciation is every bit as important. Most of the attention given to managing depreciation goes to resale: how to maximize resale dollars, and, thus, minimize depreciation. Equal attention, however, should be given to the “front end” or acquisition cost, and the strategies experienced fleet managers use to reduce the prices they pay for fleet vehicles. And, it isn’t just about price, either.
Although much has been written about the difference between amortization and depreciation, it’s a good idea to start there. It is relatively simple: When a vehicle (or any asset) is acquired, the company must decide how quickly its value declines with use, and reflect that decline on the books. This is amortization.
After an asset is taken from service and sold, the actual value that has been lost is determined by simply deducting the resale proceeds from the original cost. This is depreciation. Ideally, the two numbers — amortization and depreciation — will be the same, or more realistically, fairly close.
Amortization is an entirely arbitrary number, so there is no need to “manage” it in the strictest sense of the word. Depreciation, however, is not arbitrary, and fleet managers must constantly track and adjust for both original cost and resale values to keep it as low as possible. There are a number of sourcing strategies experienced fleet managers consider when seeking to manage and reduce depreciation expense.
Strategic sourcing has become all the rage in the corporate world, and for good reason. Leveraging the volume of a corporation’s purchases makes purchasing simpler, and results in volume pricing.
Strategic sourcing applies the full leverage of the company’s purchasing power, whether buying vehicles, paper clips, or office furniture. Some companies have a culture that pushes responsibility down as close to the customer as possible. There’s nothing at all wrong with this; however, doing so as it pertains to acquiring fleet vehicles won’t achieve the best pricing available. Simply put, the price for buying 500 vehicles will be better than that for buying five.
There are different ways this can be accomplished, depending on how the company is structured. For example, some companies are a single entity, with regional or branch locations spread across the country. Under this scenario, sourcing fleet vehicles strategically is a relatively simple matter.
Other companies consist of a corporate office/entity, with two or more business units under it, whose purposes may or may not be related. The fleet requirements for the business units may be dramatically different — one might have only a sales fleet, another just a service fleet, still others a combination of both. Just because one division needs only cars, and another just vans does not necessarily mean that the volume cannot be leveraged.
Taking a Single Sourcing Approach
More or less joined at the hip with strategic sourcing is single sourcing. Common sense dictates that if a company leverages all of its volume, it must be with a single supplier to achieve maximum savings. For a long time, a number of fleets have “split” their volume among two or more suppliers; the logic being that each of them will compete all the more vigorously for more of the business when they are competing with others. But, a fleet lessor will be every bit as vigorous in “protecting” a very large customer that it has all the business of, as it will, if it only has half.
Single sourcing can be accomplished in a number of ways:
A fleet can single source with a fleet management company (FMC) or fleet lessor. Whether leased or owned, FMCs can “bundle” all vehicle types needed into a single program. Across-the-board pricing for cars, trucks, and other vehicles can be negotiated. This way, in the case where a corporate entity has two or more distinct business units with unique fleet requirements, a master agreement can be signed.
There are also large, national fleet-oriented dealer groups that have sophisticated ordering and delivery processes, and multiple franchises. For a company-owned fleet, which prefers to deal directly with a dealer, these groups can provide whatever vehicles the customer needs with a master agreement on pricing. This allows leveraging across multiple brands and vehicle types.
Under either of these scenarios, fleets can negotiate with a single manufacturer if the automaker can provide the vehicles required for additional discounts and incentives.
No matter how it’s done, single sourcing can help fleets maximize their buying power under a single supplier; however, not all sourcing strategies have to do with negotiating price.
The timing of fleet ordering and deliveries is one of the basic tenets of effective fleet management. Smart fleet managers, once they’ve leveraged their purchases, must determine when their orders should be placed. Although, in the past, the new model-year was a major event occurring early in the fall (September or thereabouts), this is often no longer the case, with new model introductions occurring throughout the year. It is still important that fleet managers funnel as many orders into that fall season as possible.
First, order timing has a substantial impact on resale values. A vehicle ordered in July or August for September or October delivery won’t be a full model-year-old for another year or so; the company will get the full model-year’s value out of the vehicle. Conversely, when vehicles are delivered in the spring, for example, they’ll be a model-year-old in only a few months, with the corollary of a reduction in resale value.
Second, the fall used-vehicle market is usually strong, so that fall deliveries result in fall used-vehicle sales. The combination of these two factors makes fall orders more economically feasible than during other seasons.
There is a second ordering season, spring, when orders that haven’t yet been placed can be completed. Although the model-year will still be in effect, spring heralds the strongest used-vehicle market, which will help offset getting only a half model-year of value.
A sourcing strategy that times orders in this manner will go a long way toward managing depreciation.
Picking the Right Specs
The sourcing process doesn’t end with simply choosing the right vehicles for the job. Equipping those vehicles is nearly as important. It is often said that fleet management produces a product — a used vehicle — and the fleet manager’s primary responsibility is to produce the most valuable product possible. This is where proper spec’ing plays a role.
Years ago, base vehicles didn’t have very much in the way of standard equipment. Much of the vehicle content taken for granted today — power steering, brakes, cruise control, and power windows and door locks — had to be ordered as options.
Today’s vehicles come very well equipped; much of the equipment listed earlier is standard on many models, along with air conditioning and sound systems that were unknown in the past. So, what do fleet managers have to do if it seems like just about every piece of equipment is standard?
Specification goes beyond power options and CD players. First of all, powertrains must be matched to the load and geography, particularly in an era where downsizing and fuel-cost reduction is paramount. Putting a four-cylinder engine into a car that carries product and people regularly can hurt mileage and often hurt resale value. Options, such as sun roofs add cost, and, depending on the model, don’t add anything to resale value.
Fleet managers are wise, as part of a sourcing strategy, to check projected used-vehicle values for equipment that will add value, and avoid equipment that won’t.
Sourcing the ‘Back End’
The word “sourcing,” as applied to fleet management, brings buying immediately to mind. But, sourcing, particularly as it pertains to managing depreciation, applies to the “back end” or resale of fleet vehicles as well.
How does a fleet manager source the resale half of the depreciation equation? For fleets that lease, it is often simply taken for granted; off-lease vehicles will be left at the delivering dealer, picked up by the lessor, and sold at auction. It is a historically simple and well-tuned process that has worked for decades. Or has it?
There is nothing wrong with selling vehicles at auction; however, there are other sources of used-vehicle sales that, if ignored, can stifle depreciation management. Not all vehicles are “auctionable” — that is, they will not do well at auction, and should be sold via other means.
First and foremost, the best and most lucrative market any fleet manager has for used vehicles is right within the company: drivers and other employees. A healthy driver/employee purchase program is a winner for all concerned. Fleet managers can sell vehicles at so-called “wholetail” prices, somewhere in between retail and wholesale. That way, the company gets pricing that is slightly higher than they can get in traditionally wholesale markets (e.g., auction, broker, or wholesaler), and the driver or employee pays less than he or she would pay in the consumer used-vehicle market.
For vehicles that aren’t auctionable — usually high-mileage and/or fair- to poor-condition vehicles — there are specialty wholesalers and brokers who know markets where these vehicles sell well. These used-vehicle sale sources also are good at getting work trucks and vans sold quickly and at better prices than can often result from the auction lane.
Sourcing resale should not be simply a matter of leaving it to a fleet management company or lessor. Fleet managers need to be fully engaged in the used-vehicle market; know what sells, where, and when. The used-vehicle market is a commodity market, with values changing on a nearly daily basis.
What’s the Down Side?
Most of these sourcing strategies are likely commonsensical, e.g., to leverage full volume or to single source for the same reason. But, there are certainly pitfalls and challenges that should be considered.
Single sourcing, for example, can bring with it challenges, and sometimes serious problems. Consider what happened in the late 1970s and early 1980s, when fleet managers scrambled to downsize into the then-new four-cylinder, front-wheel-drive, transverse engine cars that promised better mileage. When the technology didn’t initially perform, and product recalls and recurring repairs began to mount, some fleet managers who originally embraced the new vehicles found themselves not only with expensive repairs on their hands, but with large numbers of used vehicles with little value. Single sourcing individual models, then, carries with it risks that should be taken seriously.
Then, there are the risks in single sourcing for leasing. Consider the consolidation in the industry in the past 20 years, as lessors are bought and sold both amongst each other as well as outside the fleet market.
Changes in personnel, systems, funding options, even program offerings can create chaos in a fleet that depends on a lessor that has been sold or merged with another. Certainly, there is little that a fleet manager can do to control such activity, but there are some things that can be done to prepare for it.
Remain in touch with other lessors, talk with peers, and know what the options are should the fleet lessor be sold to or merged with another company. Better still, as resources permit, keep as much of the fleet operation in house as possible, so that a change in suppliers won’t impact all areas.
Other than a handful of long-time, national fleet dealers — dealers and dealer groups move in and out of the fleet market regularly. They are bought and sold often, and sometimes even lose franchises.
On the used-car side of fleet sourcing, there are fewer risks, as moving vehicles from one venue to another is far easier. Again, remaining in touch with markets, even moving in and out of different buyers and sellers, will help a fleet manager be more nimble when changes occur.
Many fleet managers don’t move too quickly into new models and new technology. Remember, there is nothing wrong with giving a new model a test, with a handful of units, but certainly there are risks in converting a large portion of the fleet.
Depreciation is Controllable
Depreciation expense is one of two fleet expenses, the other being fuel, that drive overall costs more than all others combined. If a fleet manager can do nothing else, managing depreciation and fuel should be primary targets for control.
Depreciation is a function of several key items:
■ Original cost. Whether capitalized cost in a fleet lease or purchasing cost for a company-owned fleet, it is the “starting point” in the depreciation process.
■ Preventive maintenance. Often forgotten as a key to managing depreciation, keeping vehicles properly maintained via a vigorous preventive maintenance regimen will help create that used product fleet managers seek.
■ Timing. Bringing vehicles into service at the most advantageous point in the model-year will help maximize resale value and get the most out of the model-year.
■ Resale sourcing. Rather than simply “turning vehicles in” to a lessor, fleet managers must take full advantage of several resale venues, including driver/employee purchase programs, auctions, and wholesalers/brokers for specialty units and rough, high-mileage vehicles.
In summary, there are a number of sourcing strategies that will help fleet managers control depreciation:
■ Source strategically. Leverage volume wherever possible, no matter what the corporate structure is. The more vehicles a supplier provides, the better the pricing the fleet can negotiate.
■ Single source. Even where a company has multiple business units, with widely varying fleet needs (cars, trucks, vans, and even upfits), there are ways a fleet manager can single source. For leased fleets, a single lessor can provide a master agreement, which has pricing across the board for most manufacturers and vehicle types. For owned fleets, national dealer groups with multiple franchises can do the same.
■ Spec properly. Choose equipment that helps drivers do the job, while avoiding superfluous options that add cost, but not resale value. Make sure vehicles have equipment that adds value.
■ Source the “back end.” Don’t ignore how valuable a well-sourced resale program can help manage depreciation. Use auctions where possible. Line up specialty wholesalers and brokers for vehicles that don’t sell well at auction and know the difference. Above all, institute a driver/employee purchase program. Don’t just send prices when asked. Market vehicles actively. Send a price on every vehicle taken out of service, and offer vehicles to all employees (if the driver isn’t interested).
■ Timing is everything. Buy as many vehicles early in the model-year as possible, avoid slow winter and summer used-vehicle markets, and keep emergency/stock purchases to a minimum. FF