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.[PAGEBREAK]
Changing Maintenance Logic
Maintenance management programs have been a fairly standard part of most fleet operations since they first became popular more than 40 years ago. The logic used was simple: fleet managers aren’t mechanics, and usually have neither the technical expertise nor the time to discuss and negotiate repairs with shops. Thus, the supplier provides auto technicians who, based upon procedures established by the fleet manager, will intervene with shops, make certain that only necessary work is performed, and provide advice and counsel to the fleet department.
Why was this necessary? Again, it is simple. New vehicle warranties in the 1970s were 12 months/12,000 miles, barely six months of typical fleet usage, and after that, when problems occurred or components failed, the fleet manager was on his or her own. An alternator failing at 21,000 miles was out of warranty, and the company was responsible for the cost of the repair. And, fleet managers had to face far more serious and costly expenses back then, such as engine and transmission/transaxle failures. Few, if any, fleet managers had the kind of technical background to discuss a transmission overhaul with a service manager.
Yet again, however, things have changed, and changed dramatically. New-car warranties, as we’ve previously seen, are now several times longer, and powertrains are covered for the full life of most fleet usage. That alternator failing at 21,000 miles is now a warranty repair, and in the now-unlikely event an engine fails, it, too, becomes a warranty event.
So, now, what maintenance management comes down to is the payment of regular monthly fees for technical expertise that is seldom needed, as the vast majority of maintenance costs are simple PMs, and predictable expenses such as tires and brakes.
It can certainly be a little frightening to break loose from the maintenance management tradition. But, with most larger expenses now covered under warranty, and with vehicle quality and durability at a much higher level, outside-the-maintenance-box thinking may result is some dramatic savings, not only in program fees, but in overall expense as well: Most maintenance management programs rely on national account programs with retail tire and repair chains. Although these chains do provide national, “fleet” pricing, this pricing is not always the best available pricing, even in their own locations. The fleet’s drivers, and branch offices, can develop relationships with local independent shops for discounted service, and use coupons and local specials that are available nearly every day.
Fleet preventive maintenance scheduling is another fleet management tradition that has its origins decades ago. Manufacturers’ oil change recommendations for normal, consumer usage (10,000-12,000 miles per year) varied from 5,000 to 7,500 intervals. But, there was a caveat, known as “severe” use, and fleets assumed that the kind of higher mileage that their drivers accumulated (upwards of double or even triple the consumer rate) required more frequent intervals, usually every 3,000 miles.
Yet again, times, vehicle technology, and the oil they use have changed. The point of changing engine oil is twofold: first, as oil ages, it picks up dirt, metal, and other impurities which can damage delicate internal engine parts, and second, as it ages it also begins to break down, become thinner, and its ability to properly lubricate the engine is degraded. Fortunately, today there are synthetic oils which have gone 10,000 miles or more without breaking down, and engines operate far more cleanly than they did in 1975.
Some vehicles today also have oil life monitoring systems, which continually track vehicle use and conditions, notifying drivers when such circumstances require oil to be changed.
The bottom line is that the combination of the factors above can allow even fleet users a longer PM interval — 7,500 to as much as 10,000 miles. One caveat: it isn’t a good idea to place wheel alignments on any regular schedule. Drivers should be tasked to carefully monitor the wear patterns on their tires; anything other than even wear across the tread (inside or outside wearing faster than the other, cupping wear, center or shoulder wear, etc.) is a sign that wheel alignment should be checked, as is any difficulty in handling (pulling to one side or the other, shimmys, or vibrations). Doing only two oil changes each year, rather than five or six, will save hundreds of dollars for each vehicle in the fleet.
This fleet tradition says that other than driver or employee sales, the best market for out-of-service fleet vehicles is the auction lane, where the vehicle is exposed to a number of potential buyers; and it only takes two of those buyers to bid your prices up.
The used-vehicle market is an eclectic one. There are a number of channels that cars and trucks are sold through. There are the aforementioned auctions, wholesalers, retailers, brokers, drivers, and employees. Each of the above now also can have “virtual” sales, online, even via smartphones, and overall, the used car market is a technologically advanced, sophisticated market. The day of the slick used-car marketer, wearing a garish sport coat and flashing a diamond pinky ring are long gone.
Again, the best channel for selling most fleet vehicles is a strong driver/employee sales program. But, beyond that, are auctions really the best venue? The answer isn’t yes or no — it is more “it depends.”
Some vehicles are “auctionable,” some aren’t. Some are better sold through other channels, such as employee sales or online remarketing channels. Thinking outside the auction resale box requires a fleet manager to learn and know what vehicles can, or should, be sold through what channel, when, and for how much. Learning about the used-vehicle market will help fleet managers to take full advantage of all channels, to negotiate pricing in a non-auction channel, and ultimately sell vehicles at higher prices and, nearly as important, more quickly.
For a fleet manager who has already found the “big” money savings, implemented a fleet policy, and, in general, has the fleet running efficiently, thinking outside the traditional fleet management box can offer additional opportunities for savings.