Procurement’s Fixation on Hard Costs Misses Larger Soft Cost Savings

Procurement initiatives to reduce fleet cost structure primarily focus on hard costs with secondary consideration given to soft cost reduction. Hard cost savings refer to tangible bottom line reductions, such as reduced acquisition expenses associated with physical assets like fleet vehicles and their associated operating expenses.

Soft costs, on the other hand, are those expenses not included on a company’s balance sheet, such as preventable accidents, productivity improvement, and downtime minimization. Based on my conversations with fleet managers, some procurement teams often don’t appreciate the sizeable impact of soft cost reductions and how they can lead to larger hard cost reductions.

Invariably, procurement focuses cost reduction efforts in those categories that will result in the largest return. Namely, the two greatest cost categories: on the fixed cost side, depreciation, and on the operating or variable cost side, fuel. As a result, fleet cost-reduction programs typically focus on the asset; however, there’s a limit to how much a fleet manager can modify fleet specifications without impacting the fleet mission.

You can’t change the fundamental requirements of your business. This necessitates minimum fleet equipment specifications that, as a result, predefine the expense parameters for your assets from both a fixed and operating cost perspective. In addition, if you already acquire vehicle assets that best fulfill your fleet application, then any supplemental cost reduction will only be based on incremental refinements, in essence, chasing pennies to further reduce costs.

Unfortunately, many fleet-related cost-reduction decisions are made for the short-term, with very little consideration of the long-term impact on the total cost of ownership (TCO). More often than not, senior management is more interested in the fiscal, rather than economic, consequences of their fleet-related decisions.

Short-Term vs. Long-Term Cost Reductions

Soft cost reduction can translate into process improvements that do not immediately reduce cost or assets but provide benefits through improved employee productivity and safety that over time becomes cost savings. For example, a company could invest in improved safety and risk management measures, which will result in decreased accidents and minimize corporate liability exposure, which in turn could positively affect company insurance costs over a period of time.

Companies that actively try to reduce their soft costs are able to improve efficiencies and productivity. Lackluster productivity is an important soft cost that can be addressed by modifying fleet acquisition strategies by buying the right equipment for the intended fleet application. These soft cost reductions translates into a hard cost savings.

Unfortunately, soft costs are difficult to measure so procurement doesn’t classify them as important as other cost reduction initiatives. Procurement is often driven by short-term, immediate cost reductions. There must be a longer perspective to soft cost savings because fixating on short-term results will hurt a company in the long run.

For instance, one shortfall in achieving hard cost savings is demanding “commodity pricing” that sacrifices service. Some procurement groups are focused on upfront pricing (lease rate or purchase cost) rather than on the scope of service. In worst case situations, this results in the wrong vehicle choice, higher operating costs, and reduced driver management. While most sourcing groups increasingly recognize the importance of service, they have difficulty quantifying it and often view it as an intangible.

A procurement group is very good at buying, but often doesn’t understand the subtleties involved in the service relationships between the corporate fleet department and its partner fleet suppliers. A fleet manager needs to persuasively articulate the nuances of a service relationship to others on the fleet procurement team. This requires a broad perspective of how procurement and supplier selection decisions impact the corporation as a whole since fleet is a key tool to implementing and fulfilling the corporate mission.

When dealing with intangibles, such as service, quality, and innovation that a supplier can provide, a fleet manager should attempt to quantify these costs savings and express them in cents per mile, dollars per month, or lifecycle expense.

Indirect Procurement Costs are Significant

Fleet is only one subset of the much broader category of indirect procurement, which involves purchasing services or goods required to keep a business operating on a day-by-day basis. (Direct procurement, on the other hand, is the acquisition of raw materials and goods that allow companies to manufacture their products and create revenue). Other indirect procurement categories include, but are not limited to, capital goods (plants and machinery), IT-related services, and travel management. Indirect procurement, on average, is a significant proportion of a company’s purchases, in some cases up to 50%. Consequently, indirect spend, such as fleet operations, attracts much focus during cost reduction initiatives.

Over the past two decades, procurement’s involvement with fleet has grown deeper and its scope of responsibility has expanded. Currently, 28% of all fleet managers in the U.S. work in the procurement area or report up through procurement. Over the years, procurement has gained a greater voice in operational considerations. At times, there is friction between savings, cash flow, and other financial targets and operational imperatives. Invariably, there are interdepartmental conflicts, such as the challenge of balancing HR/driver requirements versus finance/accounting department requirements that are often at odds with one another.

Nonetheless, procurement’s involvement in fleet has generated positive outcomes, such as standardizing processes, aggregating market intelligence on supplier management, and facilitating a more integrated supply chain. More companies are modifying procurement strategies by moving toward a more cooperative approach that delivers cost savings based on parameters structured around business value. Fleet management procurement must shift away from a commodity pricing focus to an overall value and service focus. Long-term success requires evolving beyond transactional relationships to strategic partnerships designed to deliver measurable and sustainable business value.

Let me know what you think.