Every function of a fleet operation is centered on money: the acquisition of vehicles/equipment, fuel, maintenance, safety programs, facilities, replacement parts inventory, tools, etc. As such, corporate initiatives actively seek to improve fleet efficiencies and employee productivity by implementing cost-effective acquisition strategies to buy the right assets, programs, and services to fulfill specific fleet applications. In this environment, procurement plays an important role in fleet management; but how these monies are invested can make the difference between success and failure.
Misguided Procurement Incentive Programs
One factor that can be counter-productive to implementing a best-in-class fleet operation is a procurement incentive program structured on a year-over-year cost take-out strategy. Striving to achieve this goal incentivizes a more aggressive procurement stance — occasionally employing a take-no-prisoners strategy when negotiating with suppliers. This type of incentivization fosters an adversarial relationship since the procurement organization is single-focused in being bottom-line driven.
I am not saying that procurement should not be aggressive in achieving its goals, but its goals must align with the larger fleet management goals. For instance, one shortfall is demanding “commodity pricing” that forces suppliers to downgrade service levels to maintain profitability. These procurement groups are primarily focused on upfront pricing (lease rate or purchase cost) rather than the full range of fleet services. In worst case situations, this results in the wrong vehicle choice, higher operating costs, decreased residual values, and reduced driver management. While most sourcing groups recognize the importance of service, it is difficult to quantify and is often viewed as an intangible.
Align Incentives to Achieve Fleet Optimization
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. The responsibility for bridging this “knowledge gap” falls on the fleet manager, who needs to persuasively articulate the nuances of a service relationship to the procurement team. This requires communicating how 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 a supplier can provide, a fleet manager should seek to quantify these costs savings and express them in cents per mile, dollars per month, or lifecycle expense.
I fully support the concept of incentivizing procurement to achieve specific cost goals, but these goals should be based on outcomes that enhance the fleet operations’ ability to fulfill its corporate mission. When incentive plans are solely based on cost cutting, this continuous squeeze of suppliers distorts the overall objective of the fleet function by compromising service delivery. Incentive plans should be developed to encourage procurement to focus on other goals, such as the acquisition of assets and services that enhance employee safety or to acquire more ergonomic vehicles and upfits that will result in fewer Workers Comp claims.
Procurement is often driven by achieving short-term goals, but when working with fleet operations a longer perspective must be taken. Monies invested in process improvements do not immediately reduce cost, but provide benefits through productivity improvements, decreased preventable accidents, and downtime minimization that over time generate substantial cost savings.
For example, when a company invests in improved safety and risk management measures, it will result in decreased accidents rates and minimized corporate liability exposure. When you think about it, a single preventable accident resulting in a fatality can wipe out years of past cost savings. Metrics must be employed that measure these desired outcomes, such as performance improvement, supplier service consistency, and other critical intangibles that must be expressed in numbers, allowing them to be quantified.
In some procurement organizations, incentives are based on achieving specific fleet outcomes. In particular, management must encourage outcomes that aligns the procurement incentive plan to achieving best-in-class fleet management. Fleet procurement strategies must shift away from a commodity pricing focus to overall value and service delivery. These are the outcomes you want to incentivize.
Ask yourself how does fleet category procurement contributes to making fleet operations a best-in-class, cost-efficient organization? Are they driving excellence or are they merely minimizing procurement costs? In fleet management, long-term success requires evolving beyond transactional relationships to strategic partnerships designed to deliver measurable and sustainable business value. Procurement should be assigned collective KPIs (with cost/value being just one of them) that encourages this wider responsibility and focus when evaluating suppliers and contracts.
Procurement Needs to Support Strategic Goals
The short-term goal of procurement is to generate measurable cost saving. But bonuses based on savings alone may potentially undermine supplier relationships and stifle the emergence of long-term strategic partnerships. The long-term goal of procurement is to cultivate these supplier-centric partnerships that are both cost-efficient and mutually beneficial.
My takeaway is that procurement goals must align and support fleet’s strategic goals. The goal of procurement should not solely fixate on cost reduction/avoidance, but expand to support the wider strategic goals of fleet. Management must develop remuneration policies and incentive plans encouraging procurement to cooperatively work with in-house fleet leadership to support attainment of larger strategic goals allowing fleet to cost-effectively fulfill its corporate mission.
Let me know what you think.
Originally posted on Automotive Fleet