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Proven Strategies to Reduce Fleet Costs
Oct 1, 2022 | This article was originally published on Fleet Financials.
Fleets are expensive and understanding their costs is an important part of fleet management. But, ringing phones, meetings, buckets of e-mail, reports — the day of a fleet manager is a non-stop series of interruptions, crises, and schedule conflicts. The day goes quickly, and it is often easy to lose sight of what the basic, overall goal of fleet management is — cost containment and control.
Sometimes, however, just slowing down and going back to basics can help a harried fleet manager refocus on what’s important. Here are some of the most basic — and proven — ways that fleet managers can reduce costs.
‘Because That’s Where the Money Is’
Infamous bank robber Willie Sutton, when asked why he robbed banks, reportedly replied “because that’s where the money is.” That is, in a nutshell, the very theory that a good fleet manager uses to develop and implement a cost reduction program. Focusing on the largest expense items results in the greatest savings and the most productive use of a fleet manager’s time.
There are two basic categories of fleet expense: fixed and variable. These categories break down as follows:
- Fixed expense: Depreciation, lease or finance expense, and insurance.
- Variable expense: Fuel, maintenance and repair, tires, and oil.
There are further, more-specific expense items within these; however, breaking expenses down further to seek savings is tantamount to killing a mosquito with a sledgehammer. It isn’t productive; the savings available are nominal; and the effort would be a waste of the fleet manager’s time.
Fleet expenses vary, of course, by region and type of vehicle. For our purposes, let’s look at how variable expense categories break down for intermediate cars, nationwide, as a percentage of total cost:
- Fuel: 75 percent.
- Oil: 2 percent.
- Tires: 6 percent.
- Maintenance/repair: 17 percent.
Again, the percentage of overall expense each of these categories represents varies by region, type of vehicle, and mileage, but the overall effect is clear. With a fleet manager’s time at a premium, serious efforts to reduce oil or tire expense do not result in the same level of savings that the same focus on fuel and maintenance/repair would. Put simply, use time wisely and go where the dollars are.
The same analysis for fixed expense is equally telling. Depreciation expense comprises more than 62 percent of fixed expenses for intermediate cars, with the balance split more or less equally between insurance and lease/finance costs. Clearly, overall cost savings efforts are best focused on fixed expense, fuel, and maintenance/repair.
Savings Found in Fixed Expenses
The three primary categories of fixed expense — depreciation, insurance, and lease/finance — are all within a fleet manager’s grasp for cost savings.
Savings in fleet leasing or financing are based in rate negotiation and in choosing the basis from which charges are derived. The most common lease used in mid-sized and larger fleets is an open-end lease with a terminal rental adjustment clause (TRAC). The lease rate factor is made up of three segments:
- Reserve for depreciation.
- Administrative fee.
- Interest charge. (The administrative fee and interest charge are often referred to as the “lease charge”).
The depreciation reserve is merely a bookkeeping exercise; some portion of the capitalized cost of the vehicle is paid each month to reserve for anticipated depreciation. Changing (lowering) the depreciation reserve rate, which in turn lowers the lease payment, doesn’t provide true savings. It results in a larger unamortized value for the resale proceeds to cover when the vehicle is sold. There may be some nominal savings when the cash flows are present valued; however, it generally isn’t worth the effort.
Both administrative fees and interest charges are subject to market pressure and negotiation. There are several interest rate instruments upon which fleet lease rate factors are based, including:
- Commercial paper.
- U.S. Treasury issues.
- LIBOR (London Interbank Offering Rate).
- The Prime rate.
Working with the company treasury department, a fleet manager can make certain the rate factor instrument is the most cost-efficient possible and can save tens of thousands of dollars each year.
In addition, most lessors offer both fixed and floating rates, and the option to switch from one to the other (with contractual restrictions). In an economy where rates are rising, for example, fixing rates can help avoid dramatic increases in fleet lease interest charges, and vice versa (opting for floating rates when interest rates are falling).
Administrative fees are usually expressed as a multiplier applied to the capitalized cost of the vehicle, i.e., .007, or 0.7 percent. As vehicle prices increase, the dollar amount of the administrative fee increases accordingly. Some lessors may be willing to charge a flat monthly administrative fee, which prevents this inflationary increase.
Reducing Depreciation Expense
Depreciation is where the money is, as Sutton would have said, and a fleet manager can take any number of actions to reduce depreciation expense. Most are basic fleet management methods that sometimes get lost in the shuffle of day-to-day work.
The single most effective way to increase resale proceeds and thus reduce depreciation is an employee sale program. Selling vehicles first to drivers or thereafter to any employee is a win-win for both the company and the buyer. The buyer can purchase a late-model, well-equipped vehicle that has been rigorously maintained at a price lower than that on the open retail market. The company receives proceeds greater than those available on the wholesale or auction market. The keys to a successful employee sale program are:
- Marketing. Too many companies merely make it known that vehicles may be purchased, then wait for the driver or another employee to request a price. Aggressive marketing of out-of-service vehicles ensures that vehicles are seen by the widest market possible. When new-vehicle orders are placed, the driver should be provided a price. Follow-up communications are also important; don’t simply send a price and wait for a reply. Finally, the Internet offers the company an opportunity to “post” vehicles available for sale to the entire company and include photos, condition reports, and preventive maintenance records.
- Pricing. Avoid the twin temptation of trying to price vehicles too high or too low. Vehicles not purchased by employees are usually sold through auctions or in other wholesale markets, where prices are significantly lower than in the retail market. (Indeed, retailers themselves get inventory at the very auctions where your vehicles are sold.) Price vehicles somewhere between the two — the so-called “wholetail” price.
- Ancillary Programs. The easier it is for driver or other employee to purchase a vehicle, the more often they will. Programs for financing, leasing, and warranty coverage for used vehicles are available to include in a package that makes the purchase fast and simple.
The key, then, is not to simply sell vehicles to employees, but to actively and aggressively market them. Most large fleet lessors have programs that perform these tasks, handling the administration and sale for the fleet manager. Increasing the employee sale share of all vehicle sales can result in significant savings. A 500-vehicle fleet, selling half of its 150 off lease vehicles annually to employees, and increasing the proceeds of these sales by $500 per unit (a very conservative assumption) would realize $37,500 in annual savings.
Use Diverse Markets
Vehicles not sold to employees can be remarketed in several other markets.
- Auctions. The most common resale market used by lessors. Large numbers of vehicles can be sold quickly, exposed to a wide market via competitive bidding.
- Wholesalers. This market buys vehicles directly, and prices can be negotiated directly with the buyer. Using wholesalers can take advantage of regional markets, where premium prices are paid for specific types of vehicles. Wholesalers are also useful when vehicles are older, with very high mileage, and do not elicit strong bidding at auction.
- Brokers. Used-vehicle brokers don’t actually take possession of vehicles; they bring buyer and seller together. Particularly useful for specialty vehicles, such as upfitted trucks and vans and other “work” vehicles that tend to also be very high mileage with severe use.
The overall goal of a depreciation control regimen is to make vehicles available to the largest and most diverse markets possible to maximize proceeds and minimize depreciation. The savings possible can be well into the six figures.
Controlling Insurance Expense
Two overall categories of insurance expense are fleet-related: liability (including bodily injury) and physical damage. Liability generally falls within the responsibility of the treasury department under the risk manager, and is usually also part of overall liability negotiations. This does not mean, however, that fleet-loss experience is left out of the decision. Most large and mid-sized fleets self-insure for physical damage; they create accrual accounts from which repair expenses are drawn as they occur.
The more accidents the fleet has, the greater the risk of liability and bodily injury, and the greater the cost of physical damage repair. What are some proven methods of reducing overall insurance expense?
- Safety Training. All drivers should be required to participate in at least annual safe driving training, and there should be regular followup. Drivers know they should not exceed the speed limit, tailgate, drive while impaired, etc. But they do these things anyway, in no small part because safe driving isn’t always paramount in their minds. A monthly safety newsletter, reminding drivers to drive safely and defensively, bolstered by at least annual training and testing goes a long way toward keeping safety at the forefront.
- Accident Management. These programs help get the driver out of the repair process and back on the road quickly, while providing physical damage expertise that most fleets do not have to negotiate repair estimates directly with the shop. One phone call from the driver sets in motion the entire process, from towing to replacement rentals to managing the repair process. Finally, such programs usually include subrogation recovery efforts, which can return many thousands more to the company from third parties.
Too often, the physical damage repair process is handled using a “get three estimates” program, usually a recipe for a higher cost. Unless the risk manager (or fleet manager, if that is where responsibility lies) has the experience and training to find padding in a collision repair estimate, outsourcing is a key element in a cost savings program.
Maintenance/Repair: Second-Largest Expense
Maintenance and repair expense is the second-largest variable expense (fuel, again, is the largest). However, it responds well to a concerted effort to find savings. There are three categories within this expense and methods to approach each one.
- Preventive Maintenance. Basic preventive activity such as oil changes, cooling system service, filters, and inspection.
- Predictable Repair. This includes repairs and other service known to be necessary during the normal service life of a vehicle, such as tire replacement and brake service.
- Repairs. Unscheduled repairs that are not part of the normal operation of a vehicle, such as engine and drivetrain, electrical and fuel injection systems, even emergency tire repairs, and replacement.
Key to saving money in maintenance/repair expense is a rigorous regimen of preventive maintenance (PM). The benefits of an enforced PM program are numerous. Fuel efficiency is maximized. Downtime associated with component failure is reduced. Resale value is maintained and enhanced. Finally, drivers are more apt to purchase vehicles they know have been rigorously maintained.
Most fleet lessors offer a maintenance management program, through which they provide drivers the means to purchase needed PM and repairs, technical expertise to discuss repairs with the shops, and tools to capture and mine the data that this expense generates. These programs can also include means by which drivers are reminded when maintenance is due, and follow-up communications when it isn’t performed on time. The bottom line is that well-maintained vehicles run more efficiently and are worth more when they are sold.
Here are some areas where maintenance and repair expense can be reduced.
- Overmaintenance. There is definitely such thing as too much of a good thing. Scheduling preventive maintenance should be done carefully, with lower-mileage vehicles subject to greater intervals (5,000 miles or more) than higher mileage vehicles.
- Maintenance/Repair Near Replacement. Fleet managers should be careful in allowing some repairs to be performed as the vehicle approaches replacement. Sometimes, drivers who plan to purchase the vehicle at replacement attempt to have unnecessary work done, e.g., replacing tires that don’t yet need to be replaced, etc. A maintenance management provider should be aware of the fleet replacement cycle, and a policy should be in place stating that after a particular date (perhaps when the replacement order is placed), only safety-related items may be performed.
- Condition Reports. Drivers should be required to complete vehicle condition reports on a regular schedule, at least twice each year, for example. These reports can reveal work that, if not performed, will lead to a deterioration of the condition and subsequent value of the vehicle, as well as more expensive repairs down the road. Fleet managers should implement a conditions follow-up policy requiring attention, and the reports should be signed off by the driver’s supervisor.
Here’s the bottom line: a fleet of 500 vehicles, each driving 24,000 miles each year, accumulates 12 million total miles annually. A reduction of a mere quarter of a penny per mile will bring savings of $30,000. This can be accomplished by using a firmly enforced PM schedule, limiting near replacement work to safety items only, and using the expertise provided in a maintenance management program.
Fuel is the Largest Expense
With oil prices in the $90 per barrel range, and gasoline prices hovering at $3 per gallon, fuel expense has become almost an obsession for most fleets. Saving money in fuel cost, just like other expense areas, is a matter of getting the right tools and determined mining of the data fuel transactions generate.
Here are some proven fuel expense reduction ideas.
- Fuel Only. Whatever method the driver uses to buy fuel, make certain fuel is the only item bought. Unless proper controls are put in place, drivers can buy non-fuel items such as food, beverages, tobacco products, even lottery tickets, using the fuel card. A fleet fuel card program usually enables the fleet to limit purchases to fuel.
- Capacity. If the driver is assigned a four-door sedan with a tank capacity of 18 gallons, there’s clearly something amiss if a fuel transaction for 30 gallons comes through. Know the tank capacity of your fleet vehicles and be prepared to question transactions that exceed it.
- Fuel Type. Premium-grade fuel can be as much as 20 cents per gallon more than regular unleaded. Make certain that your drivers aren’t using premium fuel, unless the vehicle owner’s manual requires it.
- Self/Full Service. Full service is more expensive than self service. Limit drivers to self-serve only.
Fuel savings can mount if a fleet manager has the tools and data, and simply knows where to look. Fleet fuel card programs allow fleet managers to place direct controls on what can be bought and how much can be spent, as well as tracking exceptions to policy.
Common Sense & Hard Work
Achieving cost savings is a matter of common sense and hard work, as fleet managers wade through the mounds of data the operation of a fleet can generate.
- Go where the money is. Time is precious, so concentrate on those expense areas where the potential savings are greatest.
- Make certain that the data is available, and that there is a means by which it can be mined for dollars.
- Work with suppliers to develop cost savings processes.
- Keep drivers in the loop; make sure they know that they are the lynchpin of any cost savings initiative.
- Document everything when executing a cost savings program.