Here is a typical situation that I see at companies with large fleets (i.e., >500 cars/trucks):
- Spend is large, often the company's largest single indirect spend category
- Leadership wants to cut fleet costs, but is unsure of how to do so
- Fleet managers push back on requests for cost reduction, claiming that costs cannot get any lower without sacrificing quality, given that automaker discounts are negotiated on an annual basis and the fleet management provider is earning razor thin margins as it is
The above scenario often leads companies to remain motionless, unwilling to make structural changes to their fleet -- thus incapable of significantly reducing costs. But there is light at the end of the tunnel. Here are three key areas of cost reduction opportunity that every company should reexamine starting today:
It goes without saying that you should negotiate volume discounts from automakers annually (if you don't, then that is a primary -- and easy -- step you should take to achieve savings). That said, most companies do receive volume discounts from their selected automakers; the real problem is complacency. We recently conducted a survey of large commercial fleets, revealing that over half of survey participants use a sole-source approach (i.e., only one automaker). This may be because of a long-standing relationship with the automaker, or perhaps the automaker has convinced the companies that they get the biggest discounts when they go "all in." Either way, this is a red flag. More often than not, the perceived benefits of sole sourcing become an excuse not to shop around.
Sole sourcing may actually be the optimal solution, but I would be highly skeptical of this claim until it had been proven through a comprehensive Total Cost of Ownership (TCO) analysis of all available models. Which brings us to our next red flag: the lack of an internal TCO analysis of all available models. A comprehensive TCO analysis begins at model selection and ends at disposition, and includes everything in between. Even if a TCO analysis is performed, too often it is outsourced to the fleet management provider, which can cause a conflict of interest (for example, the "holdback" is a special payment fleet management providers receive from automakers when buying vehicles; holdback amounts vary by automaker and are usually not passed on to the lessee).
Besides a TCO, companies should look at new model options from non-traditional commercial fleet automakers (for example, Nissan) as well. There have been a number of changes in the auto industry in the past decade -- from bankruptcies to large recalls to tsunamis that affect supply chain. Now is the ideal time to go to market for model selection, as companies hurry to gain or regain market share. Likely you will find, as I recently have, that not only are there significant cost savings to be achieved by going to market, but, in the case of companies that currently sole-source, a diversified portfolio of automakers will also bring the added benefit of reduced supply risk from automaker bankruptcies, recalls, and natural disasters.
As mentioned above, one of the key elements of effective fleet cost management is an internal TCO analysis. A key input to the TCO is the lifecycle parameter (i.e., how long the vehicle should be kept before resale). Lifecycle parameter decisions are typically made by gut feeling and not changed for long periods of time. However, given the fact that changing the lifecycle parameters is probably the fastest, most effective, and least painful way to cut fleet costs, it is only prudent to do the necessary due diligence in order to make an informed decision on the matter. To provide an idea of the scale of savings potential, I recently performed a lifecycle parameter analysis for a client with a fleet size of 2000 vehicles and the result was an annual savings of $2 million (10% of the fleet budget) by adding 6 months to the vehicle lifecycle, which still kept it within industry averages. Now, that is not to say that all companies should automatically increase the vehicle lifecycle because it leads to savings; however, it does suggest that vehicle lifecycle analysis be part of a strategic decision that takes into account not only savings potential, but also employee satisfaction. At the very least, the decision makers need to be armed with the financial implications of changing the lifecycle parameters, which can be significant.
Fleet Management Providers
Fleet management providers have had a tough time over the past few years. The recent financial crisis hit them hard, significantly stifling their ability to access credit lines to support the leasing side of their business, which is about half of the commercial fleet market. Numerous providers actually had to tell their clients that vehicle purchases would have to skip a cycle, which caused many clients to jump ship and subsequently caused an industry shakeout. To the relief of these providers, the government came to the rescue with TALF loans, allowing them to remain solvent in 2009 and get back on their feet in 2010.
Why the history lesson on the fleet management provider industry? Because I am trying to paint the picture of an industry ripe for strategic sourcing. The providers most affected by the crisis are clamoring to regain the market share that they lost, and providers that benefited from the crisis are fervently trying to hold on to the unexpected but welcomed market share gains.
Beware: providers will stop at nothing to prohibit you from taking their business to market. They will tell you that they survive on razor thin margins. They will use scare tactics to discourage shopping around, outlining the painful transition that would have to take place should you decide to change. But, as with the lifecycle parameters decision, it is essential to gather the facts in order to make an informed decision. If they really do survive on razor thin margins, then an RFP process will only help prove their case, right? Unfortunately, most companies listen to the incumbent provider and don't go to market, with 64% of survey respondents having been with their providers for more than eight years. Just to give you an idea of the current savings potential, I recently conducted a fleet management provider RFP process and, with a thorough cost analysis and aggressive negotiations, was able to cut incumbent provider costs by 20% -- as it turned out, their margins weren't so thin after all.
If you manage to expand your automaker horizons, adjust and optimize your lifecycle parameters, and go to market for fleet management providers despite the obstacles -- congratulations! You have tackled the "low hanging fruit." But be warned -- your journey toward world-class performance has just begun. The fleet spend category is in perpetual motion, requiring constant vigilance and reevaluation of not only the elements listed above, but also your fleet funding strategy (i.e., buy, lease, or other). If company leaders want to cut fleet costs, they need to be willing to constantly challenge the status quo and put in the time and effort required to understand the true options and their implications, both financial and non-financial.
-- Frank Buchanan, Manager within Procurement Practice, Archstone Consulting.