Championing the Unsung Benefits of Smart Fleet Procurement

Please welcome this guest post from Richard Hipkiss, Managing Director at Fleet Operations.

Fleet businesses are under continual pressure to control costs. At the same time, however, they can also be resistant to change and slow to embrace business transformation opportunities aligned to long-term cost-control strategies.

In some cases, this resistance can be born out of a fear that the introduction of major new systems or processes may backfire – risking the reputation of the business decision-maker. Paralysis caused by this fear, however, can lead to a lack of progress and, ultimately, business failure. As Benjamin Franklin famously once said, “when you are finished changing, you are finished.”

The change management required to implement cost-control strategies, let alone the change itself, can be a daunting prospect but can often be undertaken with minimal expense, resource, and business disruption.

The support of an outsourced fleet manager partner, for example, can be instrumental in driving change within an organisation, facilitating implementation of operational and efficiency changes and helping to deliver on strategic goals.

Resistance and short-termism can also be born out of restrictive, and potentially damaging, procurement KPIs set by company finance departments. These may classify ‘savings’, for example, as measures that have a direct P&L impact over a restricted 12-month period.

Kicking the can …

The adoption of such an approach can hinder smart decision-making and the implementation of long-term strategies. Furthermore, it can simply result in ‘cost deferral’ – or kicking “the proverbial can down the road” as eminent fleet journalist Mike Antich recently described it.

There can, of course, be good commercial reasons for transferring costs or expenditure to future fiscal years – but if such decisions are taken, they should be taken as part of prudent strategising for the greater corporate good. They should also be taken holistically, with input from all relevant company stakeholders.

It is not uncommon, for example, for restrictive KPIs, born out of short-termism and a lack of joined-up thinking, to result in time-consuming year-on-year vehicle lease negotiations by managers as they strive to achieve ‘new’ savings in each financial year. The same, or even greater, annual savings may be achieved over a three-year contract, written up-front. Inefficient working practices are instead being promoted.

Where sizeable, up-front, ‘residual value profit share’ payments from leasing companies are accepted by fleet procurement professionals because they happen to be focused on in-year savings, purchasing decisions can sometimes be taken to the detriment of the greater, long-term, financial good. A focus on fleet TCO – the most complete and meaningful evaluation for fleet procurement – optimised through multi-supplier procurement will invariably offer the most effective and sensible approach to long-term, sustainable, cost control.

Although cost-deferral can have a role to play in corporate cost-control strategies, ‘cost-saving’ or ‘cost-avoidance’ measures will invariably offer more meaningful bottom line results.

The true value of cost avoidance

While the value of direct cost saving measures are irrefutable, the value of cost-avoidance – initiatives or control processes that reduce lifecycle costs or eliminate future costs from being incurred – often fails to be recognised. By overlooking cost-avoidance in procurement performance reviews or in the setting of KPI targets however, significant financial benefits can be lost.

The saving made by one of our clients as a consequence of invoice validation processes offers a powerful illustration of this. Despite the processes saving thousands of pounds for the company, and delivering a significant return on investment, the procurement manager discarded them because his company’s bonus structure failed to recognise them.

In other areas of a business thousands of pounds might be saved in termination fees by reallocating employee vehicles to other members of staff when they leave the company. A finance department’s policy not to classify reallocation of vehicles as a saving however, may instead result in the termination of all such vehicles at cost, wiping thousands off the company’s bottom line.

Ultimately, those with a fleet procurement remit should receive reward and recognition for delivering real value, implementing meaningful change and long-term strategies for sustainable cost control. By doing so, businesses will achieve greater control over their long-term finances and enjoy a more competitive future.

 

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