Fleet Management ROI — Advice from the Experts

Ross Jackson, CEO of fleet management and consultancy organisation Fleet Operations advises how to establish a cost-effective fleet procurement strategy and minimise the total cost of fleet ownership.

Concerns abound over the impact of Brexit on UK plc. Business confidence is being severely tested against a backdrop of market instability, a weakening pound and a slowdown in global growth.

As economic uncertainty prevails, procurement professionals are under increasing pressure to ensure their strategies are sufficiently robust to withstand potential cost volatility and threats to the business bottom line.

For those involved in fleet procurement, lessons should be learned from the 2008 recession – an economic fall from grace that resulted in a shortfall of funding and lease rate variations of anything from 3 percent to just under 10 percent.

While even the most accomplished of economic crystal gazers cannot forecast the future of the fleet industry landscape with any certainty, a fall in residual vehicle values, combined with similar long-term forecasts, suggest wide lease rate differentials may once again be on the horizon. This calls for careful market scrutiny.

Future-proofing fleet procurement

Enticing ‘residual value profit share’ payments, paid in advance by leasing companies to win business and tie customers down to three or four year contracts are becoming increasingly commonplace.

Procurement managers should tread carefully however and not let eye-watering upfront deals cloud their judgement. Even in the current climate, leasing cost deltas between competing lease companies can often be as much as £40 per vehicle/month. Such differentials have the potential to widen further once a contract has been signed, particularly if a leasing company has factored in a sizeable upfront payment into its business model.

Procurement cost calculations, including any such upfront payments and interest fees, should consequently be made across the full term of the contract.

While, for many, this may seem a given, recent research by Fleet Operations revealed that only one in ten companies (11 percent) currently take total cost of ownership (TCO) into account when procuring vehicles.

Although headline prices must always be a consideration, TCO offers the most complete and meaningful evaluation method of selecting fleet vehicles. This calculation includes not only leasing and purchasing costs but all real-life costs over the period vehicles are retained – from depreciation, fuel, insurance and maintenance to interest, tax and employers NI. The cooperation and sharing of relevant data between fleet, finance and procurement can prove crucial in this regard.

Sole supply arrangements often prove a popular option when agreeing contracts with fleet providers, as companies look to minimise resource and administrative demands. Price volatility, however, will usually mean this procurement model results in a significant, and unnecessary, cost burden. A chosen supplier may offer eye-catching deals on certain makes and models, but will not typically be able offer the best deals for all vehicles. Moreover, in light of the current economic landscape, putting all your eggs in one basket may prove more costly than ever.

Companies that choose to search the market for the most competitive price on every vehicle from multiple suppliers will invariably realise significant savings.

Fears over the complexity and management time involved with multi-bid leasing have often discouraged companies from adopting this model. Where the process is outsourced however, returns on investment are ‘writ large,’ with organisations benefitting from the same minimal resource demands they get with a sole supplier.

Unlocking the door to fleet management ROI

Transparency in cost and performance data holds the key to maximising the value of these returns. Where all, or a proportion, of the fleet function is outsourced to an independent and impartial fleet management partner, the fleet operator should still have direct contracts with all its suppliers, such as those providing maintenance, fuel and accident management services.

Supplier contracts in a leasing environment, in contrast, are held with the leasing provider and service costs are wrapped up in its fees. This makes it extremely difficult to identify all items of spend for cost control purposes.

Where lease costs are optimised through multi-bid procurement and fleet service savings successfully realised through contract transparency and breakdowns of all items of spend, returns can be as high as 8 to 1.

Whatever economic landscape lies in store post-Brexit, such effective cost control management will help procurement professionals mitigate against future fiscal risks to fleet TCO.

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