Remarketing

Identifying Policy Changes that Reduce Costs

June 2004, Automotive Fleet - Feature

by David Fern

While many types of policy changes can immediately impact cost reduction, smart fleet managers also realize that some changes may yield results down the road to save significant amounts of both hard and soft dollars. The following is a list of obvious and not-so-obvious policy changes that can reduce overall fleet costs.

Vehicle Replacement

Standard policy for most companies mandates vehicle replacement at a certain mileage or month in service. What many fleet managers may not realize is that the time of year in replacing a vehicle is crucial to saving money. Replacing vehicles during the fall buying season, before Thanksgiving, is the optimum time. The best used-vehicle resale values can be expected during this period, literally saving hundreds of dollars per vehicle. In addition, during this time, managers can lock in on early order incentives and the lowest model-year prices, decreasing capitalized costs and thus reducing monthly lease payments.

Lease Term

Depreciation is the most expensive component of a lease. The lease term length determines the percentage a vehicle depreciates each month. For example, a 50-month term depreciates the capitalized cost at 2 percent a month. Likewise, a 40-month term depreciates at 2.5 percent a month.

Plan the duration of a vehicle lease term around the anticipated length of time you expect to keep it. A zero residual on a vehicle that will be sold at a profit at the end of a 40-month open-end lease is an attractive prospect. However, you paid for that profit over the first 40 months with a higher depreciation charge. Increase your cash flow by extending the lease term and making smaller monthly payments. Chances are you will still realize a resale profit.

Maintenance/Fuel Card Program

Securing a fleet maintenance and/or fuel card can reap both hard- and soft-dollar savings in a short period of time. A maintenance program card administrator can provide valuable monthly transaction reporting, as well as maintenance tracking. Practicing preventive maintenance is very important, especially during the covered warranty period. Fuel cards monitor proper fuel grade usage and excessive fueling.

Short-Term Vehicle Needs

Vehicles reaching service limits and nearing retirement may be resources to fill short-term vehicle needs. Examine your current fleet to determine if any vehicles can best be used in different ways, as long as business needs and cost justifications support your decision. Some options to arrange short-term vehicle use include temporarily transferring vehicles from one sector to another, reassigning the vehicles of vacationing personnel, designating about-to-be replaced vehicles to pool status, extending expiring leases for a short period, and reviewing company policy to determine if criteria to obtain a vehicle should be changed. The key is to avoid keeping excess vehicles simply for sake of convenience.

Cost-Cutting Goals

To be effective over the long term, fleet management decisions must be tailored to ever-changing imperatives such as cutting costs in some years and making investments in others. While fulfilling that responsibility, the fleet manager must also promote policies and practices that maximize ongoing fleet cost effectiveness. The fleet manager must be prepared to pursue two types of cost-cutting goals: elimination and deferral. Eliminating costs may involve reducing fleet size, cutting driver training, or increasing employee use of personal vehicles. Significantly eliminating particular fleet costs generally cannot be done quickly since most costs are fixed and thus unavoidable in the short term. In short, true cost eliminations usually do not produce significant economic or fiscal benefits in the short term. To easily “defer” fleet costs, move them to future fiscal years. The fleet manager must reduce or suspend replacement expenditures if they work for companies that finance acquisitions with cash. However, depending on the fleet age, deferring the replacement could translate into an increase in maintenance costs. Whatever policy road you take, make sure you commit to it for the long haul.

Best Practices

Best practices, or benchmarking, mean exactly that: obtaining the most cost-effective vehicles and using them efficiently to achieve fixed and variable cost. Maximizing fleet utilization by matching needs with the proper vehicle and using one vehicle to perform multiple functions can make your fleet more flexible and more valuable. Best practices are a continuing process that changes as the organization, customers, or competition changes. An internal and external process, best practices can provide success stories and reveal deficiencies.

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