Taking Control of Fleet Costs

1
Taking Control of Fleet Costs

• NAFA Fleet Management Institute
• Atlanta, GA
• Scott Pattullo April 18, 2004

2
Introduction

• Weak economy lower demand, falling tax
  revenues
  
• Global competition companies cannot raise
  prices
  
• Major focus on reducing expenses

Most Fleets Under Pressure for Cost Savings
Fleet is a significant spend expected to contr
ibute to cost reductions
3
Controlling Fleet Costs

• At first look, fleet costs appear tough to
  reduce
  
• Many, many small transactions
• Purchased by many users across broad geography
  and vendors
  
• Lots of stakeholders in policies and behavior
  modification

• In reality, fleet expense can be reduced
• Focus on a few critical policies
• Manage a few major cost drivers

4
Definition Well-Run Fleet

• Get the benefits your business needs from fleet
  for the lowest possible cost

• Fleet Benefits
• Driver productivity
• Driver satisfaction
• Safety
• Image
• Revenue
• Customer service

5
Todays Objectives

• Reduce the cost of fleet
• but still deliver key benefits

• Using a manageable approach
• focusing on what really matters

6
Two Types of Fleet Costs

• Direct Costs (hard costs)
• Depreciation
• Maintenance
• Fuel
• Funding
• Taxes
• Accidents
• Insurance

• Indirect Costs (soft costs)
• Lost productivity
• Lost revenue
• Driver turnover
• Administration

Impact of fleet on business when fleet is not
well-run
What we spend on fleet
7
Last Years Presentation Save 1 million
Direct Costs - Typical Large Commercial Fleet
Taxes Licensing 6
Damage Repairs 5
Funding 9
Administration 3
Maintenance 9

• Profile of our fleet
• 750 vehicles
• 300 sales vehicles
• 300 service vans
• 150 manager and work vehicles
• 7.5 million annual spend

Fuel 15
Depreciation 53
8
Summary Direct Cost Savings
Potential Savings 315 100 25 45 200
1,660,000
Potential Savings 45 240 125 225 40
110
100 25 65
Opportunities
Opportunities

• Eliminate excess vehicles
• Choose right vehicles
• Choose right options/equipment
• Sole source/negotiate well
• Avoid dealer purchases
• Optimal lifecycle for each application
• Early fall replacements
• Manage resale timing on each individual vehicle
• Competitive sales of used vehicles

• Reduce accidents
• Manage maintenance
• Fuel policy compliance
• Fuel discounts
• Higher MPG vehicles

Nice Theory How do we really do this?
9
Todays Presentation

• Discuss how to really do it focusing on six
  high-leverage areas
  
• Choose right vehicle for the job
• Negotiate well with manufacturers
• Establish right lifecycles
• Manage replacement timing
• Reduce accidents
• Minimize unscheduled downtime

10
1. Right Vehicle for the Job

• Driver productivity
• Driver satisfaction
• Cost to own
• Cost to operate
• Image

Major Impact on Many Issues
11
Common Mistakes in Vehicle Selection

• Model creep sedans, SUVs, pickups
• Feature creep sunroofs, extended cabs, ¾ ton
  capacity, higher HP engines, 4W drive
  
• Model proliferation for choice
• Multiple manufacturer selector for no good
  reason
  
• Overloaded trucks
• Over-specd trucks
• Sub-optimal upfitting
• Low fuel economy
• Poor durability does not stand up to use
  conditions or lifecycle
  

• Focus on acquisition cost only
• Focus on incentives only
• Adding content for resale
• Poor visibility
• Inappropriate image
• Poor functionality - pickups that should be vans,
  sedans that should be minivans, etc.
  
• What weve always done

12
Complicated to Do Well Many Moving Parts
Key Questions

• Who are the drivers job, size, age, gender
• Key driver requirements comfort, utility,
  productivity, safety, choice
  
• Downtime impact and cost
• Cargo samples, inventory, tools, coworkers,
  customers, families
  
• Monthly mileage/time in vehicle
• Driving conditions/geography rough roads,
  farmers fields, parking, city streets, high
  speed freeways, idle time, metropolitan areas,
  remote rural areas
• Image what will customers see, marketing value
• Compensation value
• Which alternatives realistically meet needs
• Operating costs fuel, maintenance, taxes,
  regulations, accidents
  
• Cost to own acquisition, incentives, resale

13
How to Do It Well

• Define fleet vehicle requirements by job
  application (not job title)
  
• Check your assumptions by getting feedback from
  users/user management
  
• Think 80/20 develop great solutions for 80 of
  vehicle applications, work on the other 20
  later
  
• Layout functional requirements and vehicle
  alternatives by job application national
  accounts sales, district sales reps, regional
  service techs, plant vehicles, line crews,,,
• Evaluate costs over life of the vehicle
• Link to lifecycle decisions
• Dont overanalyze repair costs similar by class
  of vehicle
  
• Give credit for lighter weight/higher MPG in
  operating costs
  
• Make best guess residual value estimates
• Separate cost of work from cost of perk
• Develop a solid, comprehensive recommendation

14
Example High Level Application Strategy
Fleet Application
Executive Region Sales/Mgmt Operations Work
Vehicles Foreign luxury Domestic sedans Lt dut
y vans Med duty pickups Driver satisfaction
Safety Functionality Functionality
Driver satisfaction Reliability Reliability
Practicality Economy Low High High Low 2-3
years 3 years 4-5 years 7 years
Early fall Early fall Avoid frequent Avoid freq
uent downtime replacement replacement downti
me
Vehicles
Priorities
Mileage
Typical Lifecycle
Replacement Strategy
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Potential Impact Alternative Solutions

• Cap Cost Residual Depreciation Difference
• Sales/Perk Vehicle
• -SUV 25,600 10.500 15,100
• -Foreign Sedan 20,500 7,600 12,900 2,200
• High Mileage, Ag Chem Sales
• -3/4T 4WD Crew Cab 26,700 13,500 13,200
• -1/2T 2WD Super Cab 20,900 10,500 10,400 2,80
  0

Source ALG, PC Carbook
16
Potential Impact Choosing the Best Vehicles
Model Miles MIS Cost Resale Monthly Depr/Mile
Sedan A 59 34.2 18,103 8,035 294 16.98
Sedan B 61 34.7 16,787 5,247 332 19.00
Sedan C 61 35.4 18,128 5,312 362 21.07
Sedan D 60 34.7 18,588 5,127 388 22.61
Sedan E 61 34.7 15,360 4,218 321 18.17
Sedan F 60 34.6 15,968 4,983 318 18.27
Basic Sales Application 33 Cost Difference
Highest to Lowest
Source Wheels data
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Value of Vehicle Standards

• Best cost/function configurations used across
  most applications
  
• Negotiation leverage with manufacturers and
  upfitting equipment
  
• Less administration to maintain
• Greater flexibility to move vehicles across
  organization

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2. Negotiate Well With Manufacturers
Manufacturers Average Retail IncentivesSource
Lehman BrothersSeptember 2003
19
Manufacturers Average Retail IncentivesSource
Lehman BrothersSeptember 2003
20
Manufacturers Average Retail IncentivesSource
Lehman BrothersSeptember 2003
21
Negotiate Well With Manufacturers

• Aggressive price discounting by manufacturers has
  made this a key issue
  
• Requires thoughtful evaluation of your basic
  approach
  
• Multi-year single source versus opportunistic,
  flexible, take more risk
  
• Many incentives to consider
• Early order
• Specific models
• Early intro
• Free content
• Early replacement
• Work with manufacturers, be flexible, look for
  win-win
  
• Constant attention be aware of opportunities

22
3. Establish Right Lifecycles

• Depreciation per month declines as vehicle ages
  lengthen lifecycle policy to reduce average
  depreciation per month
  
• Mechanical failures and repair costs increase as
  vehicle ages shorten lifecycle policy to reduce
  downtime

Optimal Replacement
Total Cost
Repairs/downtime
/ Month
Depreciation
Months
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Lifecycle Impact - Depreciation

• Minivan 19,000 price, 2000 miles per month

Mileage at Months Residual Total Depr/ Depr/
Replacement in Service Value Depreciation Month M
ile 48,000 24 8,315 10,685 445 .22 60,000
30 6,750 12,250 408 .20 72,000 36 5,210 13
,790 383 .19
Source ALG
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Lifecycle Impact Maintenance Cost

• Life-to-Date Maintenance and Tire Expenses

/Vehicle
Current Vehicle Odometer
.081
.036
.035
.022
.018
.014
.005
Incremental /mile
Source Wheels client
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How to Do It Well

• Develop lifecycle analysis by vehicle
  applications
  
• Operating conditions
• Average miles per month
• Loads
• Likely PM compliance
• Downtime cost/need for vehicle reliability
• Look at current experience
• Look for benchmarks in other similar
  applications
  
• Factor in vehicle choice versus lifecycle
• Shorter cycle minivan versus longer cycle cargo
  van
  
• Shorter cycle low cost sedan versus longer cycle
  mid-cost sedan
  
• Dont expect a perfect answer, just something
  which makes sense
  
• Continually optimize over time run experiments

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4. Manage Replacement Timing

• For 2-4 year old vehicles, resale prices decline
  as the model year changes and the vehicle becomes
  another year older
  
• Also, fewer used car buyers are active during
  November and December - driving down used car
  prices
  
• These two phenomena create an opportunity to
  purchase new model year vehicles at the annual
  price and obtain the highest used vehicle prices
  of the year by replacing vehicles early in the
  fall

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Manage Replacement Timing
Resale Prices - 2002 to 2004 Model Years - FORD
TAURUS SE - 2 Yr. Olds w/ 60,000 Miles
8,000.00
7,500.00
7,000.00
6,500.00
2002 Ford Taurus (2004)
6,000.00
2001 Ford Taurus (2003)
2000 Ford Taurus (2002)
5,500.00
5,000.00
4,500.00
4,000.00
Sept.
Oct.
Nov.
Dec.
Jan.
Feb.
March
April
May
June
July
Aug.
Resale Prices - 2002 to 2004 Model Years - FORD
TAURUS SE - 3 Yr. Olds w/ 60,000 Miles
6,500.00
6,000.00
5,500.00
2001 Ford Taurus (2004)
5,000.00
2000 Ford Taurus (2003)
1999 Ford Taurus (2002)
4,500.00
4,000.00
3,500.00
3,000.00
Sept.
Oct.
Nov.
Dec.
Jan.
Feb.
March
April
May
June
July
Aug.
Month
Source AMR
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How to Do It Well

• Build a standard selector and replacement list so
  vehicle orders can be pre-approved by management
  
• Push late spring replacements into the following
  fall pull November/December replacements earlier
  in the fall
  
• Be ready to finalize everything just as pricing
  comes out in June/July
  
• Use electronic ordering direct with drivers
• Sell used vehicles as quickly as possible every
  day costs money
  

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Early Fall Replacement Two Cautions

• Pulling replacements too far forward into prior
  fall
  
• Pushing high mileage vehicles into next fall

Replace at Target Odometer
Pull Forward to Fall
Ave Miles Months Months per March In
March Total Depr/ Sept In Sept Total Depr/
Month Odo Service Resid. Depr Month Odo Service R
esid. Depr Month 2000 60k 30 6000 14000 467
48k 24 8440 11560 482
Replace at Target Odometer
Push Out to Next Fall
Ave Miles Months Months per March In
March Total Depr/ Sept In Sept Total Depr/
Month Odo Service Resid. Depr Month Odo Service R
esid. Depr Month 3000 60k 20 6000 14000 700
78k 26 3500 16500 635
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5. Reduce Accidents

• Fleet accident rates frequently too high and too
  expensive
  
• Average vehicle accident repair cost
  approximately 1500
  
• Estimated total accident cost (including property
  damage, liability, workers comp, legal,,,)
  5000-9000

Accident Costs for 1000 Vehicle Fleet
Annual Accident Rate
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How to Do It Well

• Pre-employment MVR dont hire bad drivers
• Annual MVR check on all drivers of vehicle
• Consider substance abuse testing often required
  for operators of other dangerous equipment
  
• Driver training increase skills, raise
  awareness
  
• Comprehensive driver point system accidents,
  moving violations, condition at resale
  
• Safety review board with penalties and consistent
  enforcement
  
• Appropriate vehicle selection

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6. Reduce Downtime/Improve Driver Productivity

• Impact of unscheduled vehicle downtime varies by
  business and application

• National Account Sales Rep Low take cab to
  airport
  
• Relationship Sales Rep Low reschedule for next
  week
  
• New Business Sales Rep High difficult to
  reschedule prospect
  
• Reorder Sales Rep High orders lost to other
  suppliers
  
• Service Technician High hourly billing rate
• Service Tech (critical client equip) Very High
  client revenue impact
  
• Work Crew Low hourly wages
• Law Enforcement/Social Service High public
  safety

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Real Examples
Vehicle Application
Client Cost of Downtime

• HVAC service call van
• HVAC construction van
• Pharma sales rep
• Food service sales rep
• Cell phone tower service
• Cell phone tower QA

• Hourly billing rate
• Hourly wage
• Ave revenue per rep per day
• Ave revenue per rep per day
• 4000 per minute
• Hourly wage

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Potential Impact

• Driver time value at 8 hours per event and
  100/hour 500,000
  
• Revenue/Customer Service Impact?

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How to Do It Well

• Choose reliable vehicles
• Ensure proper capability and loading
• Define appropriate lifecycles
• Get feedback from users
• Monitor compliance to PM (oil change, tire
  replacement, etc) schedules
  
• Reduce accidents
• Manage accidents and maintenance repairs
• Develop effective emergency replacement plans
• Rentals
• Dealer stock
• Spares
• Bailment pools

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Turning Soft Costs into Hard Costs

• Measuring downtime tracking actual time is
  difficult tracking events related to downtime is
  not
  
• Accidents
• Major repairs (by type or )
• Roadside service/towing
• Organize by application cost per event will
  vary greatly
  
• Doesnt need to be perfect
• Publish numbers to create a dialogue
• View as enhancement to direct cost reporting
• Watch out for high maintenance cost by
  application (right vehicle)
  
• Segment maintenance cost by vehicle odometer
  (right lifecycle)
  
• Develop strategies to reduce downtime events
  try some things
  
• Take credit for savings

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Example Tracking Downtime Costs
Accidents
Major Mechanical
Roadside
Downtime Total Downtime Total Downtime Total
/Occur. Cost /Occur Cost /Occur. Cost
Coatings Sales 5 1000 5000 2 500 1000 10 125
1250 (Major OEM) Ag Chem Sales 10 5000 5000
0 20 5000 10000 38 5000 190000
(Direct revenue) Application Engr. 2 1600 320
0 5 800 4000 17 400 6800 (Hourly rate) 58,
200 15,000 198,050 This Year YTD 21
8,870 Last Year YTD 307,850 Difference
88,980
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What About Maintenance?

• Lots of transactions, involving every vehicle
  typically a smaller of total fleet cost
  
• Lots of transaction data temping to
  over-analyze, focusing on driver behavior and
  model performance
  
• Doing it well
• Use a managed maintenance program to ensure right
  repair at right cost and to obtain warranty
  credits
  
• Focus on PM compliance prevents downtime and
  major repairs
  
• Focus on high cost applications insights into
  right vehicle decisions, best savings
  opportunities

39
Fleet Costs Overall

• Focus on a few high leverage areas and you can
  reduce fleet costs significantly
  
• Despite all the pressure for cost savings, its a
  wonderful time to run a fleet
  
• Deflation in new vehicle prices only somewhat
  offset by deflation in used vehicle prices get
  to keep most of it
  
• Historically low interest rates
• Better vehicles lower maintenance, longer
  warranties
  
• Safer vehicles fewer injuries, lower insurance
• Even at 1.90 per gallon, fuel prices roughly
  same as 1980
  
• Higher MPG use less of it
• More vehicle content more vehicle comfort