# Total Fleet Cost is Proportional to Fleet Size

By Mike Antich

Every fleet manager is feeling the pressure to reduce costs. The best place to have maximum impact is to reduce overall fleet size and/or modify vehicle composition. Unfortunately, it is not uncommon for the size and composition of a fleet to be out of sync with actual corporate needs - either there are too many vehicles in the fleet and/or larger than needed vehicle types are in operation.

A fleet's total cost is directly proportional to the total number of vehicles in operation, which drives all fixed and operating costs, such as fuel, replacement tire expenses, depreciation, accident repair costs, etc. If you can reduce overall fleet size, all other cost categories will decrease correspondingly.

One of the best explanations about the relationship between fleet size and fleet cost was provided to me by the City of Philadelphia, which, during a 2004-2005 fleet reduction initiative, quantified the relationship into an equation. It was explained that fleet size is the super-variable driving overall costs.

The aggregate fleet costs (FC) can be represented by the equation:

FC = [A + R/M + F + I/O] x #V

(A = acquisition expenditures, R/M = repair/maintenance costs, F = fuel costs, I/O = indirect/overhead costs, and #V = number of vehicles.)

The right side of the equation is calculated for each vehicle class (using averages for the four variables) and then summed to determine aggregate fleet costs. Regardless of how well costs are managed and efficiencies generated through process reengineering for the first four variables, fleet costs will be proportional to the overall fleet size.

At some fleets, it is reasonable to assume an overall fleet-size reduction in the range of 5-10 percent is feasible. For a fleet of 500 units, eliminating 50 units can save between \$175,000 and \$300,000 per year, depending on the mix of passenger cars and light-duty trucks eliminated from service. Substantial cost reductions can also be achieved by rightsizing the class of vehicle. For instance, Valero, the largest independent petroleum refiner and marketer in North America, achieved a 6.5 cents-per-mile savings over the life of each unit. "When you consider millions of miles traveled per year by fleet vehicles, a few cents-per-mile advantage adds up quickly," said Randy Burwell, fleet administrator.

## Managing Inventory

Reductions in fleet size often occur as a result of decisions made at levels higher than fleet management. Sales departments experience cutbacks. Business units or product lines are sold or shut down. Installation and service operations are outsourced. In these instances, fleet managers are often not part of the decision-making process, but are certainly part of the implementation.

Senior managers must ensure there is an ongoing effort to rightsize the fleet. Inventory management should be part of any strategy development in an overall company cost reduction goal.

While selecting the right vehicles, with the right equipment, and managing overall expense are strategic fleet issues, one area that often gets short-shrift is managing inventory: making certain that every vehicle in the fleet is necessary and fully utilized. Inventory management is a long-term, ongoing process. As a result, fleet managers must be vigilant about maximizing vehicle usage. For instance, surplus vehicles are a fact of life in fleet management. It is important to know how many vehicles are surplus and why (e.g., drivers who resigned or were terminated, vehicles "inherited" via acquisition, etc.). If you operate a nationally dispersed fleet, branch locations are notorious for hanging on to a surplus vehicle for occasional driving or "just in case" it is needed.

## Combating Complacency

It isn't unusual for a company to become complacent in the way its vehicles are used and how territories or routes are serviced. For service and delivery fleets, in which drivers use established, regular routes, mapping and route software packages can help determine not only the most efficient routes to facilitate reorganizing the fleet, but better use of existing vehicles before any cutbacks are implemented. Applying routing software to map the most efficient routes often leads to discovering that reductions are possible before the management edict comes down to do so.

Sometimes employees need to be shifted to a driver reimbursement program. Fleet managers should run regular exception reports analyzing monthly driving mileage to determine if drivers continue to qualify for a company-provided vehicle. A month or two of insufficient mileage should not cause the revocation of the vehicle; but, if a driver consistently drives less than the break-even mileage, rightsizing demands the vehicle be taken away and the driver shifted to a monthly allowance or cents-per-mile reimbursement program. This is particularly true when field territories are restructured and the changes reduce the mileage driven.

In the final analysis, fleet managers are responsible to not only efficiently manage vehicles, but also explore all options to save the company money, even if it means reducing the size of the fleet for which they are responsible. Inventory management is an ongoing process, and a key management responsibility is identifying and acting upon opportunities to maximize fleet utilization.

Let me know what you think.

[email protected]

## Recommended Whitepapers

1. 1. Steve Kibler [ February 28, 2012 @ 02:29PM ]

Mike, your articles are the most thought provoking in the industry. Fleet managers can't simply read one and log it away in memory just to wait for the next one. This fleet cost formula is both too simple and too complex (like an Oxy-equation). I got to thinking about the equation and it's impossible to lump depreciation, utilization, lifecycle time, residual value, and personnel overhead all into I/O. Some of these variables are tangible, some intangible and all are subjective to the multiple definitions assigned them by each manager. This equation sounds like an accountants attempt to simplify of fleet costs. This one's going to keep me up at night for a while thinking about it. Oh well, hurry up and write the next one.

2. 2. Phil Schreiber [ March 02, 2012 @ 04:50AM ]

I think Steve is right, this this is an over simplified formula. It might be a quick way to assess the overall cost, and the average cost per vehicle. However I am sure that fleets that allow their drivers to take vehicles home see an increase of fleet usage when gasoline prices go up, as we have now. Also items such as tickets, taxes, fees can skew the numbers and the total formula. If it was that simple we all would have had great sleeping nights. One thing for sure, taking vehicles off the fleet will reduce total cost.

3. 3. Allen Mitchell [ March 02, 2012 @ 05:20AM ]

While I concur that total fleet cost does corollate to fleet size, there are many other factors that influence cost. For example, operating area, types of equipment used and the amount of use per equipment type, PM, number of fleet staff, parts inventory, insurance , et. al. The effectiveness of the fleet's preventive maintenance program, controls on fuel cost and utilization are the 3 most important contributors to reducing fleet costs in my experience. Staffing costs should also be closely monitored by comparing total fleety maintenance/repair hours and expense with technician productive time because having too few or too many technicians will adversly impact fleet operations.

4. 4. Michael Geffroy [ March 05, 2012 @ 09:07AM ]

Mike, you make a good point -- right sizing the fleet has the most direct impact on reducing fleet cost. But this leaves the question for business owners -- how do we meet customer needs given fewer resources at our disposal? Through TomTom's experience deploying GPS and wireless fleet management technology, we have seen that it is not uncommon for companies to have 10 – 15% under-utilization of their vehicle assets due to operational inefficiencies. Efficiency can be improved through better visibility of fleet operations, better communication between drivers and their back-office counterparts, and more efficient route planning and trafic avoidance when vehicles are on the road. So much time is lost because mobile workers are waiting for instructions when they start in the morning or even when they complete a job in the middle of the day. Add the uncertainty of traffic, road conditions, and weather, and a route plan can fall apart in a matter of a few hours. As a result of this dynamic, too often, fleet size is planned to meet the highest level of inefficient supply against customer demand. And many fleet operations normally set aside an extra number of vehicles just to deal with emergencies or uncertainties, further decreasing their fleet utilization. The best way to balance efficiency with customer service is good technology that allows fleet managers to know instantly, and at all times, what’s going on with drivers, route assignments and road conditions, so they can focus on the customer.

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