There's Nothing New Under the Sun
May 31, 2012
Since every aspect of fleet management revolves around money, reducing fleet costs is a constant, never-ending struggle for all fleet managers. The pressure to save money year-over-year is persistent for all companies, but extremely difficult to achieve, especially in an environment of rising costs. For instance, vehicle acquisition costs have increased (and will increase further in the future) to meet increasingly stringent government-mandated safety and fuel-efficiency standards. In addition, the amount of technology contented in new vehicles increases each model-year. While new onboard technologies improves engine performance, fuel economy, driver comfort, and increases productivity, they incrementally add to overall vehicle acquisition costs and subsequent maintenance expenses.
The same trend is true for fleet operating costs, which are, likewise, facing upward pricing pressures. Replacement tire prices have increased due to higher raw material costs.
Tires are the second-highest operating expense for fleets and prices will continue to remain elevated for the balance of 2012 and into 2013. The root cause of tire price increases is volatile commodity prices for the cost of rubber, steel, and oil. Similarly, higher commodity prices are impacting maintenance expenses by causing replacement component costs to increase, while inflation puts upward pressure on labor rates in many high-cost markets.
Today’s high resale values are helping mitigate depreciation expense, but they are an anomaly caused by the shortage of used vehicles in the wholesale market due to the extremely low sales of new vehicles during the 2008-2011 time frame. Nowadays, everyone is a hero when it comes to getting top dollar for their out-of-service fleet vehicles; however, these artificially high prices will ultimately decline as used-vehicle supply increases. Most remarketing analysts predict used-vehicle supply will begin to increase starting in CY-2013. As used-vehicle supply reaches equilibrium with buyer demand, resale values will soften.
Many fleet managers are given cost-reduction goals by management, based on a specific percentage reduction in fleet costs, and it is up to them to figure out how they are going to achieve the goals. This sometimes creates interdepartmental friction between fleet and other departments such as procurement, HR, and the sales/operational areas of the company.
The reality is that there is a limit to a fleet manager’s ability to reduce fleet equipment costs (and related operating expenses) due to fleet application requirements. One way to offset higher costs is to increase fleet productivity. However, implementing productivity strategies is difficult since fleet touches so many stakeholders within an organization who have varying and, sometimes, contradictory expectations. The best truism in fleet management is that the optimum time to control cost is before it occurs, and the way to do this is by establishing fleet policies and procedures that inhibit unnecessary spending by drivers and user departments.
Beyond our Control
Most expenses are beyond the control of fleet managers. Fuel is the highest operating expense facing commercial fleet managers, with price volatility creating tremendous challenges to planning, budgeting, and containing this variable cost. Market demand and consumption drive fuel prices, which is beyond the control of fleet managers. Most fleet managers are resigned to the fact that fuel prices will remain elevated and are reacting by acquiring more fuel-efficient vehicles by downsizing to four-cylinder engines. Other fuel-saving programs involve idle-reduction initiatives, modifying driver behavior, the use of telematics to monitor fuel consumption, and fleet-size reduction.
Another area impacted by cost constraints is sustainability. Despite a slow economy, sustainability initiatives continue to receive strong support from senior management at many companies, especially multinational corporations. Nonetheless, one of the biggest issues in fulfilling green fleet initiatives is constraints in capital spending budgets for fleet replacement. At most companies, before a green fleet initiative is implemented, a business case needs to be presented illustrating an acceptable return on investment (ROI).
Most major green fleet initiatives are difficult to adopt if they do not create a near-term payback or significant ROI, particularly in those organizations that do not have an inherent “green” culture.
There’s Nothing New under the Sun
Although these fleet challenges are daunting, as the proverb reminds us, “There is nothing new under the sun.” The cost-containment issues confronting today’s fleet managers are essentially no different than those confronting the fleet managers of yesteryear and will most likely be the same issues confronting the fleet managers of tomorrow. Borrowing from another proverb, “The more things change, the more they seem to stay the same.”
Let me know what you think.
Author: Mike Antich | Posted @ Thursday, May 31, 2012 12:00 AM