|AT A GLANCE|
|Increasing fleet productivity involves:
■ Defining it in terms of vehicle and departmental aspects.
■ Determining how to measure it.
■ Identifying ways to improve it using all the resources available.
Webster's defines productivity rather obviously: "The quality or state of being productive." Drilling down, productive is defined as "having the quality or power of producing, especially in abundance."
So how does a fleet manager make his or her fleet more capable of producing abundantly? Better put, how can you get more work out of the resources given? Productivity is a key element in any economic discussion; it determines costs, prices, efficiency, and a host of qualities found in any business endeavor. The first two steps in increasing productivity are first to define it, and then determine how it is to be measured. The third step, achieving it, is the real challenge.
Improving Fleet Productivity
Fleet managers have two areas where productivity can be enhanced:
■ The fleet itself. The vehicles, their costs, and the amount of work the vehicles can do in relation to the costs associated with them.
■ The fleet function. The fleet manager, his/her staff (if any), and how much work they can do relative to the time and resources they have to do it.
Like employees, fleet vehicles are "hired" to do a job - provide transportation, deliver products and services, and perform tasks on a jobsite. They have costs associated with acquiring and holding them and costs associated with operating them. Vehicle productivity can thus be defined as the relationship between the work a vehicle does and the resources required to do it.
Departmentally, a fleet manager incurs costs associated with the administration and management of fleet vehicles. Vehicles must be ordered; delivered; records and files kept; costs tracked and analyzed; titles, registrations, and inspections administered; and vehicles sold. Some fleet managers have staff to manage as well, while others do not. Fleet departmental productivity is defined in much the same way that any business function is defined: how much work can be done in relation to the resources (people, money, time) necessary to do it.
Thus, fleet managers are challenged to step up the productivity of the vehicles they manage, as well as how they're administered and managed.
Maximizing Vehicle Productivity
Managing a fleet of vehicles is an exercise in productivity; in essence, the job is that of squeezing as much production out of company vehicles as possible.
How is the productivity of a fleet vehicle measured? Fortunately, the industry has provided fleet managers with some very specific measures. All of them, in one way or another, are time or mileage/cost ratios, which makes measuring vehicle productivity relatively simple.
Fixed or holding costs, those costs incurred in the acquisition and ownership/use of the vehicle, consist primarily of depreciation and leasing or finance (money) expenses. It is important to note that depreciation expense can only truly be measured after a vehicle has been taken out of service and sold; during a vehicle's term in service, it is only an accrual or reserve established to "cover" true depreciation.
Because depreciation makes up 70 percent or more of holding costs, it is a natural first stop in stepping up productivity. For purposes here, fleet depreciation is simply the difference between the original cost of a vehicle (either purchase cost or the cost capitalized into a lease) and the net proceeds when it is sold. Depreciation is expressed (measured) in either dollars per month or cents per mile (cpm) - both are cost/use ratios. Merely reducing the net depreciation number, therefore, is an increase in productivity only if the use, expressed either in cost (cents) or time (months), remain the same or increase.
For example, if the original vehicle cost $20,000, was kept in service for 30 months accumulating 75,000 miles, and is then sold for $7,000, the actual depreciation is expressed as follows:
■ Net depreciation is $13,000
($20,000 - $7,000 = $13,000)
■ Cost per mile is $0.173
($13,000 x 100 / 75,000 = 17.3 cpm)
■ Dollars per month are $433.33
($13,000 / 30 = $433.33)
Thus, if the depreciation dollars decrease while achieving the same mileage and time in service, or conversely mileage or time increase at the same level of depreciation cost, an increase in productivity has been achieved. Most commonly, decreases in depreciation are sought either by decreasing the original cost or increasing resale proceeds. There are practical limits to the former (only so many dollars are available in the original cost), so most efforts to increase productivity by addressing depreciation costs center on increasing resale proceeds. This is not a bad idea at all; there are a number of ways this can be accomplished:
■ Employee sales.
■ Varying markets used (wholesale, auction, broker, even retail).
■ Increasing condition report follow ups.
■ Enforcement of preventive maintenance policy.
How can a fleet manager go from the traditional to the next level? It may sound like blasphemy, but keeping vehicles in service beyond the usual replacement time and mileage criteria can be done, and can result in additional savings/increased productivity. Most auto and light truck fleets keep vehicles in service for 24-48 months or 65,000-100,000 miles, whichever comes first. The common wisdom is that beyond that, the fleet risks major component failure (as mileage accumulates), decreased resale values, and even reduced fuel efficiency.
While these can indeed happen, they don't necessarily have to happen. Vehicles today are (despite common perceptions that "they don't build them like they used to") far better engineered, have more extensive warranties, and retain value at a better rate than did vehicles 25 or 30 years ago. The key, of course, is a rigorous preventive maintenance program, coupled with detailed condition reports for which follow-up and action are critical.
The next level of productivity? It could be extending the service life of your fleet vehicles beyond what the industry has historically recommended. The depreciation curve tends to flatten out as time and mileage accumulate; the greatest period of depreciation occurs in the initial weeks in service. Once a new car has been titled, registered, and hits the road, it becomes a used car and suffers its greatest drop in value. Beyond the second, third, and fourth years of service, all things being equal, the drop in resale value becomes less and less precipitous.
Extending replacement cannot, nor should it, be done without testing the waters for some period. Select vehicles over a replacement period to keep in service. If, say, the replacement mileage is normally 75,000 miles, keep a handful beyond that. Extend one to 90,000 miles, another to 100,000, and still another to 125,000. When they are sold, run the full lifecycle depreciation analysis and compare it to that of vehicles replaced normally. You may well find that, on a cost-per-mile or dollars-per-month basis, your depreciation costs will actually decline. The next step is to run the same cost analysis for variable, or operating costs (fuel, maintenance/repair, tires, oil). If those at least remain steady, you have a winning strategy for taking a major portion of your fleet productivity to the next level. Naturally, if the test vehicles don't pan out cost-wise, it is a simple matter to shut the test down.[PAGEBREAK]
Incurring Variable Costs
Variable or operating costs are those incurred in the operation of a fleet vehicle. They include fuel, tires, maintenance and repair, and oil. Variable costs will tend to "ratchet" upwards as mileage accumulates. Initially these costs consist primarily of simple preventive maintenance, such as oil and filter changes, wheel alignments, tire rotation, winterizing, and the like. At somewhere between 30,000 and 50,000 miles, the two major variable costs that are predictable - tires and brakes - will need replacement. This will cause variable expense to spike, then decline as accumulated mileage dilutes them. This process tends to repeat itself, with overall cost per mile slowly increasing.
Today's fleet manager enjoys something fleet managers 30 years ago did not have: more extensive, and extended, warranties. While the typical vehicle back in 1980 might have a warranty of 12 months or 12,000 miles, today's vehicles are often covered bumper-to-bumper for three years/36,000 miles or more, with powertrains covered as long as 100,000 miles. Repairs that would have added variable costs back then are now covered under warranty, and thus the overall lifecycle variable costs are lower today (in addition, tire and brake life have both also been lengthened). With that in mind, what action could possibly take productivity to the next level, given that variable costs have declined?
It could be that vehicles are being over-maintained from a preventive maintenance perspective. It is easy to be locked into the common practice of, for example, changing oil and filters every three months or 5,000 miles. For years, vehicle owner's manuals would provide a "severe use" exception to an oil change interval, usually around 7,500 miles, due to the increased mileage accumulated in fleet usage (the typical personal car runs about 12,000 miles per year or less; fleets regularly accumulate 20,000 or more miles each year in service).
Let's take a look at what this might mean in increasing productivity. In a 1,000-vehicle fleet with vehicles driven 25,000 miles per year each, total annual mileage is 25 million. Changing the oil every 5,000 miles adds up to five oil changes per vehicle per year or 5,000 oil changes. Extending the interval to 7,500 miles reduces this to 3.3 oil changes per vehicle per year, or 3,300 oil changes. At $25 per oil change, productivity is as follows:
■ At 5,000 miles: 5,000 oil changes @ $25 each = $125,000 or 25 cents per mile.
■ At 7,500 miles: 3,300 oil changes @ $25 each = $82,500, or 11 cents per mile.
A decrease of 14 cents per mile in oil change expense results in total savings of $42,500 per year. Can this be done? In the same way that the depreciation test is done, so too should this go forward. Take a handful of vehicles and extend the oil change interval to 7,500. Keep close track of any other maintenance or repair issues that may arise during the test. If no major component failures occur and fuel efficiency remains static, slowly roll out the change to the rest of the fleet. Run your standard lifecycle cost analyses as the change matures and you may well see the productivity of your fleet increase, squeezing the same or more miles out of your PM dollar.
Minimizing Fuel Expense
As depreciation is to holding costs, so fuel is to variable costs. It is the 800-lb. gorilla, eating up as much as 70 percent or more of variable cost. And when fuel pump prices spike as they did in 2008 and are today, this can move higher still. Even small moves to increase fuel productivity can reap large rewards.
Sometimes, it seems as though we're at the mercy of prices, as they move up and down "fueled" by events that cannot be controlled. Yes, fleets use fuel cards, track data, and place strict controls on what can be bought (when, where, by whom, and how much). All of these are good actions and are critical to the productivity of fleet fuel dollars. Is there more that can be done? Yes, and it can take fuel productivity to the next level.
Fleets press suppliers for rebates, elimination of fees, and even discounts. But there are actions that can be taken at the regional and local level that can have an even greater effect. Most fleet fuel cards are "universal;" that is, they are accepted by nearly all merchants, so when drivers need to fuel up, they can conveniently pull into the next station they see and do so. Branded oil company locations, convenience store outlets, and other retailers accept fleet cards. However, asking your supplier to seek and manage discounts only takes the effort so far.
There are literally hundreds of local and regional fuel retailers that can be approached for discounts. Your branch and regional offices can find them; it is likely they already use many of them. Many, if not most, of these retailers are open to providing discounts at the pump in exchange for brand loyalty. A branch manager who contacts the corporate offices of a regional convenience store chain, for example, with an offer to send his or her drivers to the brand in exchange for discounts, is likely to encounter a great deal of interest; the same goes for fleet managers. The fuel card supplier can then be notified of the agreement and should be able to pass the discount through to the fleet in full on each month's billing. Let's look at the effect.
Take the 1,000-vehicle fleet, driving 25 million miles each year and getting an average of 20 miles per gallon. Productivity, at $3 per gallon, is as follows:
■ 25,000,000 miles / 20 mpg = 1,250,000 gallons per year
■ 1,250,000 gallons X $3 per gallon = $3,750,000 in annual fuel spend
■ $3,750,000 X 100 / 25,000,000 = 6.6 cents per mile
Every penny per gallon discount negotiated will save $12,500. The percentage isn't great - 3 cents per gallon, at $3 per gallon at the pump, is a mere 1 percent. However, because the dollar spend is so great, the dollars saved can be substantial. Remember that productivity gains don't need to be huge to result in substantial savings.
There are also things that fleet managers 30 years ago had that fleet managers today don't - staff tops the list. The old rule of thumb that a fleet department needs three people for every 1,000 vehicles in the fleet has long become obsolete, as fleet managers have been forced to do more with less, and outsourced programs have expanded. In spite of this, some fleet managers haven't taken full advantage of technology and are often timid in outsourcing.
Taking departmental productivity to the next level begins with technology. Is the fleet manager taking full advantage of all the tools available for communications, administration, recordkeeping, and data mining? Time spent on the telephone, for example, can better be used in more strategic management and decision making. Do drivers call to ask how they can renew a registration? What do they do when their vehicle is up for replacement and they need to order a new one? How do they report an accident? They don't need to call if a fleet manager uses the technology available. Make certain that the company intranet site contains the company fleet policy, along with an FAQ (frequently asked questions) feature and remind drivers it's there at every opportunity. Many drivers now have Internet access via smartphones and other devices, and they should be able to answer any question they have without calling the fleet manager on the phone.
Use social media (Twitter, Facebook, LinkedIn, etc.) to get the message out that drivers can find answers to questions themselves, and where they can do it. Set up a company LinkedIn or Facebook group, where you can check to see what drivers are saying, and answer questions without spending time on the phone at work.
Don't be afraid to outsource what should be outsourced. The fleet manager (or staff, if there is any) should not be handling license renewals, paying parking tickets, or directing drivers to repair shops. Remember that clerical and administrative tasks can and should be outsourced, but management decision-making should not. If a fleet manager does have staff and finds that he/she can do without, it's better to take action than to have someone else do it for you.
The Next Level
Taking fleet management to the next level is not always the most glamorous process. It can be the result of simple common sense, of using the resources available to their fullest advantage, and yes, sometimes, bucking the common wisdom.
■ Take advantage of local leverage. Ask your regional and branch locations to assist in the search for better productivity.
■ Take a second look at what is considered the "right" way of doing things. Question the common wisdom, and don't hesitate to test new processes and policies.
■ There is a whole world of technology out there, and it is changing every day. Look for ways to use it all. Stay current on what is going on. Apply it wherever and whenever it makes sense. Use it to do more.
■ Be creative. Don't dismiss any idea out of hand.
The key point in taking productivity to the next level is this: If you don't do it yourself, if you don't make it a part of every working day, someone else will do it for you.
Originally posted on Fleet Financials