Fleet is usually among the top 10 corporate capital expenditures and is often the focus of corporate cost-reduction initiatives. When corporate revenues soften, it is management's fiduciary responsibility to demand expense reductions and limit capital expenditures. Unfortunately, many fleet-related cost-reduction decisions are made for the short-term, with very little consideration on the long-term impact on the total cost of ownership (TCO). Many times senior management is more interested in the fiscal, rather than economic, consequences of their fleet-related decisions.
Nowadays, procurement-driven productivity is the primary success lever in most business units. At many companies, fleet is viewed as a “commodity” where TCO is not a primary decision lever. However, this is creating corporate blind spots. For instance, in this type of corporate environment, it is very difficult to convey the importance of safety to executive management. Everyone in management says they support fleet safety, but, when proposals are submitted to implement proven safety programs, they are reluctant to pay for it. This is a corporate blind spot.
Cost Deferral vs. Cost Elimination
Senior management exerts intense pressure on fleet managers to control and/or reduce vehicle acquisition and operating expenses. A tighter corporate operating environment force fleet managers to pursue two different types of cost-cutting goals – cost deferral and cost elimination and, the easiest way to cut fleet costs is to move or defer them to future fiscal years.
There are two categories of business activity in any company – income and expense. The income side includes sales, service, and any other activity charged with producing income for the company. The expense side includes areas such as administration, operations, and personnel, which are charged with managing the costs of doing business. If the fleet manager reports up through the cost side of the organization (operations, administration, etc.) there is even greater urgency to acquire fleet assets and provide fleet services at the lowest cost possible.
Fleet managers must think strategically when developing long-term cost-containment initiatives by focusing on running the fleet more efficiently. Cost reductions should be achieved through operational efficiencies, such as vehicle and upfit standardization, selector list consolidation, spec'ing smaller displacement engines, or downsizing to smaller vehicle segments. Other cost-containment initiatives focus on soft costs, such as driver downtime and concurrent lost revenue. Driver productivity can produce impressive results when quantifying cost savings, particularly in a well-run fleet program where the law of diminishing returns limits the impact of fixed and variable cost savings. Achieving true cost savings involves more than just putting off expenditures in the hope your organization's fiscal situation will improve in the future – it requires eliminating costs. One way is to eliminate costs by implementing proven fleet safety strategies and programs.
Does Your Company Walk the Talk?
Management’s interest in fleet safety ebbs and flows. Currently, fleet safety is a hot issue because of an uptick in preventable accidents. The primary cause for the increase in preventable accidents is driver distraction, which accounts for 25-30 percent of all auto accidents. Driver distraction is increasing because drivers bring their own mobile communication devices into the company vehicle and multitasking while driving. Drivers use non-productive “windshield time” for cell phone calls, texting, reviewing documents prior to meetings, eating while driving to the next appointment, etc.
The annual accident rate for commercial fleets is approximately 20 percent, with some industries, such as pharmaceuticals, even higher; however, fleet accidents are a controllable expense. Of the 20 percent of vehicles involved in an accident, about 40 percent were preventable accidents resulting from driver negligence or distraction. If 40 percent of your accidents are avoidable, this represents a huge opportunity to reduce fleet costs. Industry studies show that accidents represent 14 percent of a fleet’s total expenses, although it is probably even higher since these studies do not take into account soft costs such as downtime, lost employee productivity, etc.
It is impossible to reduce all preventable accidents, but cutting the number of preventable accidents in half would yield substantial cost savings. The cost savings are even more phenomenal if you prevent a fatality. The average cost for a fatality resulting from a fleet accident is $200,000 based on industry data; however, in high profile incidents it can be substantially higher. Just one incident involving a fatality can devastate a fleet budget. If you were able to cut $20,000 per year off your accident management costs over a 10-year period, a single lawsuit can erase all 10 years of cost-cutting efforts.
Many find it counter-intuitive that costs can be reduced by incurring expense, but safety programs, in the long-run, pay for themselves. To believe otherwise, is a corporate blind spot.
Let me know what you think.
Originally posted on Automotive Fleet