How do you know if a vehicle is needed?

How do I know if a vehicle is really needed in my organization?
This is a question often asked to fleet management professionals by using agencies. So what do you tell people who are not fleet management minded about the ills of hanging onto a vehicle sitting idle and why they shouldn't hoard them any longer. Below are several questions you can ask to help determine if the vehicle is really necessary to the operation:*

1. When the vehicle is out of service, do we miss it or does it affect our ability to perform our mission?
2. Is the vehicle being used on a daily basis consuming fuel and accumulating miles?
3. When the vehicle is down does my organization pay an employee mileage reimbursement to use their personal owned vehicle (POV)?
4. When the vehicle is down does my organization lease or rent a substitute vehicle from a commercial leasing company?
5. When the vehicle is down does my organization borrow a vehicle from another source (i.e. motor pool, sister agency, etc) to fulfill its mission?
6. When the vehicle is down does my organization expend any funds to acquire a substitute vehicle?
7. Is our vehicle equipped with special or unique equipment where a substitute vehicle cannot be easily rented at a moment's notice? (e.g. Firetrucks, police cars, refuse trucks, waste collectors, command posts, etc.)
8. When the vehicle sits idle and is not used does my organization incur an interruption in the core services it performs?
9. Is my vehicle new, safe, and reliable and do employees avoid using the vehicle in favor of other modes of transportation?
10. When you removed the tree growing up through the cab of the vehicle could it be savaged and placed back in service?
11. When you removed your vehicles out of storage and paid the fees did they still run?
12. After your vehicle sat idle for several months because it was damaged or in need of repair did you miss it?

If the answers are "NO" to any of these questions then it should be a hint that the vehicle is no longer needed in your organization and you as the fleet manager can recommend disposing the vehicle. Disposing vehicles quickly helps your organization recoup precious funds that can be used elsewhere to fund other important programs.

Some of these situations are real but names have been withheld to protect the guilty. :)

Fleet Management 101 - Fleet Management Purpose

Fleet Management 101

What is the object of Fleet Management?
Those of us in fleet are often asked; “What is the purpose of fleet management and why this is important to my organization?” The answer is not a simple one but those of us dedicating our careers to fleet management know it is more than simply owning and operating a vehicle. In fact, a full understanding of fleet management is generally a very difficult proposition because true fleet management is knowledge of a complex set of principles used to manage a fleet of vehicles efficiently and effectively. A fleet manager knows the difference between lease versus purchase decisions, asset utilization principles, cost versus benefit analyses, opportunity cost principles, present value of money, life cycle modeling and other complex financial theories.

Nonetheless, in its simplest terms the real purpose of fleet management is to provide low cost transportation solutions which may or may not involve an organization owning vehicles. Below are alternative transportation solutions used by effective fleet’s to transport people and materials while minimizing expenses:
· Public transportation
· Personally-owned vehicle mileage reimbursement
· Commercial rental vehicles
· Pooled and shared vehicles
· Leased vehicles
· Owned vehicles

Myth: “Vehicles don’t cost anything!”

Most of us understand that vehicles always cost money to operate whether we choose to recognize it or not. Even vehicles sitting idle incur costs related to; personnel expenses, administration, personnel, management, auditing, parking and storage space, security, repair facility operation, insurance and liability costs, preventative maintenance, costs related to sitting (i.e. leaky seals, tire degradation, fading paint, sun damaged upholstery, vandalism, technical obsolescence, etc.) and finally the loss of residual value as a vehicle continues to age.

Fleet Principle: “Vehicles are always worth more today than tomorrow!”

Simply put, if a vehicle is not being used, it is always the best decision (and right thing to do) to rotate the vehicle elsewhere to maximize utilization and/ or cut future losses by disposing the vehicle immediately recouping its maximum residual value. In the current state of the national economy few of us would operate an unused vehicle with a $450 car payment while struggling to balance our household budget and make ends meet. Most of us would quickly make a decision to sell the vehicle - when we see it sitting idle in the driveway - and we would use the $450 a month elsewhere. This same rationale applies an organization’s vehicles.

What is the lowest cost solution?
The answer to this question is, “it depends”. Notice in the list of alternative transportation solutions above that “owned vehicles” is the last solution on the list. Why? Because all fleet decisions must be based on two key factors, specific function to be performed and frequency of use. Keep in mind owning a vehicle is not always the best and most cost-effective transportation solution. Many other alternatives may be less costly to your budget. Without due consideration upfront as to whether to own a vehicle or not organizations fall prey once they purchase a vehicle that it may become a sunk cost. Once a vehicle is regarded as a sunk cost then perception changes and there is little motivation to rid the organization of the asset, even if it costs more to retain it. The perception of those unfamiliar with fleet management principles is the vehicle does not cost us anything – this is a risky and often expensive preposition as an organization attempts to dispose the vehicle. Unfortunately the mindset of users is, they view vehicles as entitlements and clamor at the mention of selling the vehicle they perceive as needed. It is best if an organization avoids this pitfall by making good business case vehicle decisions before a vehicle is purchased.

How do I know which transportation alternative to select?
Fleet management in its most simplistic terms is “Asset Management”. It matters little whether the asset is a vehicle or a laptop computer, the primary goal still boils down to effective utilization of the asset. Few people would purchase a new computer and let it sit idle out of sight and out of mind, because this would be a waste of money. The same principle applies to vehicles because it is simply not cost-effective to allow vehicles to sit idle going unused. To fully understand maximum value of a vehicle each organization needs to recognize total opportunity costs related to having a vehicle available.

What are opportunity costs?
Basically, opportunity costs represent what else you could do with the money if it was not tied up in vehicles. This applies whether it directly impacts the current expense budget or not and sometimes it boils down to just doing the right thing. Organizations must discipline themselves and their employees to consider every transportation alternative before they invest in purchasing a vehicle.

What is the cost of vehicle?
Vehicle expenses consist of fixed or standing costs (e.g. principle, interest, depreciation, administration, licensing, taxes, insurance, etc.) and variable or running costs (e.g. maintenance, labor, parts, fuel, parking, tolls, washing, permits, fluids, etc.). A recent industry publication called Automotive Fleet magazine released a study by leasing expert PHH Arval which shows a single vehicle costs over $9,200 annually, when total costs are considered. (Figure 2)

If you really think about it this makes sense since most of us recognize the average car payment nationally now exceeds $450/month. Of course every organization must determine its own cost of operating a vehicle so it can determine the actual “break-even” point and/or “return on investment”. However, as a rule most organizations can gauge vehicle costs as $5,000 bill because this is generally equal to the costs of operating a sedan even, if it sits idle. Thinking in these terms, few people would allow a $5,000 bill to sit idle wasting away without a return on investment or using these opportunity costs elsewhere in the organization.

Why is recognition of total cost of a vehicle important?
Basically the answer to this question relates to Adam Smith’s (Father of capitalism) original concept of the invisible hand in economics. All of our financial decisions and behaviors are motivated by the bottom line costs of consumables we purchase and the same applies to a vehicle. When we understand the true costs of a vehicle and we are paying these costs - our behavior changes when we see vehicles sitting idle and not being used. We look for other ways to use these wasted funds to balance of budgets. When we pay, we act!

What happens if we don’t recognize total vehicle costs?
In a nutshell we don’t make good decisions when we don’t possess the entire picture relating to costs. The same applies to vehicle operations. Below are few examples of decisions fleet managers see when total vehicle costs are not part of the decision-making equation.

• Broken and damaged vehicles end up in stowed or being stored (incurring storage and parking expenses) waiting for repair dollars (that may or may not be available), as vehicle continue to depreciate - when they could be sold and the proceeds be applied to fund other important programs.
• Broken and disabled vehicles being stowed awaiting funds to repair force agencies to seek backup transportation solutions (e.g. purchase, lease, POV payments, rentals, etc.) increasing costs in other areas. Basically agencies end up paying for two or more vehicles instead of one!
• Broken or damaged vehicles sit idle in fields where they continue to degrade and weeds and trees grow up through the vehicles as they wait to be repaired.
• Vehicles sit idle waiting – continuing to depreciate –await undefined errands when other solutions may be more viable like mileage reimbursement and daily rental would be less expensive.
• Fleets grow indiscriminately and indirect costs soar when idle vehicles are hoarded by users thinking they might be useful in the future.
• As fleets grow frontline vehicles become over utilized - depreciating faster – as broken vehicles sit idle and organizations incur higher operating costs and aged fleets.
• Frustrated politicians, leaders and decision-makers find they are forced to render decisions to reduce capital spending allocations and to implement fleet size restraints to prohibit the tide of future growth.

As you can see failure to recognize total costs forces organizations to make poor fleet management decisions. Whereas when organizations recognize total costs the decision-making process becomes much easier because total cost recognition influences personal behavior empowering agencies to make good vehicle decisions.

What now?
Now that you understand the real cost of operating a vehicle, simply determine your organizational needs upfront (before buying a vehicle) and choose the lowest cost transportation solution. There are many online tools that can assist with making good transportation decisions.

Final Thoughts:
Total cost recognition of a vehicle always modifies decision-making behaviors of consumers as to whether it is cost-effective to own a vehicle and allows organizations to seek other alternatives to owning vehicles!

Consider first:
· Using public transportation options when feasible
· Paying employees mileage reimbursement for personal vehicles
· Sharing motor pool vehicles or car pooling
· Renting commercial vehicles on a daily or short-term basis

Once you determine that none of the solutions above present the most cost-effective transportation decision then look at the total cost of owning a vehicle as the solution.

Let me know if you feel otherwise?

Lack of Total Cost Recognition

What motivates an organization to sell unused vehicles when they fail to recognize the total costs associated with a vehicle asset? This is a question I have been searching to answer the past several months. Most of us recognize when we don't value something any longer that the time has come to to dispose of this item. For example, when we have two vehicles in our family and one is no longer being used, most of us will reassess whether this vehicle is still of value. This especially becomes the case when we are paying a monthly car payment or we are looking to sell the vehicle to receive a monetary gain on the sale.

What if these cost motivators are not present? Then what motivates someone to sell a vehicle other than it may simply be the right thing to do. This is the struggle of many fleet organizations that fail to aggregate the total costs of owning and operating vehicles. A lot of organizations then become complacent and view unused vehicles as "sunk costs" to the organization. This is a dangerous assumption!

There are ALWAYS costs associated with vehicles whether they are used or not or whether someone chooses to recognize the costs or not. Even if a vehicle is NOT being used it often incurs costs associated with management and administration (e.g. Computer tracking programs, insurance premiums, staff salary and benefits, facility space, parking space, etc.)

It is simply NEVER true that a vehicle is not costing an organization something!

Costs are most often categorized in two cost centers which are direct and indirect costs. The latter being the most ignored from my experience working with fleet management. Most people understand the direct costs of operating vehicles like vehicle purchase price, maintenance and repair, and fuel costs. Of course the largest single cost of operating vehicle is depreciation, which is estimated between 55-70% of the total costs. Next comes fuel, maintenance and so on....

However, some of the most expensive and often overlooked vehicle costs are the indirect costs. Costs like computer tracking systems, loss of employee productivity associated with vehicle downtime, safety and liability costs from failure to renew vehicles timely, costs associated with storing and parking vehicles, routine preventative maintenance, monthly insurance costs, and most commonly overlooked, the residual value from the sale of the vehicle. The vehicle disposal proceeds are ALWAYS worth more today than tomorrow which should motivate any organization to sell the vehicle the moment it is no longer being used.

But what if the sell proceeds are not retained by the organization viewing the vehicles as sunk costs? Then of course there is little motivation to sell these underused units. In addition, without true cost recognition an organization can't evaluate other transportation alternatives that offer lowest cost, like paying employee mileage reimbursements, using rental vehicles, or pooling and sharing vehicles to maximize asset utilization.

Bottom line is organizational leaders need to educate non fleet personnel about the all the true costs associated with managing and operating vehicles. Without proper cost recognition, agencies cannot operate effectively and efficiently.

Regardless how any organization chooses to view vehicle its costs, without complete and total cost recognition an organization can never truly become efficient. It is a simple fact that without total costs you can't make good fleet decisions.

All effective organizations must start recognizing the costs of vehicles to be effective and deficient! I have witnessed users of fleet vehicles allow vehicles to sit idle over and over due to the failure to properly see the total cost picture. Their rationale has been simply, this vehicle costs no more than a tank of gas should I chose to operate it. Failing completely to consider all the other direct and indirect costs associated with effective vehicle operation does not allow for good decsion-making and usually ends up costing an organization much more in the end.

If you have another opinion or how to motivate sound decision-making without total cost recognition, I would like to hear from you!