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?
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