Not long ago, when fleet programs and services were needed, the fleet manager simply requested vendor proposals and drew upon his or her experience and expertise for the ultimate decision. While pricing was certainly an important factor, fleet managers who had to live with the decision knew that “buying cheap” wasn’t always buying smart, and the low-cost bidder might not be the best choice.

How times have changed. Today, more and more companies are applying formal procurement and purchasing processes to fleet management, with decidedly mixed results. In the past, if a fleet manager saw intractable problems with an existing vendor, a phone call to a few potential replacements brought proposals. Today, the industry is seeing a more formal RFP process, built around the purchase of commodities, in which price and price alone is king.

Core Fleet Programs are Complex

Fleet managers use a number of core fleet management programs to facilitate the provision and care of fleet vehicles. These include:

  • Leasing/Purchase. How the company acquires (and disposes of) its fleet vehicles.
  • Vehicle Selection. Which vehicles will be used?
  • Maintenance/Repair. How vehicles obtain preventive maintenance, tires, and repairs, and what systems and reports the program provides.
  • Collision Repair/Subrogation. Reporting systems for drivers involved in accidents, vehicle repairs, replacement rentals, and subrogation recovery.
  • Safety. Driving record tracking and review, safety training for new hires and existing drivers, and reward/ penalty policy.
  • Fleet Administration. License/ title/tax administration, parking ticket payment, and fleet call center.

These programs provide drivers the tools to keep their vehicles maintained and get help when they need it. They also provide fleet managers with critical cost data to make important strategic and tactical decisions and achieve cost containment and reduction goals.

The selection of vendors to provide these services is based on several important criteria, and pricing is only one. For example, a master lease agreement, the core document in a fleet leasing program, outlines the lease transaction’s financial terms and conditions (including rate calculations). But the success of such a program goes far beyond the lease rate and capitalized cost numbers that comprise a monthly payment:

  • The ordering process: how factory-order vehicle specifications are communicated; the delivery processes; and order placement with the lessor.
  • How the fleet department (and/or the driver) tracks order status as it moves along the production/delivery chain.
  • Will the company be able to establish standardized specs for selected vehicles to facilitate the ordering process?
  • The consultative assistance the lessor provides in establishing replacement cycles, vehicle selection, and other key elements.

These and other service elements must be considered when a fleet leasing program is established and a vendor chosen to provide it. These programs are complex and ongoing, and the answers to these questions should be as much the determining factors as the lease rate.

Consider Price and Fleet Needs

Put simply, procurement professionals are experts in buying things. They are trained to reduce the desired item or items to simple commodities, whether nuts and bolts for the factory floor or office furniture for the corporate headquarters. How many, when, how much, when do we pay the bill? They are expert in negotiating the best price and the best terms available.

There is nothing wrong with this management tool, taken in isolation. But the simple fact is that, when negotiating for the procurement of complex fleet programs, value should trump price as the determining factor, and value cannot be determined without considering what the fleet department and its manager need. Only fleet managers know the resources they have available to carry out such programs, which people they can dedicate to the task, and how much time fleet staff requires to implement the program.

It has been suggested that combining the expertise of these two critical company functions — fleet and procurement — is the best way to achieve maximum cost efficiency. There is much to recommend such a strategy. It cannot be carried out, however, unless sourcing groups set aside their concentration on price for a moment and consider fleet department needs, using both focal points to seek maximum value.

[PAGEBREAK]

Leasing Provides Example

Leasing arrangements provide an example of considering both price and need. The typical lease program consists of several key elements:

  • Lease rate factors. The typical fleet open-end TRAC lease rate can be broken down into three primary parts: depreciation reserve, administrative fees, and interest factor.
  • Capitalized cost. Master lease agreements call for a formula for the capitalization of vehicles leased therein.
  • Billing. The billing terms, when vehicles are first billed, and when they are removed from the billing.
  • Vehicle disposal. How, where, and when vehicles are disposed when removed from service.
  • Reporting capabilities. Replacement forecasting and inventory reports.
  • Exceptions to rate and cap cost terms. Cap cost for vehicles purchased from dealer stock, specialty vehicles, and imports, as well as rate exceptions.

Although several of these elements are relatively simple to judge from a pricing standpoint — an administrative fee is an administrative fee— others are not. While a sourcing professional might review two leasing proposals and see such fees, cap cost formulae, interest rate factors, and other pricing elements, and make the decision based upon these price variables alone, the fleet manager sees that and a great deal more.

If the company must purchase an unusually large number of vehicles from stock, how are they capped? Is the rate factor calculation the same as for factory orders? Is the fleet permitted to find and negotiate pricing for stock purchases, and, if so, how is the cap cost determined? If the fleet chooses import models for the selector, do the standard lease rate factor and cap cost apply?

  • What methods does the lessor use for vehicle disposal? How is performance determined? What assistance does the lessor provide to market and sell vehicles to drivers/employees?
  • When are vehicles added and removed from lease billings? When are resale proceeds applied?
  • If the fleet uses upfitted vehicles, how is the process handled? What are the billing terms between vehicle delivery and upfit completion? Can the fleet transfer upfit equipment from one vehicle to another, and if so, can upfits be depreciated separately from the vehicle?
  • These are just a few examples of the questions fleet managers can answer in evaluating two proposals. The answers may not necessarily point to the bid with the lowest lease rates as the right decision.

Programs, Not Products

Fleet uses a number of management programs that are not as simple and straightforward to source as products. Only a fleet manager knows what questions to ask and has the experience to understand that cost efficiency isn’t simply a matter of price, it is a matter of value — value determined as much by how the program is delivered as by the fees that are charged.

However, these concerns do not negate, by any stretch, the strengths sourcing professionals bring to the process. They are expert in negotiating techniques fleet managers often lack. This expertise can help realize terms and conditions favorable to the company. As a team, fleet pros and sourcing pros are excellent partners in achieving maximum efficiency and the best combination of price, contract terms, and effectiveness.

The trend to include sourcing in the fleet procurement process isn’t necessarily bad; indeed as described, it can be highly beneficial. However, too often, the process and even the decision itself are removed from fleet oversight and handed entirely to sourcing. This is where mistakes are made. Sourcing doesn’t have to live with the results of the decisions. Fleet managers and their staffs do. Leaving them out of the process entirely is simply bad business.

Vehicle Selection

Choosing one or more manufacturers for the fleet selector is also a major decision. It might seem to a sourcing professional that, of all fleet programs, this one is the most price-dependent.

Yes, pricing is probably more important in choosing a vehicle manufacturer than for nearly any other fleet program. However, once again, the process isn’t quite as simple as it may seem. Fleet managers know that once various makes and models “make the cut,” the final decision, though price-sensitive, must await answers to critical process-dependent questions. 

  • How strong is the fleet allocation for the model chosen?
  • What are average order-to-delivery times?
  • What assistance does the fleet manager get in pushing through orders that get caught up in build-out?
  • Is price protection available?
  • Will the manufacturer representative help the fleet manager place an order that ends up being surplus?
  • Is out-of-stock purchasing assistance available?

How fleet-oriented is the dealer body?

While other issues can also be considered, the picture is clear. The lowest-priced vehicle may not represent the most cost-efficient program.

[PAGEBREAK]

Maintenance Management

Most maintenance management programs are similar. A per-vehicle, per-month fee is charged, and in return, the vendor provides a shop network that includes toll-free 24/7 access to certified technicians, a maintenance and repair purchase process, reporting capabilities, and extended warranty application and tracking. Sourcing professionals too often focus on the fee alone, but here too, a number of fleet issues must be considered.

For example, most maintenance management programs “funnel” drivers into national account locations to handle the majority, if not all, maintenance and repair services. The reasons are essentially very good ones.

  • Coverage is excellent; there are usually multiple national account locations in a particular geographic vicinity, eliminating the driver’s search for a participating shop.
  • Pricing is nearly always published, readily available, and consistent nationwide.
  • Warranty for work done in one location is usually applicable at a supplier’s other locations.
  • National quality standards provide consistency for work at all locations and are enforced by the corporate entity. The fleet then has recourse when issues arise with work at any location.
  • Level III data is provided electronically for all transactions, enabling the fleet to track and control variable expense.

Again, to sourcing staff, maintenance management seems a “commodity” service, differentiated only by fee amounts. Fleet managers, however, know differently, and their needs are sometimes overlooked by sourcing committees:

  • National account pricing is not always the best pricing available. Can the fleet use local, independent shops where they have negotiated discounts and special services (vehicle pickup / drop-off, loaners, etc.)? If so, how does t he vendor charge such purchases (surcharges, add-on fees)?
  • How are disputed invoices handled? Are they removed from the billing while investigated, or is the fleet required to pay them, receiving a credit at a later date if the dispute is settled in its favor?
  • Not all national account locations are equipped or staffed to perform major mechanical or specialty work (engine, drivetrain, electrical, etc.). How extensive is the vendor’s network of shops that perform such repairs? How are these charges billed?
  • What level of custom or exception reporting is available and are there additional charges? Can report formats be created and run on a regular schedule? What kind of benchmarking can be done?

Choosing a maintenance management program based solely or primarily on monthly per-vehicle fees can leave the fleet manager with a more expensive and less effective program if the fleet needs described in these questions (and others) aren’t factored into the decision.

Accident Management

More and more fleets are including an accident management program in their overall fleet program. The benefits of these programs are substantial. Accident management comprises three major components:

  • Reporting.
  • Repair management.
  • Subrogation recovery.

Sourcing pros find fees for these components generally take the form of “per-occurrence” charges for reporting and repair management and a contingency fee for subrogation (a percentage of monies recovered). The pricing decision on accident management appears relatively straightforward and simple.

Not only should criteria beyond pricing be used, but the decision also is not as simple as it seems. In reporting services, for example, a fleet manager must know how many copies of the accident report are included for the fee charged. Copies are often required for fleet, risk management, the branch or office out of which the driver works, and other departments. If only two report copies are included, how much do additional copies cost? The report information, its format, and the forwarding process are also important factors in choosing an accident management program.

Repair management also consists of several important steps that can differ dramatically from one supplier to another.

How often does the provider follow up with the shop once the vehicle has been brought in? If follow-up isn’t prompt and regular, a vehicle can sit for days on the lot before an estimate is produced. What is the policy on estimate supplements? How is the driver notified when repairs are completed, and does the vendor follow up to ensure that replacement rental cars are returned immediately when the repaired vehicle is picked up? And what is the shop payment record? If a provider doesn’t pay shops promptly, it can cause serious delays and problems.

Finally, subrogation recovery is a critical cost-saving process, and simply basing a business decision on the contingency fee can be a serious mistake. Unfortunately, there are no fleet industry standards of performance in subrogation, and only an experienced fleet manager knows the right questions to ask a bidder. How quickly is a third party contacted? How often are follow-up calls made and the file pursued? Will the fleet manager receive status reports on each file? What happens if a file goes to litigation?

If done right, accident management can be one of the most effective ways to control both hard (repair costs) and soft (downtime) fleet costs. Sourcing committees simply do not have the expertise to know the consequences the fleet department faces when price alone is the determinant.

0 Comments