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Controlling Creeping Fleet Costs

February 2017, Work Truck - Feature

by Jack Roberts - Also by this author

Keeping costs under control is a key element to running any successful fleet, and one that can often be plagued by a variety of factors that are often out of your control.

And timely, proactive measures can be effective when unexpected challenges arise.

A fleet that has stable, practiced cost-control measures in place will be stronger and better able to withstand down markets, rising fuel costs, labor shortages, or any of the myriad challenges fleet managers face today.
For most fleets, controlling costs fall into two basic categories: fixed costs, which can be thought of as “front office” issues; and operating costs, which happen “out back” in the shop or on the road.

Getting a handle on these two key areas is critical for peace of mind and operational efficiency as well as securing bottom-line profits.

Own, Lease, Buy, or Sell?

In terms of fleet management, fixed costs generally boil down to decisions regarding the acquisition and disposal of vehicles.

In the good old days, this generally meant looking around for the best deal on new equipment and then deciding if you wanted to buy outright, or take out a loan and make scheduled monthly payments. In most cases, fleet executives looked at the bottom line, considered their credit standing, as well as the overall liquidity of the fleet, and acted accordingly.

Today, paper-thin profit margins and skyrocketing equipment costs for even light- and medium-duty trucks have changed the game considerably and brought new options into play.

Vehicle leases have become popular, both as a short-term remedy to handle capacity spikes and as a long-term cost control measure. These leases can come straight from vehicle OEMs, or second-tier lease providers such as Penske or Ryder System, and are increasingly being offered with highly customizable service and maintenance programs to boot.

“Generally speaking, fixed costs are pretty stable for most fleets,” explained Darry Stuart, president of DWS Fleet Services.

Stuart is a consultant who helps fleets manage their businesses better and says most fleets do a good job on the front end with equipment acquisitions.

“In many cases today, the acquisition component boils down to personal relationships between fleets and dealerships. Most of the time, the main considerations for equipment purchases are what price you negotiate, your preferred payment method, your preferred depreciation method, how long you finance (assuming you choose to finance), and how you depreciate the equipment. Farther out, you have to decide how long to keep the equipment and what you think its resale value will be,” he said.

Jeff Lovelady is a certified public accountant and a senior partner at Bell & Company, a Little Rock, Ark., accounting firm that specializes in transportation businesses. He said many times, particularly with light- and medium-duty fleets, the truck aspect of the business is often considered secondary to a company’s main focus, be it delivering flowers or moving construction equipment around. These fleets often need help in dealing with the highly specialized laws concerning equipment depreciation.

“Transportation is unique and can be tricky, which is why we suggest fleets hire transportation experts to help keep their books in order,” he said.

Recently, Lovelady dealt with a fleet manager who felt he could make more money on his old equipment by selling it outright instead of using it as trade-in for newer model trucks.

“He had done a good job on the depreciation side,” Lovelady noted. “On the books, the equipment was worth around $40,000 a vehicle. He had an outside buyer who was willing to pay $50,000 per unit, so he thought he was about to really get ahead of the game. He sold to the outside buyer, but then had to turn around and pay capital gains taxes on the sale, which virtually wiped out his entire profit. He would have been much better off using the equipment at its depreciation value as trade-ins to help get his new vehicles. These are the little things that can trip smaller fleets up if they aren’t getting good help and advice.”

Of course, these choices often depend on a fleet’s circumstances.

“Typically companies that operate medium-duty trucks are in the business of delivering their own goods, and that means finance and transportation needs will vary — one size does not fit all,” added Jake Civitts, director of PacLease’s franchise operations — a division of PACCAR.

Civitts said the choice on equipment financing is often based on fleet economics.

“Some fleets are cash-flush and may want to purchase trucks outright,” he explained. “Others want to own the truck and make payments, while still others want to pay for the use of the truck in the form of a lease. We’re seeing more and more small fleets like that idea and want a third party to help them manage their equipment assets.”

For those fleets, leasing is the preferred option, Civitts noted. This is because there is usually no down payment required and the contract’s set monthly payment helps with accurate cost accounting.

“We’ve found that this option really helps companies, especially those in a growth mode where capital retention is important,” he said.

Aside from the obvious tax benefit of immediate depreciation, Civitts said the main benefit of ownership is the building of equity in the truck, which can be a big help when it comes time refresh your fleet.

“Fleets considering purchasing their trucks outright should factor in overall lifetime costs — in other words, cradle-to-grave costs,” he adds. “That includes the cost of the truck, the cost of maintenance, driver satisfaction to curb driver turnover, and the resale value of the truck.”

The obvious strike against leasing new equipment for many fleets is the fact that you don’t build any equity in the vehicles. Civitts said this disadvantage is offset by a lease customer’s reduced monthly payment.

“In theory, at the end of the lease they paid for what they used because the lease payment incorporates the residual value of the truck,” he noted. “So a lease customer literally walks away from the truck at the end of the term without having to worry about trading or selling the used truck and gambling a bit on the future. With vehicle ownership, you’re exposed to the changes in the used truck market. Leasing takes away that unknown.”

Maintenance Options Tailored to Keep Costs Under Control

Lovelady of Bell & Company said that, in his experience, fleets tend to have greater problems controlling operating costs than fixed costs.

“You can make a poor decision in terms of acquiring or disposing of equipment,” he said. “And, that is frustrating when it happens. Rarely do those decisions prove fatal for a business. But, it can be the continual creep of operating costs that can really hurt fleets when times get tough. Because those costs have a way of getting out of hand before fleet managers even realize they have a problem.”

Some costs can be easier to control than others. Tires and fuel are notorious for eating up bottom-line profits. But, as Stuart of DNS Services noted, a good tire and fuel program can quickly get those costs under control. Bigger problems come with in-house shops and maintenance programs, he said.

“A lot of fleets really wrestle with whether or not they should keep their maintenance in-house, or outsource it to a dealer or a privately owned repair shop,” Stuart noted. “There are no easy answers for that question because every fleet is unique with different maintenance and application requirements. But in my experience, 40 trucks seems to be the natural dividing line. If you have more than 40 trucks, then it starts to make sense to spend the money and establish your own facilities and maintenance program. Under 40 trucks and it generally makes sense to use an outside service provider.”

Still, Stuart said, the increasing complexity of new vehicles today is causing some fleets with in-house maintenance programs to specialize in certain areas while outsourcing more difficult repairs.

“This has always been common with warranty work,” Stuart noted. “But I’m seeing more and more fleets say they will handle a certain set of ‘traditional’ repairs, and send any new problems — computer issues or high-pressure fuel system work, for example — straight to the dealer.”

Outsourcing maintenance and repair work is a growing trend, particularly among light- and medium-duty fleets because it makes better business sense today, said Fred Scott, a service manager with Rush Truck Centers in San Antonio.

“Most medium-duty fleets today don’t want to do their own service because the vehicles are so difficult to work on and they simply don’t have the assets to address maintenance properly,” he explained. “Some larger fleets in our area, Coca-Cola for example, still do basic maintenance at their facility and send everything else out to get worked on.”

Still, sending vehicles out to get worked on can be time-consuming and logistically challenging. That’s why Scott said Rush dealerships around the country are breaking new ground by bringing dealer quality service directly to light-and medium-duty fleets.

“Most medium-duty fleets run on very tight daily schedules. And, they often don’t have backup assets to fill in while a truck is getting worked on. That’s why we use fully-equipped service trucks to go to our customers’ yards to do both regularly scheduled maintenance and unscheduled repairs. And we can do this whenever it is convenient for the customer — even after hours at night, if that is their preference. Our trucks can handle most major repairs on-site and some of the larger ones have the capability to perform routine maintenance on 10-12 trucks during a single visit to a facility.”

Scott said Rush prices its on-site maintenance services competitively with more traditional maintenance programs, but the real savings go deeper than just the upfront price tag for the program.

“When you look at savings on infrastructure, facilities, and personnel, it starts to make a lot of sense for smaller fleets,” he noted. “Then, when you factor in more abstract productivity losses — such as drivers sitting around waiting for repairs, vehicle downtime, and time lost waiting on parts to arrive — an on-site maintenance service starts to make even better business sense for fleets looking to control costs.”

At the end of the day, Lovelady said simple communication between the front office and the shop is often the biggest barrier to controlling fleet costs.

“A lot of the time, the front office only has the vaguest idea of what’s going on in the shop, and the shop is so swamped trying to keep vehicles on the road, they’re not doing a good job communicating their problems back to the front office,” he said. “And when no one’s talking, that’s when you see costs start to creep out of control.”

As complex as fleet management is today, the good news is there is a whole host of companies, products, and services available to help small fleets better manage their assets and control costs. And, many of these programs can be scaled up or down easily, allowing fleets to try new services, discard options that don’t work, and keep those that do.

“Don’t be afraid to try new things,” Stuart advised. “Most dealers and service providers will be happy to let you try their services on a trial basis. If something looks like it might work, engage your people to get their feedback and give it a try. Not everything is going to work for you. But if you find one cost-saving program that does, it can make a huge difference to your bottom line.”

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Terminology used in some European countries to identify fleet services provided on a fee basis, for example, the management of maintenance and authorizations for repairs and tires. Other services might include the buying of new vehicles for the customer’s account and the selling of used ones on the customer’s behalf.

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