Purchasing takes the wheel to control fleet costs
Fleet management services is a big and complex spend category. Cost savings don't come quickly, but buyers' influence can have long-term positive impact.
By Susan Avery -- Purchasing, 6/18/2009 2:00:00 AM
No spend category is impacted more by the current economy than fleet management services, says Bob Stone, director, supply management, general procurement, at United Technologies Corp. (UTC) in Hartford, Conn.
Stone, who has global commodity management responsibility for UTC's $350 million annual fleet spend, ticks off the challenges: the credit crisis, a financially troubled auto industry, skyrocketing gas prices (of a year ago) and renewed concern about fuel emissions and the environment.
While supply teams at UTC and some other companies have long been involved in managing fleet spending, the category is a new responsibility for many other purchasing professionals. And these buyers learn soon that although the spend can be significant—it costs about $600 to $1,000 a month to keep a car or truck on the road—savings don't come quickly or easily.
That's because the spend is complex. For one thing, the life cycle of a vehicle is long—fleets tend to turn once every 3-5 years—making it difficult to make immediate and dramatic change. The size of the fleet itself, on the other hand, is always changing, meaning that it's hard to get a good read on the vehicles the company has in service. The supply base that includes gas and service stations can number into the hundreds. And there are regulatory issues that vary from locale to locale—title and registration, taxes and insurance.
 “With its processes and methodologies, purchasing brings a rigor to fleet that it developed for other indirect categories of goods and services.” —Mark Smith, strategic consulting services leader, GE Capital Fleet Services |
"It is relatively easy to move the needle to reduce costs of depreciation or lease payment," says Mark Smith, strategic consulting services leader at GE Capital Fleet Services in Eden Prarie, Minn. "But while you decrease those you increase spending on maintenance. Those who manage fleet spending have to take into account the impact of a change in one area on another."
Despite the complexity, there is still tremendous value in purchasing becoming more involved in managing the fleet spend.
In fact, Smith says that purchasing is in a unique position to take a holistic view of the spend. As he sees it, "there definitely is a trend toward more sourcing involvement. With its processes and methodologies, purchasing brings a rigor to fleet that it developed for other categories," he says.
For example, at Xerox Corp. in Norwalk, Conn. global purchasing became involved in managing the spend in 2001 and has used reverse auction tools to determine pricing for vehicles it leases. The company has a fleet of 11,500 vehicles for its sales and services operations.
"We also work collaboratively with our provider to take costs out of our processes," says Ken Syme, vice president of global purchasing. "You can't do it all right away, but we have made significant inroads." In fact, Syme's team was recognized for its efforts with an award from Runzheimer International in 2005.
From his experience working with procurement operations at The Hackett Group in Atlanta, Chris Sawchuck, procurement advisory leader, says he sees more buyers taking on responsibility for fleet along with other spend categories. "Procurement brings more than its ability to reduce costs through sourcing," he says, pointing out that the function's hold on risk management is key now especially with uncertainty surrounding the automakers.
Cradle to grave
Although fleet is a big and complex spend, most companies do not consider it strategic or a core competency. And while some manage it in-house, others outsource it to a fleet management services company such as PHH Arval, GE Fleet Services, Wheels, Inc., and others. UTC and Xerox take this route.
Fleet companies manage all the processes related to leasing the vehicle, from identifying need through acquiring and financing to remarketing or ultimately disposal, as well as health and safety management and regulatory issues. They also provide systems to track processes.
Companies typically view their fleets as a tool for employees to do their jobs or as a means to support business objectives. Industries considered big users are insurance, pharmaceuticals and medical devices and utilities. Vehicles used in fleets run the gamut, from automobiles, vans and pick-ups to medium- and heavy-duty trucks.
Purchasing responsibility for managing the spend ranges from overseeing the RFP (request for proposal) process to managing the supplier relationship. And, as is often the case with the services spend, other functions have input. At companies whose fleets are used mainly by the sales force, purchasing works with sales administration. Finance, HR, risk assessment/management and health and safety are also frequently involved.
Total cost of ownership
 “Our job then is to help manage down the rest of that 95-98%, including costs of fuel, vehicle service and maintenance, accidents and depreciation.” —Greg Corrigan, vice president of strategic consulting, PHH Arval |
While savings are not quick or easy, purchasing can help reduce costs by negotiating agreements with automakers for vehicles the company then leases through fleet management providers. Above the cost of the lease, companies pay fleet service providers a fee that ranges from 2-5% of the spend for their services.
Another way that purchasing can help reduce costs—and improve efficiency—is to include a guarantee in the contract with the fleet provider that its fees will not rise through the term of the agreement. This helps reduce costs and improve efficiencies at the supplier related to internal processes.
"Our job is to help manage that 95-98%, including costs of fuel, vehicle service and maintenance, accidents and depreciation," says Greg Corrigan, vice president of strategic consulting, at PHH Arval in Sparks, Md. "We take a total cost of ownership approach to managing the spend and helping purchasing achieve its objectives through consultation and benchmarking."
Scott Pattullo, senior vice president, sales account management and marketing, at Wheels, Inc., in Des Plaines, Ill., says that while challenging, focusing on levers that drive costs of managing a fleet can help reduce costs by about 2%. "Controlling these expenses can dramatically improve performance," he says.
Take soaring fuel prices and renewed environmental awareness which go hand in hand. Buyers are addressing these by working to better manage miles per gallon (mpg) and number of miles driven.
One way to raise mpg, which results in lower costs, is for buyers to select vehicles that best meet requirements. Opting for vehicles with four rather than six-cylinder engines can result in a 10-15% increase in mpg. Buyers also are rethinking the size of the vehicle and the weight it carries, when possible scaling down outfitting in a van or truck. And, they are adding hybrid vehicles to the fleet.
At the same time, buyers are working with fleet providers to improve driver productivity. They keep track of drivers through global positioning systems (GPS) and telematic technologies.
Xerox global purchasing drives cost savings
When global purchasing took on responsibility for fleet spending at Xerox in 2001, it was
Paula Morisey, category expert for fleet and Tom Roberts, vice president, indirect purchasing, Xerox. |
decentralized. In the U.S., the company's service organization managed the spend. In Europe, human resources considered it a duty. "By centralizing the spend within global purchasing, we were able to bring it together and take advantage of the leverage opportunity to get the best deals for Xerox," says Ken Syme, vice president of global purchasing.
In addition, global purchasing's expertise at negotiating and managing contracts can benefit a company during a down economy, says Tom Roberts, vice president, indirect purchasing. "We make sure our contracts are tight and comprehensive. Without a strong contract and purchasing behind it, it can be difficult for a company to protect its pricing if a supplier tries to raise rates to protect its revenues."
In her role as category expert for fleet, Paula Morisey works with managers who represent users of the vehicles to gather requirements of what is needed for employees to do their jobs. She takes into account internal corporate goals such as an energy initiative developed to reduce the company's carbon emissions.
"We are committed to reduce our carbon emissions," she says. "It is part of the equation we use when we select a vehicle for the fleet." With this in mind, Morisey looks to automotive manufacturers to deliver on miles per gallon (mpg).
Once global purchasing has an idea of the vehicles that fit the requirements, she works directly with the automakers to negotiate pricing and contract terms. "We have used reverse auction tools to bring the manufacturers together to determine which vehicles are most cost effective," she says. The company's fleet provider then purchases the vehicles on Xerox's behalf.
While using a reverse auction tool helps reduce the price of the vehicle, Morisey says that is not the only opportunity for savings. She takes a total cost of ownership (TCO) approach.
"Partly through our energy challenge and good economic management, we are driving down engine size and fuel consumption," says Syme. Xerox also rolled out a program for its fleet that uses GPS (global positioning system) technology to help dispatchers more efficiently plan routes of the company's service vehicles. And the company has added hybrid models to its fleet.
Global purchasing formally measures performance of suppliers with a scorecard and annual review. Morisey also regularly communicates with a representative of the fleet provider.
Now Playing: 