Driving efficiency

Centralized fleet management offers chance for savings

William Atkinson -- Purchasing, 8/11/2005

As more and more procurement organizations conduct spend-analysis projects and work to centralize and leverage spend, one of the areas that continually comes up as ripe for savings is fleet procurement and management. "Centralizing fleet spend across separate divisions is definitely an area where purchasing can generate savings opportunities," says Janis Christensen, a senior manager with Mercury Associates of Gaithersburg, Md., a fleet- management consulting firm. "When individual business units handle their own fleet management, they operate at a retail level—buying from a local dealer who sells at close to retail price or offers a retail-structured leasing program."

Siemens Shared Services is part of Siemens AG, a $75 billion worldwide company with a fleet of 14,000 vehicles. Jim McCarthy, director of vehicle operations for Siemens Shared Services in Iselin, N.J. recently convinced the 23 independent operating companies of Siemens to buy fleet services internally. Siemens partnered with Wheels Inc., a Des Plaines, Ill.-based fleet vehicle supplier and leasing company.

Siemens created a new program called Vehicle Management System (VMS) to manage the spend, operating with a budget of $60 million for vehicle purchases. The VMS team assigns an account manager from Shared Services to each operating company to make presentations, attend business meetings, provide consulting, and handle some negotiations. The account manager also works with third-party vendors, accepts accountability for account failures and successes, and conveys knowledge of the operating company to the VMS team.

After creating the VMS team, McCarthy worked with Wheels to create a Performance Index Review, a quarterly report that measures performance in all areas of the fleet program: the VMS, Wheels, and Siemens' individual business units. In sum, the total performance measurement is a total of the individual performance of all three entities.

The measurements focus in three categories identified by the operating companies as being the most important: low-cost transportation (50%), driver productivity and satisfaction (35%), and administrative support (15%).

Each category has best-in-class benchmarks based on information from Wheels' client database. "There are 40 metrics in total, but we only track 20 or 25 at a time, because we feel 40 is overkill," explains McCarthy. For example, the best time to purchase vehicles is in the fall, so the VMS team created a metric that calls for replacing 60% of the company's vehicles in the fall. "We monitor this carefully, because the resale value of vehicles is adversely affected if we don't reach this target," he notes. The Index also provides data to identify operational enhancements and recommendations for implementation of cost savings. The composite score in fiscal year 2004 was 91.4%.

The VMS team has been able to maintain a 1% out-of-stock rate on vehicles, meaning that only 1% of vehicles must be purchased from dealers rather than directly from manufacturers. It's an impressive figure, considering the national fleet industry average is 12%. "The reason for our success is that we have leveraged our buy over 23 operating units," explains McCarthy. "For example, when someone in one operating unit needs a vehicle, we can check across all 23 units and usually find a vehicle quickly that has just been turned in."

In the last five years, the VMS team has been able to bring over $30 million worth of savings to Siemens AG's operating companies. According to McCarthy, 75% of that can be tied to leveraging or consolidation savings while the other 25% can be tied to departmental expertise. The initiative has been so successful that Siemens AG is beginning to leverage the approach globally.

Illinois Tools Works (ITW) is a $12 billion diversified manufacturing company, with 650 decentralized business units in 45 countries. In the wake of its numerous acquisitions in the last decade, ITW is pursuing the benefits of centralized strategic-sourcing initiatives. It launched an initiative in 2001 focusing on indirect commodities, such as office supplies, telecom, travel, packaging, MRO, and fleet.

As a result of its acquisition growth, ITW's fleet had grown to 7,500 vehicles, with approximately 4,000 of these in the U.S. In addition, ITW had arrangements with dozens of fleet vendors, consisting of large and small lessors, as well as local dealerships and shops. The company owned about 20-25% of its fleet and leased the remainder. "Today, only about 15% of the vehicles are owned," points out Gary Anton, vice president of strategic sourcing and IT for Illinois Tool Works in Glenview, Ill.

Centralization made sense as a way to leverage the company's spend, but ITW prides itself on decentralized, and relatively autonomous, management in its various divisions. For this reason, Anton suggested a strategic-sourcing fleet program to senior management that would not be mandated to the divisions.

Anton understood the scope of the program at the macro level, but as he began to communicate with the fleet managers in the various divisions it became clear he lacked the detailed knowledge required to manage the program, so he hired Keith Scolan as manager of corporate global fleet, who came to ITW with 14 years of fleet experience.

Anton and Scolan developed RFPs to send to the major fleet-management companies and ended up selecting Donlen of Northbrook, Ill. Donlen now has responsibility for handling leasing, maintenance management, fuel management, and license/title/tax administration for ITW's fleet. Donlen also provides ITW with comprehensive expense data.

"One area where we saved a lot was being able to negotiate significant price incentives with the manufacturers," reports Anton. "Before we centralized, only one of our divisions was doing this with manufacturers, and those incentives were very small."

ITW estimates that it has been saving about $3 million a year as a result of the centralized fleet-management program. "Currently, we are negotiating with auto manufacturers, so we may see even larger savings next year," adds Scolan.

While it wasn't easy to get the program up and running in the U.S., it was easier than rollout will be in other countries. "The challenge will be going global," admits Anton. "In Europe, you have to do it country by country. It's not like in the U.S. where we were able to roll it out over all 50 states."

For some procurement executives, the cost savings of leveraged fleet spend may be obvious, but convincing business units to participate may not always be easy. (It may be possible to mandate the program, but you may be expected to achieve success with a voluntary program. McCarthy and Anton were both faced with voluntary programs.) Business unit managers may respond with, "It sounds good, but get back to us when you actually have the savings." The problem, of course, is that you can't realize the savings until you have a critical mass of business units on board in the first place.

"If you make participation voluntary, you run into the chicken/egg dilemma," explains McCarthy. "You can't provide maximum leverage until you have a sufficient number of clients, but a lot of clients don't want to sign on until you have maximum leverage."

Mercury Associates' Christensen offers some recommendations in this regard. "The first step is to conduct a complete inventory of the vehicles in all of the divisions," she states. "One way to get this is from your insurance providers, who obviously keep track of all your vehicles that they insure."

Then, identify your buying habits, including how often you replace the vehicles. Once you have compiled all of this information, provide it to various vendors. "Ask what kinds of services they could offer and how much it would cost if you did decide to centralize everything," she states.

Then, provide this information to the division managers. Also seek support from users. "For example, if most of the vehicles are for your sales force, try to get on the agenda at their corporate-wide sales meeting to make a presentation on the cost savings," she suggests.

Anton didn't experience much resistance to ITW's corporate program. "Almost all of the divisions are on board," he reports. "Agreements have been so aggressive and provide such strong benefits to the business units that it was an easy buy-in. They quickly saw benefits in terms of cost, service and quality that they couldn't get on their own." Anton and Scolan identified all of the costs for each unit, and then showed the business units what these costs would be if they participated in the centralized program.

McCarthy adds some other recommendations. "If your goal is to develop a true long-term partnership with your clients, sell your service—never mandate it," he emphasizes. "Conduct thorough due diligence." Then, make sure expectations and commitments by both parties are extremely well-defined. Next, never stop marketing the value you bring to your clients. "Always remind them why your service is so important to the success of their operations," he states. Finally, benchmark yourself against the best. "Then use the results to become the best-in-class business unit," he concludes.