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Monthly Archives: March 2016

How to Stop Cost Creep Becoming a Horror Story

How to Stop Cost Creep Becoming a Horror Story

At Fleetworx we are obsessed with our forensic approach to cost management. Last week I wrote about “knowing your numbers”, and adopting a data analysis approach to company car fleet management. I described how not having control of your numbers and data can be an unintended consequence of outsourcing a company car fleet. Well, a lack of data intelligence can also lead to another significant unintended consequence – cost creep.

As part of our obsession with numbers and knowing exactly how much is being spent across the whole car fleet, we mine every piece of cost data from across the entire supply chain. That’s a lot of data. To control it we place it in cost categories and then work with it to understand spend and savings opportunities. Because we do this daily we are used to it. But when you actually stop and take a step back, the number of different cost codes is very surprising. We did a little exercise to review the categories so we could establish the optimum means of managing the data. We removed some, merged some, created some new ones and at the end of the exercise we had 60 cost codes, sitting across 16 categories.

Now this may seem a little excessive, but it does mean complete control over spend and minimal cost creep.

Cost creep is a very common issue in supply chains. And within company car fleet supply chains it can become a big problem. When a company decides to outsource its company car fleet it will benefit from short-term savings. At this point new suppliers are on their very best behaviour, cutting deals and slashing cost. The client will enjoy some pretty substantial cost savings during the first couple of years. However, and here’s the rub, as the contract matures and becomes less visible to the client, costs begin to slowly creep up until, if remaining unchecked, they can accelerate back to pre-outsourcing levels.

They do this because of what I mentioned earlier. The 60 cost codes that provide 60 opportunities for suppliers to add margin.

Our cost categories cover areas such as accident charge, end of contract charge, servicing, management fee and insurance. Whereas our codes cover costs such as third party claims payment, loss on sale fee, vehicle movement costs and accident management fee. Being very detailed is key to keeping the creep under control.

It may not be widely appreciated, but only about 20% of a leasing providers revenue will be from declared management fees. The remainder comes from margin applied to the myriad costs associated with running a large car fleet.

This is why we are fanatical about the numbers. It is why we capture every little invoice and statement and place it in its rightful place. Because only then can we interrogate each cost code and ensure the cost is correct, that it is being applied to the correct vehicle, and any margin is within contract.

For further detail about cost creep and how to avoid the unintended consequences of outsourcing your company car fleet download our whitepaper

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Why Knowing Your Numbers is a Game Changer

Why Knowing Your Numbers is a Game Changer

In the UK, I don’t think many people will know the name Billy Beane. You may recognise his on-screen persona, Brad Pitt, but I am pretty sure Billy Beane means almost nothing to most people.

Billy Beane is a genius. A change-maker. A risk-taker. Billy Beane is the name behind the Hollywood movie Moneyball, starring Brad Pitt, and the bestselling book Moneyball:The Art of Winning.

What Billy Beane did was utterly revolutionary in his field. As a coach of a major league baseball team (I know, baseball is alien to me too, but stick with it) he transformed the player recruitment and selection process from anecdotes and subjectivity, to data and analytics.

Faced with a depleted team, and competitor’s with much higher salary budgets, Billy Beane adopted an analytical approach to assessing players values and building a new team. He devised new ways of gauging a players’ performance and potential, and used hard data and analytics to build a team based around what the numbers said, not what the scouts thought. Sabermetric was the phrase coined to describe the model, and it was the sabermetric approach that turned Billy Beane’s baseball team on its head.

The team became completely devoted to the numbers. Every decision was made after reviewing the data – from which players to recruit, who to retain and when to release someone. They challenged all their assumptions, looked at unique scenarios, ran what-if analysis and did not hesitate if the data dictated a change in direction.

It’s no different for company car fleet management.

Data analytics should be at the heart of every strategic and policy decision. Advances in data collation and analysis tools allow those with responsibility for fleet to model supply chain networks, run what-if scenrios and conduct contingency planning. They can also model strategic change, whereas spend analysis can identify consolidation and rationalisation opportunities.

The challenge, however, for many companies who have outsourced their company car fleet is capturing the data. After outsourcing, the knowledge base becomes unbalanced. The supply chain hold all the data and typically only feed sanitised information to the company. Running data analytics and making decisions based on the data feed can become very challenging.

Data analytics is fundamental to Fleetworx and is central to the value-add for our clients. We do, however, appreciate the challenges a company faces when outsourcing their car fleet and have written a whitepaper about the unintended consequences, and how to avoid them. Knowledge imbalance is a key consequence and, although it may not appear problematic, the lack of data and transparency can seriously compromise the ability to analyse the correct numbers and take advantage of what those numbers suggest.

And if you were wondering what happened to Billy Beane’s team, well, after implementing sabermetrics, they went on to a record-tying winning streak of 19 consecutive games and into the play-offs (which is a good thing) and Billy Beanes’ model became regarded by many as the future of baseball. A definite game-changer.

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How to Optimise Company Car Replacement Cycles

How to Optimise Company Car Replacement Cycles

Extending your company car replacement cycle produces many arguments for and against. Those in favour say yes… extend and lets benefit from the quick win. Those against are concerned about depreciation and employee morale. It is a big decision and has wide-ranging implications on your company car fleet policy so it is sensible to look at all the ramifications of adding an extra year before making the decision. Much has been written about the optimum replacement cycle and how extending it is counter-productive because of poor residual value, increasing maintenance costs and employee retention risks. However it is becoming apparent that the argument against extending replacement cycles may be losing its strength. And as we will show, the extension can become one part of a much wider strategy to drastically improve company car value to your employees without increasing your cost.

As the world recovers from the global financial crisis many companies find themselves with more choices when faced with the question of company car replacement cycles. During the financial crisis many fleets extended their replacement cycles from 3 to 4 years to compensate for poor residual values producing excessive and unbudgeted depreciation. However as the situation has improved the question of extending the replacement cycle is now from a position of choice rather than necessity. Indeed the 2015 Corporate Vehicle Observatory (CVO) barometer shows that in the UK 21% of small companies and 24% of large companies think usage has increased since last year. So what is the correct choice and what should be considered when making that choice?

The choice will differ from company to company and will be influenced by the demands on the fleet (job-need or status). The fleet-leasing sector typically calculates costs based on a 20,000 mile per year average, which results in the normal car policies of 3yr/60,000 miles or 4yr/80,000 miles. However companies with a job-need car fleet could easily find their employees covering in excess of 30,000 miles per year. This would take a car in its 4th year over the 100,000-mile threshold, which seems to remain a barrier for many. However for the purposes of this review we will deal with the average – 20,000 miles per year, and look at the contributing factors to making the choice and consider whether replacement extension makes good business sense.

Depreciation

The improvement in the quality and reliability of cars is resulting in a flattening of the depreciation curve between years 2 and 5. This extensive study from automotive fleet and Vincentric to crunch the numbers on replacement cycles shows that, as is commonly understood, vehicles lose the vast majority of their value between being driven off the forecourt and year two. Beyond that they depreciate on a much gentler slope.

As vehicle quality improves, extending the use of a car into its fourth year should pose less of an issue, indeed last summers’ budget announced that the UK Government would consult on extending the deadline for the first MOT of new cars from 3 years to 4. Reinforcing the shallow depreciation curve that new cars now enjoy.

Fleetwise, a collaboration between Mercedes Benz and Fleet news, state that there is no evidence to show a sudden drop in value based on a car hitting its fourth-year. As long as the car is driven within company guidelines and follows a managed servicing schedule, there is a much lower risk of greater depreciation than say 10 years ago.

Repairs and Maintenance

Rigorous maintenance and servicing programmes have a big part to play in extending the replacement cycles of company cars. The Fleetwise article highlights the public sector that, through extensive budget cuts, has needed to extend replacement cycles by up to seven years. This may seem unpalatable for the private sector, however needs must, and councils have delivered this by instilling a robust maintenance regime to ensure their vehicles remain reliable and roadworthy.

The Vincentric study, although based on US vehicles, shows that the maintenance on a 20,000 miles per year vehicle jumps drops dramatically in year 4 after potentially substantial costs in year 3. They are assuming that as the vehicle has a higher annual mileage the major maintenance issues come earlier in its life, hence the sharp jump in year 3. The point of the study appears to be that the major maintenance milestones occur either side of year 4.

TCO

Total Cost of Ownership is an increasingly popular way of calculating the true and total cost to the business of operating a company car. The Vincentric study looked at the TCO of more than 2,000 configurations from 25 popular fleet vehicles and included:

  • Depreciation
  • Financing
  • Fees and taxes
  • Fuel
  • Insurance
  • Maintenance
  • Opportunity cost
  • Repairs

All these factors contribute to the true cost of operating the vehicle across a time period. It becomes a far truer picture of company investment as it understands all the associated costs of operating a vehicle (fuel, insurance, maintenance etc). For a vehicle covering 20,000 miles per year its TCO decreased by 21% between year 3 and year 4, but then suffered a substantial increase between year 4 and 5. What the study shows is that this by extending the replacement cycle of a vehicle covering 20,000 miles per year from 3 years to 4 years, the costs in year 4 will be less than the average costs for the first 3 years. Quite a convincing argument that extending the replacement cycle can be a sensible business decision. One more consideration is the impact on the reward package offered by the company. Does a 4-year replacement cycle compromise a company’s ability to attract key talent?

Recruitment & Retention

It has been written that the extension of a vehicles replacement cycle can be off-putting for potential recruits and will weaken the employers bargaining position against other companies offering a shorter replacement cycle. This is obviously a challenge and the replacement cycle should be considered in the context of the whole employment package, industry & employee expectations, industry standards and emotive impact.

However, if a replacement cycle is not viewed in isolation but as part of a combination of tactics to enhance the car offer, then an extension can be part of a wider strategy to improve the car value without increasing the cost to the company.

Fleetworx are experts in fleet supply chain analytics and helping the fleet supply chain work well for everyone. Our interest in tactics such as replacement cycles is one of the things that drive our business. Here you can find an ebook which includes replacement cycles as one of five smart policies. These policies help you create better employee reward packages by offering higher value company cars without increasing your cost base.

In essence, we think extending your replacement cycle can be a very smart move.

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