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Category Archives: Cost Transparency

Exposing Hidden Car Fleet Contract Costs

Exposing Hidden Car Fleet Contract Costs

When costing a fleet supply agreement, and choosing the right funding model and appropriate supplier, it is important to understand that the price quoted against a vehicle list is merely a price at a snapshot in time, and on a very specific configuration.

It is a price that is being provided for the purpose of comparison, either between other suppliers in a multi-bid scenario or against other suppliers in a single bid scenario. It is extremely unlikely that it will reflect the actual cost of operating the fleet over the term because of two main reasons:

Price creep
As the fleet expands and the legacy supplier is removed, the new leasing price of each type of vehicle will change over time: likely to result in an increase in the headline price that the contract was signed against.

Additional supplier margins
Although the provider may have offered significant signing-on incentives to win the business, they will always be factored into the overall contract pricing, very often with sophisticated systems to recover this investment.

And it is these margins that the supplier can apply to consumables and services that need to be understood, so they can be managed.

It is a common misconception that the only revenue elements that can be negotiated are the management fee and the margin on the financing interest.

Most fleet stakeholders assume that focusing on these means they are in control of the contract costs, however, that is, unfortunately not the case. There are in fact six cost categories within a typical leasing contract that are used to generate revenue for the lessor.

To understand these six commercial trapdoors Download the fleetworx e-book “Fleet Contracts: Avoiding Commercial Trapdoors – A Practical Guide for Procurement Departments” .

 

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Are you getting the best possible value from your car fleet? (part 1) – 5 essential questions

Are you getting the best possible value from your car fleet? (part 1) – 5 essential questions

Appointing an external fleet management company to oversee car fleet is becoming an increasingly common practice. As businesses look to reduce headcount and out-source non-core activity, removing the fleet department and handing responsibility to HR, Procurement and/or Finance is a very familiar picture across UK and pan-European companies. A 2014 industry report found this practice in 40% of their surveyed companies. It also showed that growth in fleet size increases the likelihood of outsourcing, with 62% of companies with over 2000 vehicles being managed externally.

There are 5 unintended consequences of losing the internal specialist and outsourcing a company car fleet, see this whitepaper to learn more: one of which is knowledge imbalance. Once the strategic specialism of car fleet management is lost to the business it creates a knowledge void. The internal teams that take on responsibility for fleet are typically generalists who may not have the benefit of previous experience in fleet. Subsequently they become reliant on the supply chain to provide insight and strategic direction. This power shift results in the supply chain knowing more than the business they supply, and the potential for them to feed only sanitised information back to the client. Not an ideal situation for creating a challenging supply environment.

We have created a mini-series of articles highlighting the questions to be asked of the supply chain in order to redress the knowledge imbalance.

This first article is looking at the area of transparency and cost control. The next article will look at policy and best practice/value and the third will cover management information.

So here we go. Remember these are questions that you have every right to ask your leasing company

  1. Where are the greatest levels of unplanned, in-life spend within our car fleet supply chain?

If it remains unchecked, in-life spend can drastically increase the overall cost of your company car program. A company car programme can expect to incur 5% of the annual driver cost in unplanned , in-life costs. Consequently a company running 1500 cars at an average driver cost of £9,000 pa can expect to be faced with an additional £675,000. Unplanned spend can come from accident costs, repair and maintenance costs and end-of-contract charges and can add significantly to the total cost of ownership. The supply chain should have systems to monitor these areas of spend and offer advice on how to reduce their impact. For example, experience shows that drivers who take the risk on damage liability show a reduction of low-speed impact incidents of up to 70%, subsequently reducing the amount of insurance and repair costs.

  1. Where are your areas of margin in the products you supply our business?

If you are employing an outsourced fleet provider you may be surprised to learn that about only 20% of their revenue is from the management fee they charge you. The rest consists of opaque margins and rebates. These revenues are broad and varied and consist of, among others, interest margin, contract adjustment margin, maintenance network rebates, repair network rebates. If your contract has been written with transparency in mind, these revenues will be visible and accountable. As the client you have every right to challenge and negotiate the value of these margins and decide who takes the benefit.

  1. What discounts are you getting from manufacturers and how are they built into our costs?

Suppliers who take a partnership approach to your relationship should be willing to share information about manufacturer discounts. Manufacturer discounts can be substantial and they should be made transparent to all stakeholders. Suppliers should be asked how the discounts are awarded and how they are distributed between themselves and their clients.

  1. How does our maintenance spend compare with the maintenance spend in the budgets?

This question is vital for setting and managing accurate budgets. Suppliers should have the ability to report on different spend categories, highlighting overspends and re-directing savings. Understanding the maintenance spend category helps advise on the strategic direction of maintenance contracts and supports effective decision-making.

  1. How much are we paying in end-of-contract charges?

End of contract charges is a spend category which will often go unobserved. Charges are frequently applied without being challenged and can lead to unplanned costs in tens of thousands of pounds. End-of-contract charges are made up of excess mileage claims, damage costs and late-hire charges. Close interrogation of all invoices related to these charges should be a standard and your supplier should have systems in place to deal with and report on these costs.

Dealing with the knowledge imbalance provides valuable intelligence that the maturing relationship with the supplier has gradually eroded. Recapturing some of that knowledge will help foster a challenging supply environment, drive efficiencies and avoid cost. Next time we will look at questions about policy and best practice; making sure the policies are working to the advantage of you and your drivers.

For an informal discussion about how you can get the best possible value from your car fleet drop us an email or give us a call. 

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The Hidden Cost Threat in a Company Car Fleet

The Hidden Cost Threat in a Company Car Fleet

Creating a water-tight contract at the beginning of the supply agreement is one of the most important things any fleet stakeholder will do when dealing with fleet. We can say this with absolute confidence as we know what happens when car fleets mature and morph from their original formation.

The nature of our business means we collate and analyse heaps of data. We collect data from all areas of the car fleet supply chain and are perfectly positioned to analyse this data and see what it tells us. And one of the most startling things is the potential for massive cost creep if the initial contract is not sealed water-tight. It is quite normal to assume that there will be some degree of flux within a contracted fleet and quite natural to expect some out of contract costs to develop over time. However, our analysis tells us the extent to which unplanned, variable spend can influence the contract cost.

We looked at the data of a pan-european company operating a large car fleet across many countries. We gathered the data from the last 5 years of their car fleet operation and ran it through our systems to determine the nature of the data. We looked at nearly 20,000 invoices and over 1.6m individual cost lines. The most telling revelation was the amount of unplanned variable cost, relative to the total cost of operating the fleet: almost 1 in every 4 euros spent on the fleet was outside of the original contract.

Car fleet hidden costs

Hidden Cost Infographic

These findings are significant, as costs that are outside the original contact are, by nature, unplanned and variable. Because they are not influenced by contractual terms they can attract margin from the supply chain, contributing significantly to the cost creep of the contract. And when 25% of the total cost of operation is an unplanned cost, it reinforces the need to create contracts that capture these costs and restrain the potential for them to be manipulated to the benefit of the supply chain.

These out-of-contract costs come from a number of sources. One of which is the cost of running out-of-contract vehicles. All vehicles are introduced to the fleet under contractual terms that control the cost of operation. However, once the contractual term of a vehicle has expired, and the vehicle remains in the fleet, it becomes an out-of-contract cost that can often attract punitive charges from the supply chain. If only a small number of cars happen to be running on out-of-contract terms then it is entirely manageable, however, our research discovered a very different and worrying scenario.

View our infographic here to see the results of our research

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