15 ways to reduce fleet costs
Fleet cost reduction is important for some organisations as it can be one of the largest costs to hit the profit and loss account.
Management of these costs is not always easy as they tend to be in different parts of the accounts. Typically, the cost for each vehicle on fleet ranges from £5,000 to £10,000 per annum.
The starting point for fleet cost reduction is the existing cost. It is important to establish a cost baseline incorporating all costs associated with the running of the fleet. Any savings should be measured from this baseline to ensure any changes to fleet strategy are having the desired effect. Often changes may save cost in one area only to increased cost in other areas.
When looking to reduce costs it is important to look at the different stages of a vehicle lifecycle: acquisition, in-life and disposal.
The selection of the vehicle forms an element of fleet cost reduction. There are a number of key considerations for the acquisition stage which are detailed below:
A wide variety of options exist for the funding of a vehicle fleet. It is important to assess which option is financially most efficient. Options include outright purchase, contract hire, contract purchase, finance lease, employee car ownership and salary sacrifice. The best option often depends on the individual characteristics of both the business and fleet concerned.
- Manufacturer & Dealer Discounts
Discounts for vehicle purchases are commonplace. They can be obtained from both manufacturer and supplying dealer. Discounts can be used to reduce the price paid for the vehicle or taken as a rebate. Discounts usually scale up according to volume (or volume commitments) however at certain times of the year special offers become available, especially on stock vehicles or where model changes are due.
There are a number of areas with regards vehicle policy which can yield cost savings. Vehicle replacement cycles, levels of allowances, fuel re-imbursement method, vehicles offered and value of any cash alternative can all impact on the cost of providing the fleet.
- Fleet Management Company
Many organisations choose to lease vehicles predominantly through bank or manufacturer owned leasing companies. Businesses can choose to put some or all of their business through a certain supplier. Where sole supply arrangements are in place then the business should secure some contractual concessions from the leasing company such as pooled mileage, damage waivers or signing on bonus.
Under a multi supply arrangement these contractual concessions are more difficult to achieve. However it is likely that vehicle leases will be cheaper due to shopping around. Administratively it may also be more difficult to manage multiple suppliers but the cost difference can be significant.
- Cash Allowances
Cash allowances are generally offered as an alternative to a company car. Some businesses offer cash to job need and perk driver populations although it is more popular for perk grades.
Cash allowances should ideally be set at a cost neutral position to that of the company car so it doesn’t cost the company more should the employee opt for cash or the company car.
- Pool Vehicles
Some businesses would benefit from running a pool vehicle fleet especially where there are large offices with large casual driver populations. Pool vehicles rely on high levels of utilisation in order to make them cost effective. Pool vehicles can be used to replace grey fleet mileage which helps to reduce risk as well as cost. This has been very effective for some council fleets who operate within confined geographies and have locations with ample parking.
Once a vehicle is acquired it moves into its in-life phase. Costs can be reduced or avoided through a number of areas and initiatives highlighted below:
After lease costs fuel represents the next largest cost to the running of a vehicle fleet. It is important to procure fuel well in addition to managing its use. Businesses have the options of fuel cards, bunkered sites, corporate cards and pay & reclaim.
Drivers should have fuel economy monitored and discrepancies should be followed up. Central to the management of fuel is the effective capture of business mileage as without this it is very difficult to know what is happening within the fleet.
Speed limiters are now commonplace on light commercial vehicles and can lead to fuel and maintenance savings.
Free private fuel can be a very expensive benefit to provide and in many cases is not beneficial for the driver. Increasingly organisations are moving away from the provision of free fuel due to the cost to the organisation..
It is important that vehicles are maintained properly to avoid unnecessary vehicle downtime. Service intervals should be closely monitored and adhered to. Drivers should undertake regular vehicle checks for items such as fluids and lights. Any remedial mechanical repair work should also be checked against manufacturer’s warranty avoiding unnecessary cost.
Vehicle policy and procedure should be enforced at all times. Where employees leave vehicles should be re-allocated in the first instance as opposed to having a lease terminated early. Any vehicle damage through accidents or via other means should be reported and fixed.
- Risk Management
Effective risk management can help bring down costs through reduced maintenance, damage, insurance and accident costs. Drivers should be risk assessed and remedial interventions should take place where appropriate. This may involve some form of training or the removal of a vehicle altogether.
- Daily Hire
Daily hire provides a useful service for short term transport needs. However, daily rental can also be a large cost to a business. Daily rental costs should be periodically reviewed to ensure it offers the best value for money solution. Where pool vehicles are in operation daily hire records should be cross matched to help avoid any unnecessary hires.
- Grey Fleet
Grey fleet is both a risk and a cost to a business. Grey fleet use should be monitored to ensure risks are identified and the most cost-effective means of transport is used. Pool vehicles or hired vehicles can work well especially for longer journeys.
Once the vehicle has come to the end of its useful economic life then it will need to be disposed of. We have highlighted some considerations regarding the disposal process below:
- Disposal Channel
For leased vehicles under a contract hire arrangement vehicles are handed back to the lessor to be disposed.
Fleets who own their vehicles will need to select an appropriate route for disposal. This will range from selling via a local dealer, auction, on-line sale or sale direct to an employee. The best sale channel will depend on the type, age and mileage of the vehicle. Employee sales generally offer the best sale price as well as reduced disposal fees.
- Vehicle Damage
Vehicle damage should be assessed and where appropriate repaired before vehicles are handed back to a lease company or disposed of. Leasing companies will charge for vehicles with damage (as assessed under BVRLA standards) and this is usually more than the cost of remedial action. For owned vehicles the residual value of a vehicle will suffer if it is sold in a damaged condition.
- Excess Mileage
Leased vehicles come with a contracted mileage as part of the contract. If this mileage is exceeded when the vehicle is handed back then an excess mileage charge will apply.
Excess mileage should in the first instance be offset against a mileage pool where it exists. Failing that vehicles can have their contracts re-written in-life but fleets need to be aware that leasing companies will seek to add more profit into a contract where this occurs. Vehicles can also be re-allocated to different drivers based on anticipated mileage to reduce the impact of excess mileage.
Fleet Cost Reduction – Summary
There are a wide range of ways to achieve fleet cost reduction. Fleets should start by establishing the cost baseline. To avoid unintended consequences, cost savings initiatives should be evaluated against the baseline as generally changes will impact on more than one area.
For more information about how EVP Solutions could help with fleet cost reduction please contact us.