Fleet Category Management | How to strategically manage fleet spend and reduce operational and supplier risk
This blog looks at global fleet category management and approaches for fleet procurement and supply chain professionals. There are many different approaches, from single sourcing across all countries to multi-bidding requirements in each country.
After reading this blog, you will understand more about:
- How to set up the category management process
- The procurement levers you can utilise within the fleet management category
- How you can generate savings of up to 20% through effective category management
CIPS defines category Management as “a strategic approach to procurement where organisations segment their spend into areas which contain similar or related products enabling focus opportunities for consolidation and efficiency”.
Category Management Process
Step 1 | Category Definition
Establish the scope of the category and existing spend for each sub-category area. For the fleet, this will include some or all of the following areas:
Step 2 | Role and Purpose
Define the purpose of the fleet. For some, this will be the delivery of people, goods or services, whilst for others, it could be the delivery of additional employee benefits through the provision of a company car.
Step 3 | Baseline Current Performance
Measure the current fleet cost baseline within each geography. This should cover all suppliers with a list of services provided and existing service levels. However, this step can be tricky as relevant information can be limited in some areas.
Internal support costs and the costs of direct taxation associated with the fleet also need to be measured to assess the total cost of ownership for the fleet.
Step 4 | Set Objectives and SMART targets
Cost savings or efficiencies are common measures for procurement professionals, and in the fleet category, this is no different. However, fleet comes with a high degree of physical risk to drivers and makes a visible contribution to organisation emissions. Senior management is generally offered company cars, so maintaining service levels is another critical measurement. Nobody likes a call from the Managing Director as they are having problems getting their vehicle serviced!
Fleet can be a complex area with many competing interests. In this section, we look at how you can use procurement levers to achieve desired outcomes.
Lever 1 | Define Business Needs
The ability to align suppliers to the business’s specific needs is crucial to effective fleet category management. Effective communication with suppliers will help them understand requirements and align their service offerings accordingly. The buyer needs to keep this flow of information to avoid setting the supplier up to fail.
Businesses often overlook requirements when it comes to fleet or.
Vehicle chracteristics should be defined when there is a requirement for fufilling a specific purpose. Ask questions such as:
- What is the role of the vehicle?
- Does it need to carry goods or people?
- What does the vehicle need to carry – weight, height, load requirements, hazardous materials (gasses etc)
- What is the usual operational cycle?
Where a vehicle is a perk of the role, this becomes a benefits conversation around what vehicle is suitable for a particular grade of driver:
- Benchmark against other businesses with whom you compete for labour?
- How does the vehicle sit in the overall benefits package?
- Should you offer a cash alternative?
- How long should the driver keep the vehicle?
- What brands would be appealing to the driver?
Answering these questions can lead to much clearer business requirements and will help optimise procurement through the lifecycle.
Lever 2 | Spend consolidation
Many categories lend themselves to concentrating volume with suppliers to maximize pricing competitiveness. The same can be said about fleet but not in all cases, especially when different geographical locations are concerned.
On a country level, it is worthwhile consolidating spending around dealer terms, vehicle funding, maintenance. At a global level, you could extend this to tyres, manufacturers and glass.
One area of contention is in consolidation of fleet management providers. There are undoubtedly benefits to a global sourcing arrangement, such as a single view of management information across all countries and specific financial incentives offered by the supplier. The purchaser also has more influence over the supplier, given the increased scope.
However, all suppliers have P&L’s at a country level meaning limited scope for cross country subsidies. Each market is different regarding the vehicle acquisition cost, funding, maintenance provision and residual value. Service levels and access to credit can also vary significantly by country.
In our opinion, it is therefore highly unlikely a single provider will offer the best commercial outcome in each country. So it becomes a hard sell to the countries where they are not getting the best commercial arrangements!
This can also be the case at a local level. No leasing company will be the most competitive on all vehicles. However, sole supply deals can bring contractual and operational benefits, which outweigh a competitive bid for each vehicle. Which is more effective generally boils down to what is in the vehicle policy.
Simplistically, where there is a limited choice, it is easier to benchmark pricing, ensuring that price doesn’t creep up over time. However, a user chooser fleet with free choice can make it very difficult to manage the ongoing pricing provided by a sole supplier, which may mean a more suitable competitive bidding environment.
Ancillary services such as daily hire or accident management services are major value drivers for fleet management companies. Deciding to bundle or unbundle these services is vital to drive the maximum value from the fleet. There is a balance between operational effectiveness and commercial value, which will depend on the individual circumstances of the fleet.
Lever 3 | Alternative Specification
The structure of the vehicle fleet needs to be identified before going to market to create the conditions for maximising commercial arrangements.
Rationalising the vehicle specification and selection is crucial. Helping with volume leverage but also assisting with the operational running of the fleet. This can be particularly effective with commercial vehicles, business needs or operational vehicles.
One company we have worked with saved up 17% on 1,000 vehicles through specification rationalisation over eight countries. Even for status vehicles, consider whether a fully open choice is desirable or drivers would be happy selecting from three or four manufacturers.
Service delivery to drivers and the business are important considerations. Business facing processes need to be as efficient and unambiguous as possible. Billing, quote, order, maintenance and de-fleeting processes are critical aspects of the vehicle life cycle. The degree to which some or all of these outsourced services have a significant impact on how the supplier relationship is structured.
Lever 4 | Competitive Sourcing
Pricing for vehicles is impacted regularly through changes to list prices, discounts, interest rates, maintenance and residual values.
Fleet management providers often offer low entry pricing to win a deal and then walk up margins through pricing and other profit levers.
Therefore, it is essential, especially in a sole supply arrangement, to benchmark prices to ensure they are competitive. When benchmarking, price comparison must be on a like-for-like basis. Make sure discount terms are the same, as well as pricing the same period and mileage of the vehicle.
Pricing for some vehicles can also be impacted by special offers, especially when the model is replaced. Try to exclude these from your comparisons, as it is unlikely that this pricing will be sustainable over any length of time.
Many contractual concessions provided by fleet management companies are either not taken or not utilised. Review any concessions should be regularly with suppliers to achieve maximum value. It is vital for regular contract reviews with the supplier to distribute value from profit shares or mileage pooling.
Review the invoices regularly. It seems a simple principle, but in our experience, suppliers often incorrectly charge for assets and associated services.
When benchmarking your prices, you must take into account any contractual concessions or differences in service delivery. Fleet management companies using a highly digitised platform will have cost advantages that might not be immediately visible from a pricing comparison due to the corresponding impact on resource requirements.
Lever 6 | Restructure relationship
Where business objectives change, or there is a change in the market or supplier, you may want to change the relationship with the supplier.
If the service delivery is solid and transparent, you may wish to move towards a partnership type arrangement.
The supplier can then invest more in you as a customer helping to drive further enhancements or innovations.
Even if a good relationship exists with your fleet management provider, it is often wise to benchmark against the market. Innovations mean the market is always evolving. These may help your business with its strategic objectives.
Step 6 | Implementation
Running a fleet RFP process can often be time-consuming and complex, especially when multiple geographies are involved. A structured approach helps deal with the complexities of the process.
Our blog on managing supplier change is a valuable resource to help with this process.
Step 7 | Review
A thorough vendor management process should be put in place to manage the fleet suppliers. For instance, this should include regular benchmarks of performance and periodical price checks. Fleet management companies have a habit of walking the prices up once they have won a contract.
In our experience, a well managed fleet category can make savings of up to 20%.
The savings come from a combination of sources, and in-life contract management is much more critical than in other indirect categories.
Fleet category management can be a challenge, especially on a global scale. In addition, fleet comes with more complexity than other indirect category areas and will also impact senior managers personal benefits packages.
Managing fleet is essential, as it is often in the top 5 areas of spending. Plus, with potential savings of up to 20%, it is worth the investment.
How can EVP help?
At EVP, we have solutions that help businesses with fleet category management on a national or global scale. We can help you deliver through
1. Showing you how to do it
2. Helping you do it
3. Doing it for you