The vehicle fleet can be a major source of cost for any business, especially as the supply chain is often full of ‘hidden’ margins. Richard Hipkiss, Managing Director of Fleet Operations, offers finance directors advice on how to develop a more robust fleet purchasing model to withstand economic uncertainty and reduce total cost of ownership (TCO).
Ongoing economic uncertainty linked to Brexit has raised a number of question marks over the future of fleet procurement.
Potential fluctuations in currency markets, inflation rates and stock prices could combine to hit businesses hard in the pocket when it comes to purchasing company vehicles.
Consequently, finance directors are often faced with a thankless task in attempting to control costs while maintaining efficient business operations.
But although this challenge may appear significant, it is far from insurmountable.
First, it is important to note that there can be substantial variances in lease cost depending on supplier, a fact that too often goes unnoticed. For example, the price differential on certain models of vehicle can be anything up to £250 a month, which adds up to a huge gap over the course of a typical four-year lease.
Headline prices aren’t the only consideration though.It is also important to scrutinise all vehicle-related costs incurred throughout the length of a contract, as well as how service delivery is measured and monitored.
Effective procurement processes should take all of this into account, while being robust enough to withstand possible price increases and threats to the business bottom line.
TCO under the magnifying glass
One of the most crucial top-line metrics for finance directors is total cost of ownership (TCO). This provides a complete picture of each vehicle’s cost impact by taking into account the entire range of contributory factors over the lifetime of ownership.
So, rather than focusing solely on leasing and purchasing costs it also includes everything from depreciation, fuel, insurance and maintenance to interest, tax and employer’s NI.
But despite the value of TCO to the procurement process, research conducted by Fleet Operations has found only one in ten companies currently use this calculation as part of their decision-making or analysis.
On top of that, it is perhaps surprising to learn that 46 per cent of the companies surveyed admitted they were not even aware of the correct formula for calculating TCO.
This shortage of cost transparency has been accompanied by a rise in actual cost. More than a quarter of companies (26 per cent) said they had seen lease costs rise in the 12 months leading up to the study.
In the face of rising costs, it is essential that finance directors seek to achieve more visibility through scrutiny of the various factors contributing to total cost. Breaking away from sole-supplier arrangements can be the first step in helping to achieve this.
By moving from sole supply to a multi-supplier procurement process, where the business searches for the best price on every vehicle from a number of different suppliers, it is possible to achieve average savings of more than £1,000 per vehicle over a four-year lease.
A false convenience?
Businesses tend to fall back on the sole supply model due to the perception that it can help to minimise resource and administrative pressures. Busy finance departments may envisage a multi-supplier agreement presenting too great a burden on already stretched resources.
Yet, in reality, it is possible to benefit from the same minimal resource demands with multi-bid leasing if this process is managed by an appropriate outsourced partner.
The drawback of sole supply is that it ties the efficiency of a company’s fleet procurement process to the success of one supplier. In a situation where that supplier is particularly affected by certain fluctuations in the economy, the customer is left more exposed to potential cost rises and less equipped to mitigate the negative impact.
Unpacking the sole-supply agreement also provides the benefit of being able to unpack all the contributory costs that add up to the top-line price. Typically, vehicle leasing providers provide a number of services from third-party suppliers, from accident and risk management to maintenance and fuel management, wrapped up within their fees.
This situation means the customer is unable to negotiate their own specific terms for each of these services.
Looking at service, maintenance and repair, for example, it often seems appropriate to opt for a fully-maintained contract delivered by the leasing provider as a way to accurately forecast and control costs while removing the administrative burden.
But considering the more comprehensive warranty packages offered by manufacturers and greater vehicle reliability, it may be more effective to simply cover maintenance on a pay as you go basis.
One of the challenges with a fixed maintenance budget is that the client does not get the opportunity to specify the quality of materials used. When it comes to parts such as tyres, this can actually cost a fleet money in the long term as cheaper tyres may have an negative effect on the efficiency and safety of vehicles.
Striving for full transparency
By achieving greater visibility in the provision of each of these supplementary services, it is possible to set benchmarks for every area of spend and monitor these over time, giving finance directors the power to negotiate the cost of each from an informed position.
Unwrapping these elements also allows businesses to choose suppliers that offer the most appropriate reporting and specialist knowledge to help them address specific issues within their fleet.
Outsourced fleet management providers can help companies to manage all of these relationships. If this option is selected, it is important for finance directors to ensure service levels and KPIs are built around service delivery to drivers and stakeholders, cost control procedures, delivery of data and reporting, accuracy of data, key compliance areas, and timeframes for key processes such as vehicle ordering and vehicle off-road management.
Ultimately, transparency is key. By taking greater control of the constituent costs that make up TCO, businesses can put themselves in a better position to withstand any potential fluctuations in the market. Appropriate reporting will enable them to identify when suppliers are not delivering on agreed KPIs and make changes accordingly.
The result is a robust procurement process that help to unlock greater operational efficiencies and cost savings from the fleet department.
“Original publication in Finance Digest Issue 1 https://www.financedigest.com/