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Private Fleet Management: From necessary evil to strategic asset

Taking a holistic, integrated approach to fleet management can make a significant and continuous contribution to higher, company-wide productivity and lower costs. Our team sets out to help managers overcome current fleet-optimization issues and offers ways to create value in private fleet management.

November 01, 2011

Private motor carrier fleets comprise 82 percent of the medium- and heavy-duty trucks registered in the United States. According to the National Private Truck Council, private fleets also account for roughly 53 percent of all U.S. miles traveled by medium- and heavy-duty trucks. With slightly more than two million vehicles on the road, private fleets represent the largest single segment of the trucking industry.

But even though private fleets constitute a majority of vehicles and miles traveled, there is still much confusion, misinformation, and disagreement about their value. For example, many operator-owners view fleet management as a consequence of doing business—a cost center, non-core competency, or even a “necessary evil.”

Moreover, if you ask a typical fleet manager what his or her total fleet costs are, the answer will be something like “the sum of costs incurred for leasing or acquisitions, maintenance, fuel, insurance, and registration fees.” Most organizations accept this approach, despite the fact that it usually—and often significantly—misrepresents the cost and complexity of owning and operating a private fleet.

The fact that many private fleets are considered non-core competencies isn’t particularly surprising. With the exception of transportation companies and third party logistics providers (3PL), transportation is seldom deemed a strategic or differentiating asset. However, there is also the common implication that transportation departments are largely insignificant—that they have very little influence on the company’s success and a correspondingly small effect on capital budgets.

Other than ordering transportation managers to trim costs, little senior-level attention is usually paid to this aspect of the business. As a consequence, specialized fleets tend to be larger and more costly than they need to be, because this is the easiest way to avoid service failures.

Fortunately, a growing number of companies are recognizing that substantial value can be gleaned from well-managed private or dedicated fleets, and significant improvements in cost, not simply belt tightening, are possible. With so much capital tied up in fleet assets, this is clearly the right way to think. Over the next few pages we’ll discuss fleet-optimization problems in more depth and offer ways to understand and create value in private fleet management.

Common trouble spots
Change is not easy, even among companies that are committed to reducing fleet costs while improving performance. One reason is that fleet costs are particularly difficult to identify and analyze. Hidden expenses are everywhere. In addition, many corporate fleets are the product of mergers and acquisitions, the result of which can be a patchwork of dissimilar, barely compatible support systems, decision-making responsibilities, processes, and HR skills.

In situations like these, it isn’t uncommon for a company’s CFO to manage transportation’s financing and capital budgets; the treasurer or controller to oversee allocations of fleet-related capital; and the procurement organization to make purchasing decisions based on input from operational decision makers (e.g., COOs). Adding to the confusion, all these activities may be reflected across balance sheets, income statements, and multiple corporate and departmental budgets.

Further exacerbating the issue, the above functions may not be talking to each other about fleet management. And when they do, there probably won’t be a great deal of hard evidence with which to make informed decisions about costs and performance. Even when there is sufficient data the people examining that data often lack the engineering and logistical insights to fully interpret what they’re seeing.

Lastly, there are myriad practices that add costs and drag down productivity, including:

Redeployment of capital. Capital fleet budgets are frequently redeployed as capital reserves for other asset groups, thereby reducing maintenance budgets or the number of vehicles that can be purchased. This increases the average age of fleet vehicles, which in turn raises maintenance and operating costs.

It’s an easy trap to fall into (“We got through last year without buying new vehicles, so let’s try to do it again this year”). Sooner or later, however, this is the path to the ”perfect storm”—when an entire fleet requires sweeping overhauls or replacements in a concentrated period.

Poor replacement policies. Inconsistent buying patterns, opportunistic buying, and loosely defined replacement criteria make coordinated fleet management far more difficult. For example, new or evolving capital restrictions often force companies to disregard their own replacement guidelines, so fleet managers end up in the same scenario as noted above—holding on to aging vehicles longer than they should.

Insufficient standards.
Without rigorous standards and clear buying criteria, companies end up purchasing vehicle types based on what they want, rather than what they need. A common example is buying vehicles with expensive options—such as 4x4 capabilities—that are rarely used. Another is owning a variety of makes or models, a practice that can dramatically increase maintenance costs and boost spare parts inventories. Owning multiple brands also reduces buying leverage with OEMs.

Waste and abuse. Companies may not be doing enough to curb costly practices such as excess idling, unsafe driving behavior, unreported vehicle use, non-existent or underused pooling programs, and poorly coordinated or managed maintenance and repair programs.

New direction

Transformational change is seldom associated with fleet management. Pragmatic and continuous improvement is more common. Thanks in no small part to rapidly advancing technology, however, continuous improvement is highly achievable.

Regardless of the means (transformation or continuous improvement), the goal should be to give fleet management a new edge by reducing its costs, improving its effectiveness, and ultimately positioning it as a value-added competitive weapon. This is basically a two-part proposition:

1: Use “total cost of ownership” (TCO) principles to reduce operating costs and improve asset management. Understanding, and subsequently reducing, TCO can be represented emblematically by the continuous process diagram shown in the figure “Buy Smart, Operate Smart, Sell Smart”(page 32).

2: Develop a comprehensive “integrated fleet management program” focused on improving strategic and competitive value. The components of this multi-part initiative are illustrated in the second figure.

These two fundamental concepts are interrelated: Building a successful integrated fleet management program requires a deep understanding of your fleet’s TCO, and the result of a properly executed integrated fleet management program is a significant reduction in your TCO. Together, these concepts can help unlock a significant amount of unrealized potential.

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